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Welcome to the next episode of the Real Estate Real Life podcast.
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My name is Dr.
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Elaine Stockaberg.
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I'm joined by my sweet husband, Nick.
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Hello.
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And we have a topic to share today that came up during a recent coaching call inside of my Freedom and Legacy Blueprint MD flagship coaching program.
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And inside of that program, people have the opportunity to raise their hand and be coached on anything that's coming up for them.
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And in this particular situation, someone was acquiring a rental investment property and had, I think, five or six proposals from lenders and wanted to go over those proposals together.
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And through that coaching, I shared with her the framework about security and optionality and how that applies to real estate lending.
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And as I carried on throughout the evening and the next couple of days, and I was thinking about that, I realized that that framework of making decisions through the lens of security first and optionality second, I do believe that they are ordered, is really the way Nick and I think about all of our decision making.
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And through that coaching call, it was really the first time that I had like fully articulated it in one concise exposition.
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And I wanted to share that goodness with all of you.
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And so here we are on this episode of the podcast where we're going to share with you our thesis of how to make decisions and how we make decisions.
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And we are always thinking through first the lens of security and then the lens of optionality.
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So Warren Buffett famously has this very peculiar definition of an ideal investment.
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He says an ideal investment is one in which you get a regular, relatively certain low-level return.
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It's kind of a guaranteed base hit as much as anything can be in the investment world.
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And then it has a chance for some kind of wild upside.
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There's some optionality there where you have this chance at something, something bigger, something greater.
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That's like a very oddly specific profile to share.
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But if you think about it for a second, it helps you sort through things very quickly.
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So you wouldn't want to invest in cryptocurrency because that's not a safe and steady thing.
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There's certainly a wild upside potential there.
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And then just like regular old bonds are not amazing because there's nothing extra that you get there.
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It's it's very low fixed rate of return.
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There's no tax advantages to it.
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There's no additional upside potential or sweetener to that investment.
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Most like bonds and CDs and stuff wouldn't necessarily fit that bill.
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But there are a huge amount of investments if you look for them or if you structure your investment in that particular way that gives you this regular kind of recurring investment return with the chance for a wild upside.
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And it gives you both security and optionality.
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One way I would like to think about that is does it give you a flexibility?
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And are you set up for success 10 years from now?
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Different ways you could kind of think about that exact same principle.
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And these are the principles that we use to structure real estate deals that we put together.
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These are the exact principles we use to put together the Secure Freedom Fund.
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This is really kind of core principles to everything that we do.
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So let's talk about this coaching client of mine who was considering multiple lending options and kind of walking through this from a lending perspective.
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So here in this episode, we're going to describe two situations where people have come to us just in the last week or so asking for our opinion on a very important decision that they were making and how we think through the lens of security and then optionality.
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And then we're going to present some more overarching principles in relation to security and optionality.
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So in this situation, my coaching client was acquiring a single family home.
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She had, I think, five or six loan proposals in hand, which is always a best practice.
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You know, as a tangent to the episode, we believe that the deal is just as important as the debt.
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And so she had done her homework and had a number of loan proposals in hand.
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And kind of the long and short of it is I lumped them together in terms of those that were fixed rate versus those that were variable rate.
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And then I lumped them together in terms of those that had a prepayment penalty and those that did not have a prepayment penalty.
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And that was really when this security and optionality really crystallized for me.
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So we've been thinking of this way in our decision making for years and years.
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We've gone back to that principle from Warren Buffett that Nick just shared over and over and over again.
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But it was really as I was working through this coaching framework that this security and optionality really emerged.
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So let's talk through that.
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In terms of thinking about lending, fixed rate is security.
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You know exactly what your interest rate is going to be, which means you know what your mortgage payment is going to be, which means you can plug that into your pro forma and you can make modeling decisions based on that.
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As opposed to variable rate, that's what got so many people in the industry in so much trouble through the pandemic.
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And in that early post-pandemic years, people got rate caps and other things to try to shield from that risk.
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No one really knew that rates would go up faster than they had ever gone up before in the history of the Fed and that they would stay up for so long.
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So we got all fixed rate debt through the pandemic, just kind of looking at the number line and saying, hey, rates are two and a half percent, three and a quarter, like there's not much more room for them to go down.
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There's a lot of room for them to go up.
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And that gave us security.
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I have no illusion that we predicted, you know, exactly what would happen through 2022, three, four, five, and now even into 2026.
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But we had that security.
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From a lending perspective, I am also a big believer in legally owing the least amount possible.
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So people will ask questions like, should I do a 15-year loan or a 30-year loan on, say, a conventional single family investment property?
