Latest / The Academy Presents podcast / Lessons, Losses, and Long Game Thinking with Charles LeMaire

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Lessons, Losses, and Long Game Thinking with Charles LeMaire · The Academy Presents podcast

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Did you know that 90 % of the world's millionaires
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invest in real estate? Well, I'm Angel with the
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Academy Presents Real Estate Investing Rocks
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You're already taking the first step. just by
1:00
joining us here today. Anyway, loss number two
1:04
is one that I was wise enough not to get into,
1:06
but several of my friends did. And I heard the
1:09
actual numbers that one of my friends had, so
1:11
I will express those. This deal is rather confusing.
1:15
We have A and B. These are two dudes in Atlanta
1:17
who own this apartment. And we have this fellow,
1:21
we'll call him C, he's here in the Dallas -Fort
1:24
Worth area and he's trying to get started. And
1:26
he knows everything, sort of. Not really. Anyway,
1:30
so A wants to stay in the property, B wants out.
1:34
So B and C buy it from A, and they work this
1:39
thing out. Well, it turns out the guy in Atlanta
1:41
is a contractor, and he's going to do all the
1:44
work on the property. He's going to be boots
1:45
on the ground. He's going to be the asset manager,
1:48
and he's going to manage the contracting upgrades
1:51
in the building. And so we get into that second
1:54
situation that I referred to where we have this
1:56
one guy, he puts on his hat and says, let me
1:58
write this check. He takes his hat off, puts
2:00
the other hat on his head and goes, let me approve
2:02
this check. And he did. And so all the money
2:05
got spent on the improvements that didn't happen.
2:10
Ah, that was fun. So my buddy who put in 75 ,000
2:13
got back 17. Luckily, I have not had the fun
2:16
of experiencing that one. So do pay attention
2:19
to who you're dealing with. It is a very important
2:21
issue to understand who you're dealing with.
2:25
And no, you may not be able to know all of the
2:28
sponsors on a deal. In the old days, it was one
2:30
sponsor, so you had to know that one. Certainly
2:33
know who's going to be doing the boots on the
2:36
ground and the asset management. kind of thing.
2:38
It's important to know those and make sure that
2:40
those guys are honest along with the others.
2:42
Some people, they pull into these deals, either
2:44
the celebrity sponsor, the guy who just has a
2:46
big database, and they bring him in and he just
2:49
puts a lot of names on it. And sometimes they
2:50
have some budding people who swear they'll be
2:52
able to get, you know, two or $3 ,000 out of
2:56
people to invest in the property. In other words,
2:58
they can't do very much, but they're trying to
3:00
get their name on the thing just so they can
3:01
get started. You know, you don't really need
3:04
to know those The celebrity, you can pretty much
3:07
discount, because he's walking away. He's not
3:09
doing a darn thing on the property. But know
3:11
the people who are running it. It's important.
3:14
OK, so let's see. And my last story that I could
3:17
think of when I was putting my list together,
3:19
apologies for not coming up with more, was my
3:23
loss. Oh, no. Let's see. This was the property
3:27
here in Arlington. And we had a deal sponsor.
3:31
It was his first time. He was really a nice person.
3:35
I thought he was a very honest person. He probably
3:37
is. And it turned out that he was able to, during
3:42
the period that we held this thing, matter of
3:44
fact, just about the time we were buying it,
3:46
his circumstances changed in that he got a very
3:49
lucrative position doing some real estate stuff,
3:53
not managing our real estate stuff. I would say
3:58
that he was not paying the proper amount of attention
4:00
to our place. He was, as he put it, I'm going
4:03
by every week. Well, I'm not sure if he waved
4:06
at it when he went by or what, but by and large,
4:09
we had a rehab budget of $450 ,000 on this place.
4:15
And during the two years that we were working
4:17
on, he only spent $620 ,000 of the $450 ,000.
