Episode 166 | Paul Moore | Military Millionaire

00:00 - 05:00

Alex:

What's up Military Millionaires! My name is Alice Felice and I'm here today with my wonderful co host, David Pere. He got fired from doing intros, we are here with the legendary Paul Moore. He's gonna be here to talk to us about a bunch of different real estate topics. He's a prolific BiggerPockets contributor, he's coming out with a new book called Storing up Profits: Capitalize on America's Obsession with Stuff by Investing in Self Storage. I'm very excited talking about that.

Intro:

Welcome to the Military Millionaire podcast where we teach service members, veterans and their families how to build wealth through personal finance, entrepreneurship, and real estate investing. I'm your host, David Pere. And together with my co host, Alex Felice, we're here to be your no BS Guides along the most important mission, you'll ever embark on your finances.

David:

What's up military millionaires! I wanted to briefly talk about a service I offer that a whole lot of people don't seem to know about. And I guess that's a failure on my part for not having discussed it enough.

So look, finding a realtor that understands investing and or the VA loan or both, is not always the easiest thing in the world and finding a lender, same thing. So what I have started doing is I've built a, well I have a large network, but I've started to compile it all together, finally, as a legitimate Excel, document driven, location driven list for you guys, essentially.

So what it is basically just my way of helping connect you with a realtor or a lender that I know personally and have vetted and talked to and understand that they're not going to screw you. And what I do is, like, for example, I had a market where I had two or three agents that I all sent, the same person has connections that hey, man, you know, I trust, I know all of these, let me know what you think. And they are also the same agent. And the same thing. So what I've done is if there's multiple agents in the same market, I choose the best one. And that's what I'm going to hook you up with. But the whole point of this is just to help ensure that you get connected to the best agents.

So if that is something that you would like, just go to the website, go to frommilitarytomillionaire.com/va-realtor/ or just reach out to me on Instagram or Facebook, whatever, I'll send you the link or you can find it on the resources page, the website, but look, all it is is a way to help connect you with an agent who's gonna hook you up. No, I don't charge a fee for you know, I don't charge a fee for the agent. It's just a way to hook you guys up at the end of the day as a buyer, you're not going to pay for a realtor anyway. So Tada, it's magic, you might as well use one.

As far as a VA lender, I've got a really good one that I work with. I know very well, there's several others that are pretty good. And I'll probably try to steer you away from some companies that I just don't think are very reputable or have been very helpful. So, you know if this is a service that sounds good to you for free 99 then reach out and if not, then enjoy the show right now.

Alex:

Paul, welcome to the show.

Paul:

Hey, it's great to be here, guys! Thank you for having me on.

David:

Absolutely.

Why don't you give a little bit of background about how you got into real estate investing. Tell us your story.

Paul:

Okay, well, I started with an engineering degree, which is my first mistake. And then I got an MBA and went to Ford Motor Company realized I wasn't really fit for corporate America. So I started my own company. We had the good fortune to sell it in five years to a publicly traded firm. And I started investing in real estate to protect and grow my own wealth, and started flipping houses. Then I started flipping waterfront lots at a resort area called Smith Mountain Lake, built some houses and I learned this amazing lesson. You shouldn't build your own house. If you don't know how to tighten the doorknob on a house. That's just something I learned that's free for your audience.

But yeah, I did a small subdivision and over the years, I was always kind of perplexed like how do these really rich guys get involved in commercial real estate? What do they do? How do I get involved? I wasn't sure where the on ramp was. But I invested in oil and gas in 2010 in North Dakota during the big Bakken oil boom and there was a massive housing shortage. And there were like 10,000 people going into towns of 3000 looking for a place to stay. And so we quickly built a couple of multifamily facilities. We operated those like extended stay hotels, we made a lot of money. My partner went on to build a Hyatt hotel, I decided to stay in multifamily.

I ended up writing a book on apartment investing humbly entitled, The Perfect Investment. And we found out that the perfect investment wasn't perfect if you have to weigh overpay to get it and so we expanded at that point out into self storage and mobile home parks, RV parks, some other asset types. And my company has five funds managing investments in those spaces.

David:

Wow! That's a lot of funds.

05:00 - 10:00

Alex:

Very impressive serial entrepreneur. I love it.

Right before we got on the show though. I want to preface this. You said, you want to talk or you recently gave a talk about why real estate's a boring investment and why that's a good thing. And is that some you'd like to expand on a little bit?

Paul:

It's not exactly. So I will say it this way. I am so glad you asked Alex because I was a serial entrepreneur for years. I thought about having a serial entrepreneur business card, and I was proud of that. I should have had a card that said certified shiny object chaser because that's what I did. And I lost. I mean, literally in two deals alone. I think I lost millions of dollars because I got distracted. You know, Gary Keller and Jay Pappas, in their amazing book, the one thing says, you know, they say, he who chases two rabbits catches neither. And so I found out, you know, for years, I thought that investing should give me the same excitement that being an entrepreneur did.

But that was a lie. Paul Samuelson is the first economist from the US to win the Nobel Peace Prize. And he said, investing shouldn't be boring, it should be like watching paint dry, or watching grass grow. He said, If you really want excitement, take $800 and go to Las Vegas. And that was not my attitude, I wanted excitement. And so even when something, when I invested in something and built something and got it up and running, if I got bored, I would turn my attention to something else.