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And some people might say, you know, do the 15-year, you pay it off faster, you pay less interest along the way.
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Setting aside things in terms of like investment profile and risk and return, just thinking from a strictly security perspective, it's my belief, and again, this isn't investment advice.
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We don't give investment advice, we just, you know, share our perspectives.
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But it's my belief that if you legally owe the least amount possible per month, that gives you the most amount of security.
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Now, from there, you can choose to make additional principal payments or pay it all off, or, you know, do whatever you want with that loan.
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But that's what I think of in terms of as I was kind of separating out these loan proposals into fixed rate and variable rate, saying, you know, fixed rate really gives you a lot of security.
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And then the next layer that I thought through was a prepayment penalty.
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So there was one loan that she was considering that had a five-year prepayment penalty, one had a three-year prepayment penalty, and then several of them had no prepayment penalty.
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That's where I think about optionality.
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So in lending, if you have, say, a fixed rate and you have no prepayment penalty, well, you have maximized your security because you are now shielded against interest rate escalations in the future because you have a fixed rate.
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And yet, if you have no prepayment penalty, you have all the optionality in the world.
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Now, yes, there may be some closing costs and additional things if you choose to refinance that note.
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But if rates go down and you have no prepayment penalty, you can just go ahead and get another fixed rate note.
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This is the foundation on how Nick and I built our entire single family home portfolio across the first 10 years of our investing.
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We would acquire a property, we'd do a renovation, we'd do a cash out refi, we would put a note on it with fixed rate, with no prepayment penalty.
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And then as rates ebbed and flowed over the years, and maybe we forced a little more appreciation or we enjoyed some market appreciation because we had no prepayment penalty, we had a ton of optionality.
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We could then harvest that equity through subsequent cash out refines.
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And so we had that perfect blend of security and optionality.
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And that was so just kind of innate and ingrained in us over that first, you know, say 10 plus years of building our portfolio, that as I helped this coaching client through analyzing her lending options, what maybe felt like alphabet soup to her of like, I can sort of look at this and know, like, well, this rate's lower than this one, or this one's a 15-year term and this one's 30.
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But I don't really know how to rank these lending proposals.
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This thesis of security and then optionality just instantly emerged.
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And there was a very clear, you know, winner in that race.
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One of the most powerful tools that you have at your disposal in your personal finances when doing a real estate deal is to hoard cash, reserves, cash reserves.
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They are the ultimate tool that can both give you security, that can protect from downside and create optionality for the future.
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This is something that we see over and over again.
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The number one reason why small businesses fail, it's not because the founder is not dedicated enough.
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It's not because there's a poor premise for the business, a low quality product.
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It's under capitalization.
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They they simply run out of cash before they can escape the cradle and get to where the business is self-sustaining.
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We see a lot of people who do real estate deals kind of putting every single penny they have into that property and leaving themselves with very little cash in reserve.
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And that's one of the first questions that we ask when someone is contemplating a real estate investment is okay, well, how much cash do you have?
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And then how much cash will you have after you close on this deal?
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And it could be the purchase of a single family home, as Elaine was just talking about.
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You know, this could be a metric in your personal finances.
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We recommend that they keep a year of burn in cash on hand.
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And when it comes to running a real estate deal, we keep a very generous amount of cash reserves in each of our private equity funds and in all of our real estate deals, far more than what most people recommend.
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In fact, some some very sophisticated experts criticize that we have excessive cash drag on our vehicles because we just have a lot of cash sitting there.
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That cash does earn a return and we negotiate great rates with banks.
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But ultimately, the only thing that matters when the chips are down, when you have a problem, the only thing that matters is cash.
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Do you have cash to solve that problem?
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Do you have cash to weather the storm?
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And then when the once-in-a-lifetime opportunity comes along, in our experience, nine times out of ten, for you to really be able to create value in that opportunity, it requires cash, often a lot of cash.
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Like there's an apartment building we own right now that we own completely with cash.
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We have like seven million dollars of cash in that one property, which again, a lot of sophisticated individuals might say, well, you know, you're you're lowering your IRR or something by having an unlevered property, but uh that was something we need to close on on quickly.
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It would have been difficult to get leverage on in any uh reasonable amount for any reasonable interest rate.
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And we're almost certainly getting the the best outcome, the best financial outcome, the best spiritual outcome, the best logistical outcome by owning that property with cash.
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And if if any of these things seem too big, if you think I don't feel like I have a lot of cash or it must be nice to have cash, a simple exercise recommends just keep some cash in your wallet.
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Just walk around.
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If you have very little cash, just keep a bunch of singles in your wallet.