So like, when we were doing those amazing multifamily properties in North Dakota, I, it was going well. So I turned my attention to something ground up like a wireless internet company, that was a complete mistake. And so over the years, I found that I was losing money by chasing shiny objects. And I found out you know, honestly, I would rather be boring, George Soros, I think he's running for Antichrist or something, you shouldn't put that on the air. But seriously, George Soros..

David:

Beeeeeeep.

Alex:

We don't censor anything here. So we're gonna

Paul:

No, seriously, George Soros is an amazing investor in his 90s. And he said, if you're having fun, if you're excited, you're probably not investing, investing should be boring. And so that's the conclusion I've come to. And I found that being bored allows me to be an expert. Because I really drill down, I don't chase shiny objects, I stay in my lane, I stay focused. I've been doing that for a number of years now. And it's just been a great relief. And it gives me time for my family. It means I'm not always in startup mode, always, you know, in the plane, jet taking off using all of its energy to get off the ground. And it's not as exciting as chasing something new, but it is a whole lot more profitable.

Alex:

I love this. And I think a lot of people are suffering from the shiny object syndrome right now. Or they're, they feel like real estate is really exciting.

David is the king of shiny object syndrome. He's got his hands in everything. I'm pretty bad myself. I started out in real estate, you know, hey, look, buy one of these and sit on it and don't think about it really, really, really boring. And I find myself getting caught up in all the excitement, because, you know, it's really popular right now.

Do you think that the current trend makes things more popular, and that's just part of the cycle? And then maybe when the cycle is over people will realize that kind of advice? Because Buffett says the same thing, right? Just, you know, buy once and sit on it forever kind of investing is to be the ongoing the best wisdom?

Paul:

Yeah, you know, I'll tell you what, there's never been a better time, in my opinion, to buy and sit on something for a while. I mean, think about it, we have the lowest interest rates, at least in general, in 5000 years of Earth history. And that's been documented. We also have something going on that we haven't seen ever before to my knowledge, and that is we have high inflation. At the same time, we have these low interest rates.

So this combination of low interest rates and high inflation means that you can lock in for say 10 or 12 years or even 30 in residential real estate, you can lock in your highest payment at a very historically low rate. But yet you can allow inflation to allow you to increase rev rents and revenue and dramatically increase your wealth. While you know in the past we heard inflation was all bad. Maybe, maybe it's not if you handle it right.

Alex:

Certainly in a vacuum, I think, you know, in a piece of debt against the real asset, I think, I think inflation is gonna be really good. It's the, you know, the cost of living for everybody else who's not buying real estate is where I worry, but I do love that advice.

So let me ask another question. You interact with bigger pockets quite a bit. And I'm going to try to say this diplomatically, but it is not my strong suit. The age demographic of bigger pockets is probably a bit younger than you.

10:00 - 15:00

Paul:

I'm younger than I look.

Alex:

What I mean is that sight. And look, I love bigger pockets is mostly what I call the blind leading the blind. It's people who have succeeded for three years teaching people who have just got into it six months ago. And there's not that much. There's not that many outliers. Meaning there's not that many people on that site that have been investing since before the crash, which is basically how I determine whether somebody has been good or lucky. If you've only been doing this in an up market, then I don't know if I can trust you or not. But you've certainly been doing it since before the stock market. So how does that interaction work? Because there's not many people who have that experience level like you,

Paul:

Alex, that's a fabulous question. And honestly, in an age when everybody's making huge profits, it's really, it's easy to devalue experts. In fact, there's a book called The Death of Expertise or The Death of Experts. And it says, basically, if everybody's benefiting equally, then how can you tell the experts from the amateurs and I, on bigger pockets, I'm surprised no one's attacked me. I call people who weren't even in real estate five or six years ago, who are now gurus teaching other people. I call them new roofs, you know, new gurus. And I'm trying to coin that phrase, and I'm hoping your amazing audience will help me coin this phrase. But seriously, you can't tell experts from successful or lucky amateurs. And, you know, there's gonna come a day like Buffett said, you know, the rising tide has lifted all these boats, but someday, the tide is gonna go out, and then we'll see who's skinny dipping.

Alex:

So I figured this out a few years ago, because I read a lot of books, and I really like books. You said the word expert, but that's not really what I'm after, personally, I'm after wisdom, which maybe we can pick hairs on what the difference is. But certainly this culture and in the economy, we people have given up on wisdom, and they're really about the shiny object, where what can I make, you know, triple percent increases on and how do I get rich tomorrow, and it's all really exciting. And they sort of dismissed this, what I consider wisdom, which is, you know, investing should be boring. And they've dismissed a lot of the old knowledge, and they've gotten, you know, whatever shiny and it is a lot of, you know, I personally started in real estate in 2014, which was late in terms of the the foreclosure boom, and then I look back, the more I learned, I'm like, you know, what, I'm lucky, I don't know how much I know. Let me sit back and learn a lot. And it's just interesting to see, I don't see that many people from before the 08 crash teaching, I see a lot of people who got into this until the 19 teaching. And so I'm glad that you haven't had any trouble interacting with people. But it's good to see some faces with experience.

Paul:

Yeah, I'll make a comment on that. So I'm in a mastermind with eight amazing guys, seven amazing guys than me. But they're actually all, like just making millions of dollars. And literally, these guys are great high integrity guys, but only one of the seven, only me and one other guy had been in real estate since before the 2008 crash. It's possible some of them were still in high school, then. And they're crushing it. And they're doing all the right things, from what I can tell. But I don't know that they've been tested in the fire of what could come and so to answer your earlier question, Alex, I think being older and having speaking from this buffet type perspective, and hopefully, you know, at least using their the wisdom I've learned from Buffett and others, I'm able to speak into the life and of these people on bigger pockets. And some of them recognize that, and a lot of investors have actually come invested with us because they recognized I was saying something different.

Alex:

Again, you know, for us, just from my experience, my learning and you got our stand, like our demo is geared towards new young service members or people who just got out of the military who are trying to turn their finances around. So maybe not, not a lot of high level investors. Maybe I don't want to, you know, but generally younger people and you know, I was young once. I assume you were like, we generally take wisdom and it's very easy to negate it. It's very easy to look at it like you don't know anything. I know everything.

Paul:

Yeah. So easy.

Alex:

And so what's gonna happen to these people and this is why I really bring this up because like, I want people to listen to Paul because you know, the older I get the more I'm like bro wisdom and experience is worth more than fancy language and shiny objects like forever. And, you know, for our young demo to hear something like you know, real estate should be boring, investing should be boring the the turn off the ability to the the instinct to turn that off or say like, it's not for me, it's probably easy, but man, it's really the most valuable thing is that wisdom and experience way more than the triple percent returns that you might get from some speculative thing.

You're up 15% and a market that's up 20. That doesn't make you good.

15:00 - 20:00

Paul:

Especially with inflation when the real value of your money is breakeven at 15, you know, so, I mean, we haven't seen this happen yet. We got this as I would attend a trillion dollar bill from Zimbabwe.

I don't think we're gonna see that. But you know, guys seriously when Warren Buffett was 69, he was a kid right at 69. They were starting to call him senile. And in 1999, he was laughed at mocked, marginalize, because they said he was senile, he had completely missed the tech boom. And he got up at Sun Valley, Idaho with his little annual meeting every June of billionaires. And he said, guys, I'd rather invest in Wrigley than in the internet, because I don't know where the where tech and where the internet will be in 10 years, I do know how people will be chewing gum, I'll continue to be boring, you guys go ahead and have fun. He said, Don't forget, though, that in the short run, the stock market is like a voting machine. In the long run. It's like a weighing scale. In the short run, the voting machine just votes for what's popular, what's shiny, what's exciting. And of course, a year and a half later, in March of 2000, the tech bubble burst. And Buffett was proved right yet again. And all those people who were you know, these new billionaires were, you know, delivering pizzas.

Alex:

Yes, so fascinating.

Speculation versus investing, I really, really, really try to be an investor and never a speculator, it is very difficult. I have a huge ego, I have a lot of friends who are winning, and I want to get that FOMO. And it's really easy to be like, I want to get ahead of the next big opportunity. Rather than say, I want to stay, you know, I want to stay with what is tried and true. My intellectual Hero Guy Nassim Taleb goes, you never take on risk of ruin. And you know, people who have their whole it's so interesting, I know people that their entire portfolio is in cryptocurrencies. And then you have guys like Charlie Munger and Warren Buffett, who are like, I wish they would just ban it, there's no, there's nothing. It's a terrible investment.

And so I'm like, one of them is right. And you know, it's okay for Buffett to be wrong. He's been wrong before. But it's also, it's very similar to the tech bubble, where it's like a lot of speculation, a lot of mania. In 2001, we had just had, we didn't have the training on the phones yet, but we had, E trade had just come out. And so for the first time that somebody could get on the internet and for $6, make a trade. And so the liquidity rushed into the market like never before. And I think we're seeing that same thing with Robin Hood and these crypto apps where a kid can get on there with a little bit of money and do micro trades. And so you have all this liquidity and it makes it really, really speculative. I don't want to say bubbles, but potentially bubbles. So it's a really interesting time.

Paul:

It really is. And it's funny that you mentioned the same because I was actually speaking at an anti fragile conference in Dallas two weeks ago.

Alex:

I've read all his books twice. I talked about him every day. He's my hero of heroes.

David:

They're on the bookshelf back there. I think.

Alex:

Next time you go please invite me. I want to go to his conference in New York, the real world risk institute but it's like $8,000.

Paul:

Just to be clear, it wasn't in Nassim’s conference. It was somebody using his anti fragile theme to do their own conference, but it was awesome.

Alex:

Still probably my people.

Paul:

Yeah, probably I think you'd like these guys.

Alex:

Let's talk about self storage. I love the title of your book. I love love love it. I am sort of an anti consumerist type of like you know, I have you know, it's easy to critique Americans but you guys need all this. You do not need all this stuff, but they're gonna buy it anyway. And they're gonna store it in Paul's self storage facilities, and then when the big explosion happens and they downsize their house, they're gonna store all that stuff in Paul's storage as well. So it's pretty recession resistant.