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It should be like just slightly uncomfortable when you sit down.
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If you're a gentleman with a wallet in your back pocket, just sit down, like remind yourself continuously that that if you're listening to this podcast, if you're alive in this day and age, in in this country, you have such a profound place of privilege, you have so much abundance, and all you need to do is just just marshal that abundance and be ready when that that once-in-a-lifetime opportunity comes along.
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Cash, it's it's the ultimate tool, the ultimate tool to give you both security and optionality.
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Next up, as we explore security and optionality, is the idea of the asymmetry principle.
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So security protects against downside while optionality captures upside.
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So let me say that again because those words in the order that they are spoken are so important.
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Security protects your downside while optionality captures your upside.
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What I would say I see less sophisticated real estate investors doing is they only underwrite to upside.
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They'll go into something with modeling, assuming that they can get like, you know, hit after hit after hit.
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We can renovate it, we can raise rents, vacancy is gonna go down, we're gonna get this tax deduction, there's gonna be some market appreciation because of some new jobs that are coming in or some new development in the area.
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And they're just so excited about it.
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And like, listen, I get that, right?
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We live in a world of abundance.
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I do believe that all the stars can align in your favor and that the universe is always conspiring for your good.
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And yet I recommend or I think of underwriting to the downside, asking yourself, hey, if I acquired this thing and kind of nothing went to plan, I couldn't do the forced appreciation plan I wanted, I couldn't push rents, vacancy kind of either stayed where it is or maybe even got worse.
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There was some sort of disruption in the local economy.
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Would I still be okay owning it?
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Would it still be at least a base hit?
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Would it still cash flow at least enough to cover itself?
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Would it still, you know, meet that rule that Warren Buffett says where it's a reasonable investment out of the gate with a chance for potential upside in the future?
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And if you're okay with all of the downside, right?
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That's why security comes first.
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And I keep saying this over and over again because I do believe that these are ordered.
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Security is first, optionality is second.
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Security comes first, and then optionality captures the upside.
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So that's where you can then have fun and play of I'm gonna do this renovation plan or this marketing plan or push rents or bring in new management, or I'm excited that there's new jobs coming into town or a new manufacturing plant down the street, or maybe it's a single family home and you're gonna operate it as a short-term rental or a furnished midterm rental.
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So you're thinking of your optionality as like these are all things that, you know, if I get my base hit, I'm good.
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And if I get more than that, great, then that's fun.
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I won the lottery.
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I got the icing on top of the cake.
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Instead of the perspective, what I might see many investors do is they'll acquire, say, a single family home and they must operate it as a short-term rental.
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They must, you know, bring in that much revenue in order to service the mortgage and the other expenses.
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And then, you know, something happens, either their nightly rate goes down or occupancy goes down, right?
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The short-term rental market is struggling in many geographies across the country right now, or they just get sick of doing the operations and then they feel like they've, you know, kind of accidentally put themselves into jail with a second part-time job.
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You know, something happens, but they don't have the optionality to convert it to just, you know, a true blue long-term rental because they're likely going to earn less monthly rental income.
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And so then they they lose that optionality piece.
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So security protects your downside while optionality captures your upside.
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Think of that as a core, not just investing principle, but the way you think about your life, your relationships, your personal finances, the asymmetry principle of security and optionality.
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Another just incredibly critical resource that people don't even, I think, realize is a resource as we talk about these two prongs to a beautiful, rich life or investment of security and optionality.
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The most valuable resource you have is it's time.
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For me, it's like time and cash.
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Those are the two things that matter most.
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And there's lots of ways that people can waste their time and more importantly, can put themselves under the gun.
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So think about this from like a health perspective: the old adage that the person who has their health has a thousand dreams, and the person who does not have their health has one dream, which is to be healthy until you're taking care of your health and making sure that you have a long lifespan, a lot of time runway in front of you, nothing else matters.
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A less abstract thing would be the term on your loan if you're doing a uh a real estate deal.
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So very common in our industry for people to get like three-year debt.
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And it's exceedingly rare for us to ever get short-term debt of that nature.
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We're typically getting five or seven-year debt or 30 or 35-year debt on our investments, which sometimes makes it look like our rate of return on paper is slightly lower, but ultimately gives us this exceedingly long runway so that let's say there is a problem, we've got tons of time to figure that problem out.
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And this uh this principle applies to countless other areas of your life.
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People, you know, people look at the student loan debt crisis, and this is a situation where time is is working against you.
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If you ever are kind of working against upside-down leverage like that, you know how how incredibly crushing it must be.
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And the magic of real estate is that time is just so much on your side.
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You time is your friend, inflation is your friend.