Paul:

Yeah, it really is crazy. I love self storage for that reason. That's one of many. You know when good times people are filling up their Amazon and Walmart carts and we may be skeptical of this but it's really happening. And people need a place to store their stuff and bad times people are downsizing or they're getting you know, they have death divorce dislocation downsizing, and they're, you know, are needing a place to store their stuff and for a small price, they can store it rather than get rid of it.

20:00 - 25:00

Paul:

What happened in COVID? Well, COVID struck and right away we have 1000s 10s of 1000s of college students storing their stuff not sure if they're, you know, gonna be coming back when we flatten the curve in two weeks. And also, and then later we have, you know, wholesale mass migration from New York, Chicago, LA San Francisco to Montana, Utah, Texas and Florida. And people need a place to store their stuff along the way. We have restaurants, bars closing, other types of, you know, offices downsizing as people work from home, and people are storing their stuff. And so it really is recession resistant. The thing I love best about self storage. Well, one more thing. First, the prices are really inelastic. I mean, think about it. I mean, if I'm renting a $1,000 apartment from you, David, and you raise the rent 6%, I might leave rather than pay the extra 60 bucks a month $720 a year from signing that lease. But with a month to month Self Storage lease, if you raise my rent, you know, 6%, I'm paying 100 bucks, it's gonna go to 106. I get irritated. But then I forget about it until the next time you raise it, it hits my credit card at $113, next time.

So people aren't usually going to spend a weekend renting a U haul get their buddies together to move their junk, excuse me, their treasures down the street, just to save six bucks a month.

My favorite thing about self storage is it's extremely fragmented, unlike multifamily. I love multifamily. I wrote a book on it. But self storage, you know, there's 53,000 facilities in the US that's about the same as Starbucks subway, McDonald's combined, but 75% or so are run by independent operators. And two out of every three of those are actually Mom and Pop operators, they typically don't have the desire, the resources or the knowledge to improve the asset, drive higher income and maximize the value for their investors.

So quiet and they don't need to, they've already seen the price of their self storage facility double in the last five years just because the market rose. And so they're sitting they can be mediocre and be sitting on a very valuable asset. An expert or excuse me, a wise operator can walk in, buy yep, buy that self storage facility, upgrade it and create an incredible situation for their investors. And that's what that's the type of deals we like to invest in.

Alex:

Self Storage has been called the new hotness for a few years now. Is it still fragmented the way it was six years ago?

Paul:

It's not as fragmented. I mean, there are institutional buyers and these large regional players like we invest with who are buying these up. And so it's becoming less fragmented every year. And just like, you know, there was a day in my life, you guys might remember when the last World War I veteran died, there was no more on the planet. Well, it's gonna be that way with self storage eventually. But thankfully, that day is not today.

Alex:

Oh, David, would you like to speak, you're here too.

David:

I am. And I am gonna say something for the first time today.

So one of the things I love about self storage, is the fact that you can, like so with an apartment, right? We all know about evictions and turnovers and all this other craziness. That's a miserable experience with self storage, from what I understand. And I mean, it might be different in different areas, you can auction off, you know, if somebody just leaves it locked in whatever, you can literally make money from the eviction process. Which is great, because I mean, even when I have tenants die, I have to go pay for storage. Like it's like, it's like this unavoidable expense for me. But on the running a self storage is like, it's like the one world where you can actually profit on a turnover.

Paul:

You know, it's amazing that during COVID you couldn't evict tenants from a lot of apartments. But we could always evict people from self storage because it wasn't a person you were moving out. And we had the leverage of having their stuff. And so it was pretty easy to get people to pay. And then like you said, as a last resort, we can auction off their stuff and move on. And so it's really great business in a lot of ways.

Alex:

Yeah, I love that. You mentioned RV parks too. You had much experience with that? That's what I've been moving towards, recently.

Paul:

Guys, RV parks are where self storage and maybe apartments were 20 or 30 years ago.

Alex:

David, you didn't take that little soundbite. Give it to me so I can market it, because we are moving heavy into RV's. We've been doing multifamily, C Class multifamily value add for the last eight years because you know a lot of the same things fragmented, a lot of room for growth, low interest rates, inflation, you know, buys you some rental increases. But now we look and we say we got to pivot because investing is boring, but you do have to pivot when the market tells you to pivot. And I think we're gonna pivot out of multifamily. And we're looking at self storage and going to Palmore has already dominated it. I don't want to compete with a Palmore or, or a lot of other people, but RV parks I feel are really behind that curve. And the RV industry is booming. And so we went off and got seven parks and got 20 more million in loi right now.

25:00 - 30:00

Paul:

Seriously?

Alex:

Oh, we are going hard.

Paul:

That is awesome!

Alex:

Yeah. But I'm glad to hear you say that, because that's what we feel. And that's the pitch that I've been doing is RV parks are what multifamily and self storage was eight years ago, fragmented. You know, it's a growing industry. And you get a lot of the same benefits where, you know, I own the pad, not, not the vehicle.
Paul:

Yeah.

It's amazing. I'm there's so much we could say about this. I'll say this that we've been interested in RV parks for years. So our company Wellings Capital, we go out and find expert operators who have been in business or at least their principles have been since before the Great Recession 14 years ago. And we invest heavily with them and give them the equity they need to grow. Well, we couldn't find anybody in RV parks guys. I mean, we spent, I mean, we weren't looking hard the whole time. But for the last few years, we've been very interested, we've been actively investing in mobile home parks. With apartments, you have to spend a lot of time just to figure out who the you know, the newbies, excuse me, the new rules are and who the real wise guys are the real wisdom experts. But with RV parks, we didn't even have any choices. We couldn't find anybody who had been doing it systematically, with a team technology and track record that we wanted to see to invest in RV parks.

We did finally find somebody but two of the three big companies that were crushing in the Serena had already been acquired by Sun communities. And so there was only one to choose from so far. I hope there's others out there. And if you're out there, get hold of us because we're interested in this whole space and we think it is an incredible, incredible runway ahead of it.

Alex:

Have you heard of Climb Capital?

David:

He said before the recession.

Alex:

Yep. But he said he couldn't find anybody.

David:

Oh, I mean, I'm gonna jump into it next week, Paul, so let's talk.

Paul:

Okay, let's talk.

Climb Capital?

Alex:

Climb.

Paul:

No, I have not.

Alex:

Okay.

Paul:

Should I?

Alex:

Yeah, of course. We are the premier RV operators in the Sunbelt.

David:

This is a non pitch show, Alex.

Alex:

I agree. Okay. Just teasing. I'm just, I'm just making. I'll just..

David:

Let it out. Out.

Alex:

Look, I'm being ridiculous. I can't help myself. I wouldn't want to if I could.

David:

So Alex is on a team with a good friend of ours who has done like he said C Class multifamily and is now pivoting into and dominating or going to be dominating the RV space.

Paul:

Nice.

David:

If you want to talk about it. I will not bleep you out entirely.

Alex:

That's okay. We're here for Paul. I'm here for you, Paul.

Paul:

I'm here for you guys.

Alex:

Yeah, you're a great guest, actually.

Everybody else has to deal with me all the time. David, he is so sick of me. So I like to make it about the guest.

Paul:

Well, anyway, I love RV parks.

David:

Yeah, they're pretty sweet.

You know, it's funny, when everyone started, when everyone, I say everyone when Alex and then the friends on the team started talking about them. I started looking around my market and realized there really aren't any. So there's probably an opportunity there. But I don't know that building an RV park as my first go is going to be what I do. However I am looking at what was once a mobile home park and is now pretty much one trailer on a bunch of pads. There's potential. I just don't think it's close enough to the highway to be.

Paul:

Yeah, well, I mean, I stayed at one last week. That was almost an hour west of Fort Worth. And it was out in the middle of the sticks guys. And they were crushing it they put in so they bought it. I don't remember the exact price. But I think let's say it was like $4 million. They had like an extra 100 or 200 acres with it. They could expand. They put in like a $600,000 lake. They put in like a $200,000 wibit structure. You guys know what wibits are?

David:

Imagining you're not talking about when you hof like brown bags.

30:00 - 35:00

Paul:

No!

Maybe I'm even saying it wrong. It's a big structure like it's anchored down in a lake. And you can actually let kids like or adults and kids like run up around they run around as they dive off the jump off their slides off of it. It's like I don't even know how to spell it. But at any rate..

Alex:

Looks like a moon bounce on the lake.

Paul:

Yeah, yeah, that's right.

Alex:

Looking at one that's interesting.

Paul:

Okay, so this looks like a destination park. People would go there, they bring their RV, you know, they pay an extra fee like a resort fee just like you do at a nice hotel, you know, might be $8 per person per day. But that gives them ceramics. And of course, they have to buy ceramic, t-shirt paintings. They've got to buy the T-shirts. It gives them moonwalk, puck golf, and hayrides. Movie Theater, the wibits, the wibits, they charge like $15 per hour to jump on these. They're renting this wibit that costs 200,000. They're renting it for $1,000 an hour and talk about a value add. I mean, just on and on and on. And you know, and this Park is crushing it. I mean, I just can't believe how, what a great opportunity this is.

Alex:

Yeah, so that's what we've been doing is the resort RV parks. Yeah, I thought it was just you know, you get an RV park, you get a bunch of pads. But it's like, no, we build pools, clubhouses, volleyball courts, we build man made lakes. We put fish in them. I mean, people go fishing. It's really interesting. It was kind of new to me, too. It's very, like, I didn't think that was a thing, but it is an extremely big thing.

Paul:

Yeah.

Alex:

A lot of amenities that go with them. And then still, when you're at the end of the day, you really just own the pad.

Paul:

Right.

Yeah, I mean, especially when you're buying these rural areas. I mean, you guys have certainly seen the bonus depreciation, you can get the paper losses from mobile home parks and RV parks are amazing.

Alex:

Yeah, we're starting to buy little tiny homes on wheels. And we've put them in the parks. We rent them out as Airbnb but they're 100% to take 100% depreciation.

Paul:

Nice.

Alex:

Yeah. So there's so many interesting things you can do.

Paul:

I mean, think about this.

So you got the tiny home, you've got the pad, you know, you might have $80,000 and all that. For $1,200 you put a little dog pen around it on the outside, and you rent that for another 30% on top of the normal daily rate for the dog pen. So it's, you know, $60 extra a day for that. These value ads are pretty amazing.