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If you just buy real estate and wait, you're typically extraordinarily successful because it it tends to return a very secure, modest uh rate of return and allows over time for this incredible upside potential.
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It meets that that Warren Buffett definition of an ideal investment.
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So uh think about time as the critical resource that it is.
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Uh we think of people as uh having this incredible opportunity cost to their life.
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If you want to make a big leap, if you want to join a coaching program or do your first real estate deal, the big benefit isn't how much money you might make on that first real estate deal or what your year one ROI is on that coaching program.
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It's who's what's the person that you become as a result of those experiences?
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How much growth do you embody?
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And then who is the person that you become 30 years from now?
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And the amount of money that you make on the real estate deal you're able to do 30 years from now because you did a deal today, or or the career that you build, or the person that you become because you you did that coaching program today.
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You you want to think about the incredible opportunity that time affords on a long time span.
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The old agile I'll close on this bullet point with is that most people vastly underestimate the amount that they can do in a decade and overestimate what they can do in a year.
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They think that if they just sprint hard, they can achieve something you know that that seems impossible.
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And it's often the case, but it's much more likely that if you just stay quietly persistent and plug away at that great achievement, you will reach the by definition, those who refuse to give up never fail.
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And given enough time, that wild upside, it's accessible to us all.
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So let's end this episode with a book recommendation, something that is a core work in Nick and I's life that has really been influential for us.
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And that's the book, The Infinite Game, by Simon Sinek.
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Although that book is a little bit different than what we've expositioned here in this episode around security and optionality, it fits in so nicely.
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And if you haven't heard of this book, we would be doing you a massive disservice not telling you about it.
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The Infinite Game by Simon Seneck presents the idea that in life there are finite games and there are infinite games.
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We all understand finite games, a game of soccer, baseball, basketball.
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There's a set of rules, there's a timer, a prescribed number of players are on the field, they all have a specific goal, right?
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Get the ball into the goal, there's a score, and at the end of the timer, whoever has the highest score, that's the game that wins.
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And then that's it.
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You all go on your merry way, and that game is over.
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An infinite game is a very, very different way of thinking about life.
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And life itself is an infinite game, but unlike a discrete, finite game that's very easy to understand and describe, an infinite game can be a little hard for us to first kind of wrap our minds around.
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In an infinite game, there are no rules.
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The rules are just made up as they go.
00:20:01.359 --> 00:20:02.880
There's no set number of players.
00:20:03.039 --> 00:20:06.079
Players are coming in and out of the game at all times.
00:20:06.240 --> 00:20:08.319
There's no real set objective.
00:20:08.559 --> 00:20:15.279
The objective is changing at all times based on what those players agree upon, the different goals that the different players have.
00:20:15.680 --> 00:20:17.839
And there's no end.
00:20:18.079 --> 00:20:20.160
The point of the game is to stay in the game.
00:20:20.319 --> 00:20:36.559
The point of life is to stay alive and to get more people involved in the game and to create more optimal outcomes for everyone involved and to build coalitions and to create things that have never been created before and to create abundance.
00:20:36.720 --> 00:20:38.799
That is the point of an infinite game.
00:20:38.960 --> 00:20:41.680
This concept created by Simon Sneck.
00:20:41.920 --> 00:20:44.559
Very, very, very highly recommend reading that book.
00:20:44.640 --> 00:21:06.240
That has been a core part of our decision-making thesis over the last many, many years, was a life-changing book for both of us and really dovetails in nicely into this thesis that we're presenting here in this episode in terms of decision-making and using the two-pronged approach of security and optionality to filter through potential decisions that you might make.
00:21:06.400 --> 00:21:12.400
I think you can add on to the richness of that paradigm through having a read-through of The Infinite Game by Simon Sneck.
00:21:12.720 --> 00:21:22.640
We hope you've had at least one big takeaway from our short time together here today, one actionable item that you can take away from and take massive action on right now.
00:21:22.720 --> 00:21:30.240
And one small action that we would dearly appreciate is if you could share this episode with just one person in your life that you think would benefit from hearing this.
00:21:30.400 --> 00:21:32.079
That would mean a great deal to us.
00:21:32.720 --> 00:21:36.799
Thank you, and we'll catch you on the next episode of the Real Estate Real Life Podcast.
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Welcome to the next episode of the Real Estate Real Life podcast.
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My name is Dr.
00:00:04.959 --> 00:00:05.919
Elaine Stockaberg.
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I'm joined by my sweet husband, Nick.
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Hello.
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And we have a topic to share today that came up during a recent coaching call inside of my Freedom and Legacy Blueprint MD flagship coaching program.