Alex:

Yeah.

Paul:

Wait, I'm starting to sound excited.

David:

I was gonna say this isn't boring enough.

You guys need to chill. You guys. You should both back out of the RV world. And I will go get excited. You guys are already boring.

Paul:

Forget about RV’s.

David:

It's funny, because that whole conversation about speculation and excitement is actually really, really well timed. Because I'm looking at a building for the second time today, but it's not super boring. I think there's a huge potential, but I mean, I've spent probably 12 hours with city planning Downtown Association, building development, you know, all the things this week. And yeah, I don't know. It's like it's a good it's a good reminder, another check and balance to be like, Okay, now how much of the speculation how much is it's basically an old 20,000 square foot vacant building in a great location downtown that you know, your retail and office on the first floor lofts and the second too, second floor third floor, probably storage in the basement, because it's like, I mean, it's a nice dry basement with like nine foot ceilings and thinking like, oh, you pretty much put like dog cage style, like storage through it because it's all protected from the outside. I don't know lots of things, but I haven't figured it out. So might be a little too exciting for you know.

Paul:

Yeah, well, I mean, it sounds great. Where are you located?

David:

Southwest Missouri.

Paul:

Okay.

You know, what is the difference between investing and speculating?

David:

Hope?

Paul:

Hope Yeah, there you go.

David:

So, who is it? Who says hopium? I forgot.

Paul:

Hopium, I don't know who that is. But I view it as this, you know, I used to think wealth was you know, mansion, nice car, boat, lake house, all that but you know, I now view it as wealth. True wealth is having assets that produce cash flow. And so investing should be an asset. I would think assets that produce cash flow, if they produce appreciation as well. That's great.

So I view investing as you know, having a place where your principal is generally safe, and you've got a chance to make a return. Speculating is when your principal is not at all safe, and you've got a chance to make a return and some speculation is fine. But just know the difference when you're doing it because investing will win in the end.

35:00 - 40:00

Alex:

When I learned real estate investing in 2013, the overall message, the overwhelming message that I got from the 2008 crash was always buy for cashflow, appreciation as a bonus, that was like, you know, the gist of you know, the people who survived versus the people who got crushed. And that's when that's what kind of, that's what I learned. That's what I did from day one, I was like, this thing has to cash flow day one. And as the cash flow positively, day one, and if it goes up in value, then gravy. Now I feel like people are going well buy it now. And inflation will make my property go up in value, don't make the rents go up in value, and it'll be worth, it'll be worth XYZ in the future. We're pretty sure inflation is here, but we're not really sure how it's going to affect things positively or negatively by how much. Is this the same problem that people hadn't seen in 2006, the real estate will only go up? I mean, I know the circumstances aren't different. But mindset wise.

Paul:

You know, you're right. The circumstances are different. But mindset wise, I mean, we heard stuff like everybody needs a place to live. And they're not making any more land. And yeah, what was his name? I'm forgetting his name right now. I'll think of it a minute. The federal treasury secretary said there has never been a drop in real estate prices, a sustained drop. And at the same time..

Alex:

Geithner.

Paul:

Who?

Alex:

Timothy Geithner, I believe.

Paul:

You know Geithner, that might have been the Treasury Secretary, I might have been thinking of a different guy. But yeah, the guy I'm thinking of his brother at the same time, Hank Paulson, John Paulson, his brother, if I've got the name straight, was actually shorting the housing market, getting ready to make $2 billion, or whatever, while he was saying, and I'm not saying there was a conspiracy, they just had different opinions, apparently. But well, you know, who knows? But at any rate, you know, he's saying there's never been a sustained drop in housing prices. And of course, they were right on teetering right on the edge of it. And his brother knew that and made billions of dollars in the process.

Alex:

Yeah, the government is in an interesting position, because they have this really, there's an interesting mechanism with government dialogue, where if they say, things will go up and things are great, then maybe it might go up. And maybe it'd be great. But, it really is irrelevant. But if they say things will go down, then everybody freaks out. And it does, in fact, go down. So they are in a really precarious position. So anybody that talks about high level, you mentioned the word experts, before anybody who's like an expert, especially in government roles or something like this, they always have to say things are good. You can go and find a quote from a Federal Reserve Chairman before every crash, and he'll say everything's fine. Don't worry about it. And two weeks later, inevitably, there'll be an explosion.

Paul:

Yeah.

Alex:

So well, so back to my original question, do you think, you know, I wasn't paying attention before in 2006 to like, just, you know, your anecdotal feel of how people are acting? Is it mania? Similar?

Paul:

Yeah, it's very similar.

I was in the residential realm at the time. So I wasn't really privy to the commercial world. But yeah, very similar. There was this sense of, you know, like, Rod Cleef. He was buying stuff all over Florida. I think he said his net worth went up 30 million in 2006, and then dropped by 50 million in 2007 or 2008, I can't remember. And it was like, you know, he was just leveraging on top of leverage to buy and buy and buy because stuff was always going up. It didn't have to cash flow. It didn't matter.

And so, there was a sense of that, and that was rod's own story. I'm not saying bad about him. He told me that on my podcast, I tell you guys, I had a podcast called How to lose money. I was the host of that for four years where we interviewed 238 people about chasing shiny objects, how they lost money, lost time, lost relationships on the way to their eventual success. And we saw a lot of that.