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And inside of that program, people have the opportunity to raise their hand and be coached on anything that's coming up for them.
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And in this particular situation, someone was acquiring a rental investment property and had, I think, five or six proposals from lenders and wanted to go over those proposals together.
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And through that coaching, I shared with her the framework about security and optionality and how that applies to real estate lending.
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And as I carried on throughout the evening and the next couple of days, and I was thinking about that, I realized that that framework of making decisions through the lens of security first and optionality second, I do believe that they are ordered, is really the way Nick and I think about all of our decision making.
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And through that coaching call, it was really the first time that I had like fully articulated it in one concise exposition.
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And I wanted to share that goodness with all of you.
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And so here we are on this episode of the podcast where we're going to share with you our thesis of how to make decisions and how we make decisions.
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And we are always thinking through first the lens of security and then the lens of optionality.
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So Warren Buffett famously has this very peculiar definition of an ideal investment.
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He says an ideal investment is one in which you get a regular, relatively certain low-level return.
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It's kind of a guaranteed base hit as much as anything can be in the investment world.
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And then it has a chance for some kind of wild upside.
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There's some optionality there where you have this chance at something, something bigger, something greater.
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That's like a very oddly specific profile to share.
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But if you think about it for a second, it helps you sort through things very quickly.
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So you wouldn't want to invest in cryptocurrency because that's not a safe and steady thing.
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There's certainly a wild upside potential there.
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And then just like regular old bonds are not amazing because there's nothing extra that you get there.
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It's it's very low fixed rate of return.
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There's no tax advantages to it.
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There's no additional upside potential or sweetener to that investment.
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Most like bonds and CDs and stuff wouldn't necessarily fit that bill.
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But there are a huge amount of investments if you look for them or if you structure your investment in that particular way that gives you this regular kind of recurring investment return with the chance for a wild upside.
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And it gives you both security and optionality.
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One way I would like to think about that is does it give you a flexibility?
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And are you set up for success 10 years from now?
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Different ways you could kind of think about that exact same principle.
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And these are the principles that we use to structure real estate deals that we put together.
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These are the exact principles we use to put together the Secure Freedom Fund.
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This is really kind of core principles to everything that we do.
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So let's talk about this coaching client of mine who was considering multiple lending options and kind of walking through this from a lending perspective.
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So here in this episode, we're going to describe two situations where people have come to us just in the last week or so asking for our opinion on a very important decision that they were making and how we think through the lens of security and then optionality.
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And then we're going to present some more overarching principles in relation to security and optionality.
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So in this situation, my coaching client was acquiring a single family home.
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She had, I think, five or six loan proposals in hand, which is always a best practice.
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You know, as a tangent to the episode, we believe that the deal is just as important as the debt.
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And so she had done her homework and had a number of loan proposals in hand.
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And kind of the long and short of it is I lumped them together in terms of those that were fixed rate versus those that were variable rate.
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And then I lumped them together in terms of those that had a prepayment penalty and those that did not have a prepayment penalty.
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And that was really when this security and optionality really crystallized for me.
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So we've been thinking of this way in our decision making for years and years.
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We've gone back to that principle from Warren Buffett that Nick just shared over and over and over again.
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But it was really as I was working through this coaching framework that this security and optionality really emerged.
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So let's talk through that.
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In terms of thinking about lending, fixed rate is security.
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You know exactly what your interest rate is going to be, which means you know what your mortgage payment is going to be, which means you can plug that into your pro forma and you can make modeling decisions based on that.
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As opposed to variable rate, that's what got so many people in the industry in so much trouble through the pandemic.
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And in that early post-pandemic years, people got rate caps and other things to try to shield from that risk.
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No one really knew that rates would go up faster than they had ever gone up before in the history of the Fed and that they would stay up for so long.
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So we got all fixed rate debt through the pandemic, just kind of looking at the number line and saying, hey, rates are two and a half percent, three and a quarter, like there's not much more room for them to go down.
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There's a lot of room for them to go up.
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And that gave us security.
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I have no illusion that we predicted, you know, exactly what would happen through 2022, three, four, five, and now even into 2026.
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But we had that security.
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From a lending perspective, I am also a big believer in legally owing the least amount possible.
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So people will ask questions like, should I do a 15-year loan or a 30-year loan on, say, a conventional single family investment property?
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And some people might say, you know, do the 15-year, you pay it off faster, you pay less interest along the way.
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Setting aside things in terms of like investment profile and risk and return, just thinking from a strictly security perspective, it's my belief, and again, this isn't investment advice.
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We don't give investment advice, we just, you know, share our perspectives.