Alex:

When did that air?

Paul:

2016 to 2020.

Alex:

Can I go find it?

Paul:

You can go find it. Yeah, it's on Apple iTunes, Stitcher, all that stuff.

David:

He ran out of subjects and thought you know, we'll wait like three years and we'll have a whole bunch of people to interview.

Paul:

Yeah, well, how to lose money too starting in 2024.

Alex:

Yeah in 2020 everything started booming. So you gotta come back.

Paul:

Yeah.

Alex:

Yeah, you need to get round two. I love that.

Paul:

Yeah.

David:

How do you, how do you guys feel about I know we don't, we don't generally speculate on this, but we're kind of in the subject. So how do you guys feel about the market going forward?

40:00 - 45:00

Paul:

You know I was just answering that question right before our call was somebody with a large investor. And I said, you know, it's really possible, though there's a lot of speculation going on. And a lot of people who are newbies or amateurs are just getting lucky time after time. It's possible that inflation will allow them to continue to succeed, even if they're not really doing things right. And so I mean, let's face it, if cap rates go from 4%, up to five, I just wrote an article on bigger pockets that came out like yesterday. It says why you need to increase rents, 33%, just to break even that was irritating when that. And I basically said, Look, if you go from a four to a 5% cap rate, you just lost 25% of your value, you need to increase your revenue, excuse me, your net operating income 33%, just to break even. And even if that math doesn't make sense to you just say 25%, it's hard to increase your rents and your revenue 25% or 33% when things are crumbling, like imagine the middle of 2008 or 2009, it would be really hard to increase your rent, your revenue 25%. It's quite the contrary, in fact, so the point of it was cap rate, decompression could crush a lot of people. But I will say it's possible inflation will be the rescue, because it'll continue to allow the rent and therefore the net operating income to continue rising, even while the cap rates expand.

Alex:

No, I just wanted to add that sorry, David, thank you.

The inflation thing is funny, because everybody sees it as values going up. But there's a difference in value going up in price going up. I mean, things are getting more expensive. And people go well, my house is going up in value. And I'm like, Yeah, but inflation literally is the increase in money supply, which means the value goes down or the buying power goes down. So you might have more rent, and you might have a higher income house or valued house, but you're actually poorer, in terms of buying power. So trying to get it. So right now, if you're buying that skinny deal, even though inflation might save you, in terms of, you know, actual, it might save you in some ways, you come out of the end a overall like less percentage returns, your returns are lower than they would well how do I say it, then it's obviously going to be about a good deal. I mean, it's not going to, it might buy you out of poverty, but it's not going to buy you out of the prices are all going to look higher, but you're gonna have less buying power.

Paul:

It's exactly right.

Alex:

Yeah.

Paul:

They call it a nominal, your nominal profit would be your profit in name only, which is technically what nominal means. Versus your actual or your real profit was the word I wanted to use, which is, you know, where your buying power actually went.

My son buys and sells large pieces of farmland or timberland like mountain top land. And he might have talked to somebody and said, Yeah, bought this property for 100,019.76. Now it's worth 500,000. Pretty good deal. Hmm. And I'm thinking, No, not at all. I mean, because you know, nominal profit was huge. His real profit was, I mean, I honestly, imagine it was probably a loss at that number, especially compared to the opportunity cost of putting in something that's making a percent.

David:

Especially once you pay taxes on the capital gains, that you're still gonna get to pay on that.

Paul:

Yeah, that’s right.

David:

One of the things I've been trying to figure out, so I tried to look at less than inflation. I view it as, you know, long term fixed rate, low interest debt, I think against inflation, like, numerically, that's probably good. But I'm trying to think less in terms of inflation and more, and just the supply and demand, the inventory, that side of things with the market. It's like, well, if houses are just flying off the shelves, and the inventory is still 20% of what it was two years ago. My gut says that that's a good thing, regardless of inflation and interest rates and all those things. But what I've been trying to wrestle with is figuring out like, where's the plateau? And what I mean by that is, in every crash, every you know, it's always a stair step. And so I'm trying to what I would love to try to figure out in the crystal ball is like, Okay, well, if this continues for three years, and then it crashes, does it crash back to price now, or does it crash back to price four years ago, because that would make a huge difference. You know, it's like, well, it's gonna come back down at some point, but I don't know if I'm at the, you know, at the top, and it's about to drop 30% from underneath, or if it's gonna go up 30% and then drop 20% and I'm still you know, that's the fun game.

45:00 - 50:00

Paul:

Yeah, one of my favorite books is Howard Marks mastering the market cycle and in that book, he says, you know, it's impossible to predict when the market will turn, all we can do is act responsibly for where we are in the market today. And so that's what I think you know, these really good investors, the kind that we like to invest with are doing versus the lucky amateurs who are just buying anything they can get.

David:

Well, that sets up a great next and probably towards the end question. What do you view as acting responsibly right now? What are you guys looking for?