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But it's my belief that if you legally owe the least amount possible per month, that gives you the most amount of security.
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Now, from there, you can choose to make additional principal payments or pay it all off, or, you know, do whatever you want with that loan.
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But that's what I think of in terms of as I was kind of separating out these loan proposals into fixed rate and variable rate, saying, you know, fixed rate really gives you a lot of security.
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And then the next layer that I thought through was a prepayment penalty.
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So there was one loan that she was considering that had a five-year prepayment penalty, one had a three-year prepayment penalty, and then several of them had no prepayment penalty.
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That's where I think about optionality.
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So in lending, if you have, say, a fixed rate and you have no prepayment penalty, well, you have maximized your security because you are now shielded against interest rate escalations in the future because you have a fixed rate.
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And yet, if you have no prepayment penalty, you have all the optionality in the world.
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Now, yes, there may be some closing costs and additional things if you choose to refinance that note.
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But if rates go down and you have no prepayment penalty, you can just go ahead and get another fixed rate note.
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This is the foundation on how Nick and I built our entire single family home portfolio across the first 10 years of our investing.
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We would acquire a property, we'd do a renovation, we'd do a cash out refi, we would put a note on it with fixed rate, with no prepayment penalty.
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And then as rates ebbed and flowed over the years, and maybe we forced a little more appreciation or we enjoyed some market appreciation because we had no prepayment penalty, we had a ton of optionality.
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We could then harvest that equity through subsequent cash out refines.
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And so we had that perfect blend of security and optionality.
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And that was so just kind of innate and ingrained in us over that first, you know, say 10 plus years of building our portfolio, that as I helped this coaching client through analyzing her lending options, what maybe felt like alphabet soup to her of like, I can sort of look at this and know, like, well, this rate's lower than this one, or this one's a 15-year term and this one's 30.
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But I don't really know how to rank these lending proposals.
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This thesis of security and then optionality just instantly emerged.
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And there was a very clear, you know, winner in that race.
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One of the most powerful tools that you have at your disposal in your personal finances when doing a real estate deal is to hoard cash, reserves, cash reserves.
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They are the ultimate tool that can both give you security, that can protect from downside and create optionality for the future.
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This is something that we see over and over again.
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The number one reason why small businesses fail, it's not because the founder is not dedicated enough.
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It's not because there's a poor premise for the business, a low quality product.
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It's under capitalization.
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They they simply run out of cash before they can escape the cradle and get to where the business is self-sustaining.
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We see a lot of people who do real estate deals kind of putting every single penny they have into that property and leaving themselves with very little cash in reserve.
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And that's one of the first questions that we ask when someone is contemplating a real estate investment is okay, well, how much cash do you have?
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And then how much cash will you have after you close on this deal?
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And it could be the purchase of a single family home, as Elaine was just talking about.
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You know, this could be a metric in your personal finances.
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We recommend that they keep a year of burn in cash on hand.
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And when it comes to running a real estate deal, we keep a very generous amount of cash reserves in each of our private equity funds and in all of our real estate deals, far more than what most people recommend.
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In fact, some some very sophisticated experts criticize that we have excessive cash drag on our vehicles because we just have a lot of cash sitting there.
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That cash does earn a return and we negotiate great rates with banks.
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But ultimately, the only thing that matters when the chips are down, when you have a problem, the only thing that matters is cash.
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Do you have cash to solve that problem?
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Do you have cash to weather the storm?
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And then when the once-in-a-lifetime opportunity comes along, in our experience, nine times out of ten, for you to really be able to create value in that opportunity, it requires cash, often a lot of cash.
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Like there's an apartment building we own right now that we own completely with cash.
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We have like seven million dollars of cash in that one property, which again, a lot of sophisticated individuals might say, well, you know, you're you're lowering your IRR or something by having an unlevered property, but uh that was something we need to close on on quickly.
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It would have been difficult to get leverage on in any uh reasonable amount for any reasonable interest rate.
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And we're almost certainly getting the the best outcome, the best financial outcome, the best spiritual outcome, the best logistical outcome by owning that property with cash.
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And if if any of these things seem too big, if you think I don't feel like I have a lot of cash or it must be nice to have cash, a simple exercise recommends just keep some cash in your wallet.
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Just walk around.
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If you have very little cash, just keep a bunch of singles in your wallet.
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It should be like just slightly uncomfortable when you sit down.
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If you're a gentleman with a wallet in your back pocket, just sit down, like remind yourself continuously that that if you're listening to this podcast, if you're alive in this day and age, in in this country, you have such a profound place of privilege, you have so much abundance, and all you need to do is just just marshal that abundance and be ready when that that once-in-a-lifetime opportunity comes along.
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Cash, it's it's the ultimate tool, the ultimate tool to give you both security and optionality.
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Next up, as we explore security and optionality, is the idea of the asymmetry principle.
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So security protects against downside while optionality captures upside.
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So let me say that again because those words in the order that they are spoken are so important.
00:12:04.639 --> 00:12:10.399
Security protects your downside while optionality captures your upside.
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What I would say I see less sophisticated real estate investors doing is they only underwrite to upside.
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They'll go into something with modeling, assuming that they can get like, you know, hit after hit after hit.
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We can renovate it, we can raise rents, vacancy is gonna go down, we're gonna get this tax deduction, there's gonna be some market appreciation because of some new jobs that are coming in or some new development in the area.
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And they're just so excited about it.
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And like, listen, I get that, right?
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We live in a world of abundance.
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I do believe that all the stars can align in your favor and that the universe is always conspiring for your good.
00:12:47.360 --> 00:13:04.960
And yet I recommend or I think of underwriting to the downside, asking yourself, hey, if I acquired this thing and kind of nothing went to plan, I couldn't do the forced appreciation plan I wanted, I couldn't push rents, vacancy kind of either stayed where it is or maybe even got worse.
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There was some sort of disruption in the local economy.
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Would I still be okay owning it?
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Would it still be at least a base hit?
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Would it still cash flow at least enough to cover itself?
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Would it still, you know, meet that rule that Warren Buffett says where it's a reasonable investment out of the gate with a chance for potential upside in the future?
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And if you're okay with all of the downside, right?
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That's why security comes first.
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And I keep saying this over and over again because I do believe that these are ordered.
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Security is first, optionality is second.
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Security comes first, and then optionality captures the upside.
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So that's where you can then have fun and play of I'm gonna do this renovation plan or this marketing plan or push rents or bring in new management, or I'm excited that there's new jobs coming into town or a new manufacturing plant down the street, or maybe it's a single family home and you're gonna operate it as a short-term rental or a furnished midterm rental.
00:13:59.120 --> 00:14:06.159
So you're thinking of your optionality as like these are all things that, you know, if I get my base hit, I'm good.
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And if I get more than that, great, then that's fun.
00:14:09.519 --> 00:14:10.480
I won the lottery.
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I got the icing on top of the cake.
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Instead of the perspective, what I might see many investors do is they'll acquire, say, a single family home and they must operate it as a short-term rental.
00:14:22.240 --> 00:14:28.720
They must, you know, bring in that much revenue in order to service the mortgage and the other expenses.
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And then, you know, something happens, either their nightly rate goes down or occupancy goes down, right?
00:14:35.759 --> 00:14:47.679
The short-term rental market is struggling in many geographies across the country right now, or they just get sick of doing the operations and then they feel like they've, you know, kind of accidentally put themselves into jail with a second part-time job.
00:14:47.759 --> 00:14:57.759
You know, something happens, but they don't have the optionality to convert it to just, you know, a true blue long-term rental because they're likely going to earn less monthly rental income.
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And so then they they lose that optionality piece.
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So security protects your downside while optionality captures your upside.
00:15:07.759 --> 00:15:19.200
Think of that as a core, not just investing principle, but the way you think about your life, your relationships, your personal finances, the asymmetry principle of security and optionality.
00:15:19.759 --> 00:15:32.399
Another just incredibly critical resource that people don't even, I think, realize is a resource as we talk about these two prongs to a beautiful, rich life or investment of security and optionality.
00:15:32.559 --> 00:15:34.960
The most valuable resource you have is it's time.
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For me, it's like time and cash.
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Those are the two things that matter most.
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And there's lots of ways that people can waste their time and more importantly, can put themselves under the gun.
00:15:47.600 --> 00:16:05.279
So think about this from like a health perspective: the old adage that the person who has their health has a thousand dreams, and the person who does not have their health has one dream, which is to be healthy until you're taking care of your health and making sure that you have a long lifespan, a lot of time runway in front of you, nothing else matters.
00:16:05.519 --> 00:16:11.600
A less abstract thing would be the term on your loan if you're doing a uh a real estate deal.
00:16:11.759 --> 00:16:16.720
So very common in our industry for people to get like three-year debt.
00:16:16.879 --> 00:16:20.559
And it's exceedingly rare for us to ever get short-term debt of that nature.
00:16:20.639 --> 00:16:38.399
We're typically getting five or seven-year debt or 30 or 35-year debt on our investments, which sometimes makes it look like our rate of return on paper is slightly lower, but ultimately gives us this exceedingly long runway so that let's say there is a problem, we've got tons of time to figure that problem out.