Paul:

Well, I love that question. I've written a lot about this on my company blog, and my on the BiggerPockets blog, acting responsible to me is finding assets that are very fragmented. And what I mean is that the current ownership is a fragmented ownership base, and then buying at full price if necessary from them, and then doing significant modifications to dramatically increase the revenue, therefore the net operating income. So regardless of what happens to the cap rate, you're out running it, that was a long run on sentence.

Here's what I mean, if you can buy, so, Michelangelo was the greatest, most famous sculptor of all time. He said, when I look at a piece of marble, I don't see marble, I see an angel inside. And I need to chip away all the excess material to get that angel out. In the same way x, a great operator can look at a property like an RV park, self storage, mobile home park, and see this incredible intrinsic value. Buffett calls it you know, buying a company way below its potential value, what it should have. And then buying a property like that. So in the value equation, the numerator outruns the denominator, here's what I mean, the value in commercial real estate is the net operating income, that's the numerator divided by the cap rate. That's the denominator, the cap rate is the rate of return that somebody would spec for an expect for an asset like this in a time like this in a location like this. And so the cap rate might be four or 5%. Well, if it expands, that means it goes up to 6%, the value of the property drops by, let's just round numbers and say, by 20%.

When you want to get a property where you can significantly increase the numerator, the net operating income, it's basically called forced appreciation, where you can do things to force the appreciation and way out, run the denominator to me that is acting responsibly. Quick example. My company invested in a mobile home park in Louisville, Kentucky, the owner hadn't been there in over five years, the costs were bloated, the occupancy was down. The rents hadn't been raised in five years, at least from what we understand. And he bought it. He paid the owner what she considered an amazing amount of money, I think $7.1 million. Well, he went in and he did about five things that actually helped grow the revenue of the Park, helped make the Park you know, a much better place to live, etc. And in 10 months, he sold that Park, he bought it for 7.1 million, that was half debt, half equity. He sold it for $15 million in 10 months. And so that was about, well, it was a 347% return on equity in just 10 months. And the point of that is even if the market would have went against him significantly during that time, even if interest rates would have went up, even if things would have gone south, he would have still been way ahead of the curve. That's acting responsibly.

David:

I love it. That's a great answer. I mean, I think that's right.

Alex:

I want to ask a bunch more questions, but we have a hard stop time of four minutes left. So Dave.

Paul:

I can go a few more.

Alex:

Okay, but these questions could take a while. So hit him with our outro. All the questions I had left were gonna be really difficult.

Paul:

Maybe we should do a second show.

Alex:

Absolutely. I love this. Yeah.

David:

I'm down. Hit it with what did you ask me to hit people with?

Alex:

So at the end of every show, we asked people the same question we asked two and a half years, if you need me to send you an email with what they are.

David:

Sorry. I was double checking mine because I thought I had a three o'clock cardstock which I didn't. So I guess the first and most important one is and we haven't asked the other two in probably like 50 episodes, so I don't know what you're talking about.

Really, the question is, where can people get a hold of you if and when they want to find out more about you and invest with you.

50:00 - 52:32

Paul:

Yeah. So I spent years, like I said, trying to figure out how to get into commercial real estate. So I've created a free course people can go through for just five days to learn how to invest in commercial real estate. I've also got special reports on self storage and mobile home parks and other investments at my website, it's Wellingscapital.com. That's w e l l i n g s Wellingscapital.com/resources. And that'll get you the free stuff.

Alex:

Paul, I bought your book on Amazon while we were talking, by the way. So what I'm gonna do is I'm going to get it. I'm going to send it to you so you can sign it, and then you can mail it back to me.

Paul:

Awesome! Well, I can just mail you one. You can give that other one away.

Alex:

Oh, yeah, we can do that. That sounds good.

Paul:

Okay, give me your mailing address and email.

Alex:

All right, cool.

Hey, this was fantastic. I'm incredibly grateful for your time.

David:

Yeah, no, this was, yeah, this is a lot of fun.

Paul:

I enjoyed it, too. You guys are a lot of fun.

Alex:

Oh, yeah. He's talking to me, David.

David:

Yeah, I mean, of course, he means you. Everything's about well, no. So this is good. Because you are more experienced in the market. So there's a lot of good insight here.

Paul:

It was a real honor to be here, man.

Paul:

You're newer, okay.

David:

I said you’re not a newer.

Paul:

Okay. I thought you said you're newer, I thought.

David:

I mean, technically, by your definition. I'm a newer. But, you know.

Paul:

I want to thank you guys at times like this in our country seriously. We really, really appreciate our veterans and I want to thank you and your audience. I mean, it means the world to people like me, who my dad fought in World War II, but you know, I didn't have to serve and didn't have the opportunity, I should say, and thank you so much for what you did for our country.

David:

Thank you very much. We appreciate it.

Alex:

Yeah, we're out here trying to make sure our service members when they're done, when they're done with, you know, whatever the political nonsense of the day is that they're they're set up for life and not, you know, broke and stressed out from it.

Paul:

Fantastic.

David:

Thanks for being an awesome guest, Paul.

Alex:

Thanks, Paul.

Paul:

Thanks, guys!

End:

Thank you for listening to another episode about my journey from military to millionaire. If you liked it, be sure to visit frommilitarytomillionaire.com/podcast to subscribe to future podcasts. While you're there, we'd love for you to rate the show. Give us a review on iTunes. Now get out there and take action.