00:16:38.799 --> 00:16:42.159
And this uh this principle applies to countless other areas of your life.
00:16:42.320 --> 00:16:49.200
People, you know, people look at the student loan debt crisis, and this is a situation where time is is working against you.
00:16:49.360 --> 00:16:54.399
If you ever are kind of working against upside-down leverage like that, you know how how incredibly crushing it must be.
00:16:54.559 --> 00:16:59.120
And the magic of real estate is that time is just so much on your side.
00:16:59.279 --> 00:17:02.320
You time is your friend, inflation is your friend.
00:17:02.559 --> 00:17:15.359
If you just buy real estate and wait, you're typically extraordinarily successful because it it tends to return a very secure, modest uh rate of return and allows over time for this incredible upside potential.
00:17:15.599 --> 00:17:19.839
It meets that that Warren Buffett definition of an ideal investment.
00:17:20.000 --> 00:17:25.920
So uh think about time as the critical resource that it is.
00:17:26.240 --> 00:17:32.240
Uh we think of people as uh having this incredible opportunity cost to their life.
00:17:32.480 --> 00:17:45.519
If you want to make a big leap, if you want to join a coaching program or do your first real estate deal, the big benefit isn't how much money you might make on that first real estate deal or what your year one ROI is on that coaching program.
00:17:45.599 --> 00:17:50.160
It's who's what's the person that you become as a result of those experiences?
00:17:50.319 --> 00:17:52.640
How much growth do you embody?
00:17:52.799 --> 00:17:56.960
And then who is the person that you become 30 years from now?
00:17:57.200 --> 00:18:07.839
And the amount of money that you make on the real estate deal you're able to do 30 years from now because you did a deal today, or or the career that you build, or the person that you become because you you did that coaching program today.
00:18:08.000 --> 00:18:15.759
You you want to think about the incredible opportunity that time affords on a long time span.
00:18:16.000 --> 00:18:25.200
The old agile I'll close on this bullet point with is that most people vastly underestimate the amount that they can do in a decade and overestimate what they can do in a year.
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They think that if they just sprint hard, they can achieve something you know that that seems impossible.
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And it's often the case, but it's much more likely that if you just stay quietly persistent and plug away at that great achievement, you will reach the by definition, those who refuse to give up never fail.
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And given enough time, that wild upside, it's accessible to us all.
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So let's end this episode with a book recommendation, something that is a core work in Nick and I's life that has really been influential for us.
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And that's the book, The Infinite Game, by Simon Sinek.
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Although that book is a little bit different than what we've expositioned here in this episode around security and optionality, it fits in so nicely.
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And if you haven't heard of this book, we would be doing you a massive disservice not telling you about it.
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The Infinite Game by Simon Seneck presents the idea that in life there are finite games and there are infinite games.
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We all understand finite games, a game of soccer, baseball, basketball.
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There's a set of rules, there's a timer, a prescribed number of players are on the field, they all have a specific goal, right?
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Get the ball into the goal, there's a score, and at the end of the timer, whoever has the highest score, that's the game that wins.
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And then that's it.
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You all go on your merry way, and that game is over.
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An infinite game is a very, very different way of thinking about life.
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And life itself is an infinite game, but unlike a discrete, finite game that's very easy to understand and describe, an infinite game can be a little hard for us to first kind of wrap our minds around.
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In an infinite game, there are no rules.
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The rules are just made up as they go.
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There's no set number of players.
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Players are coming in and out of the game at all times.
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There's no real set objective.
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The objective is changing at all times based on what those players agree upon, the different goals that the different players have.
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And there's no end.
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The point of the game is to stay in the game.
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The point of life is to stay alive and to get more people involved in the game and to create more optimal outcomes for everyone involved and to build coalitions and to create things that have never been created before and to create abundance.
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That is the point of an infinite game.
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This concept created by Simon Sneck.
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Very, very, very highly recommend reading that book.
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That has been a core part of our decision-making thesis over the last many, many years, was a life-changing book for both of us and really dovetails in nicely into this thesis that we're presenting here in this episode in terms of decision-making and using the two-pronged approach of security and optionality to filter through potential decisions that you might make.
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I think you can add on to the richness of that paradigm through having a read-through of The Infinite Game by Simon Sneck.
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We hope you've had at least one big takeaway from our short time together here today, one actionable item that you can take away from and take massive action on right now.
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And one small action that we would dearly appreciate is if you could share this episode with just one person in your life that you think would benefit from hearing this.
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That would mean a great deal to us.
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Thank you, and we'll catch you on the next episode of the Real Estate Real Life Podcast.