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And for those who are a little weak in math,
4:25
what that says is, that he was financing the
4:29
rehab on our distributions. And this was a property
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that was a Lura, which is sort of a limited income
4:37
kind of place. It was marvelously bought, marvelously
4:40
sold, poorly managed. So we did make money on
4:42
the thing. But if we had been able to hold it
4:46
for another, and I'm going to say five, I don't
4:48
really remember the number of years, the Lura
4:50
would evaporate and we would have made a ton
4:52
of money, but we just couldn't trust this guy
4:54
to pay attention enough. to do it. So we ended
4:56
up selling it. And I don't remember if we made
4:59
20, 30 % IRR on the deal, but we didn't, we weren't
5:03
hurting because he had done such a wonderful
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job of buying it and such a wonderful job of
5:07
selling it. He just didn't do very good running
5:10
it. And it's sad that that's the way it worked
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out anyway. So that's my list of war stories
5:17
as it were, or my wonderful stories too, as a
5:20
matter of fact. So I get some more comments on
5:21
this. And so we will go into financial opinions
5:24
about you all who are getting into it. And I
5:27
clearly am an LP, limited partner, or lazy person.
5:31
So my mindset is set in that direction. And so
5:34
I say to the beginner, you need to know the rule
5:37
of 72s. Understand it. Now, I'm not saying that
5:40
you need to go through and work out the exponentials
5:42
and the logarithms on how it works out. That
5:44
is important. But do realize that the rate that
5:47
you pay and the time that it takes will show
5:50
you the time. with 72, how long it takes to double
5:54
your money. And it's just a really quick way
5:56
to think about it. So if I can multiply or divide
5:59
by something here, what goes into 72? Well, if
6:01
it was 36, it's going to take you two years to
6:03
double your money. Let's just go with that because
6:05
it all comes off the top of my head, which means
6:07
if it's 18, because 36 divided by 2 is 18, it
6:10
would take you four years to double your money.
6:12
And so if it's 9, which is half of that, it would
6:14
take you eight years to double your money. See,
6:15
I did work it out. Anyway, understand the rule
6:18
of 72. It's not a secret. Most people have run
6:21
across this in business school, in a business
6:24
class, in some sort of setting. But I'm here
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to tell you, I have a friend. He's got his MBA.
6:30
And this was a huge surprise to him. So I like
6:32
to tell people that rule 72 is something to work
6:35
knowing. You should always come to realize that
6:39
the time value of money is an important mathematical
6:42
concept. Figure it out. go look it up. I don't
6:45
know if Wikipedia has a stage. It's explained
6:48
in a lot of places. Just realize that a dollar
6:50
tomorrow is not as valuable as a dollar today.
6:53
And so if you work through the numbers and sort
6:55
of get a grasp of how time value of money works,
6:58
that's the basis of how IRR works. And what IRR
7:01
says is this calculates the interest rate that
7:05
I would get from a bank if I had the same cash
7:08
flows in a deal, which is how I measure all the
7:10
deals after the facts, the post -mortem of them
7:13
and how I can compare them and tell you that,
7:14
you know, I do the calculations, I like math,
7:17
so I do them. But essentially if I tell you that
7:20
I got a 30 % return, what I'm saying is with
7:22
those cash flows, if I had a just plain old bank
7:25
account paying me 30%, that's what I would have
7:28
walked away with on the deal. And so, you know,
7:31
but, and it takes into account when you get the
7:33
money, it takes into account how much you get
7:35
each time. And if you do the more complex part
7:38
of it, you can work out different values and
7:40
your exact timing and all that. But learn time
7:43
value money and learn present value, future value,
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and then this IRR concept. You should understand
7:50
cap rate. If you're going to play in this market
7:51
of anything real estate, cap rate, actually anything
7:54
business. And I go back to bonds and I'm always
7:58
humored because they will tell you that when
8:00
the interest rate goes up, the bond value goes
8:03
down. And it's like, well, wait a minute, why
8:05
the heck does that happen? It seems like when
8:06
the rate goes up, it ought to be worth more.
8:08
And they never tell you that they're talking
8:10
about the bonds you already got, not the bonds
8:11
you're going to get next week. So if you realize
8:14
that, essentially, it all comes down to the same
8:17
thing I mentioned about the NOI. It is the amount
8:21
of money that it is paying which dictates what
8:23
a person is worth to pay for it. So if the interest
8:26
rate goes up, they expect more from it. So they're
8:28
going to pay less for something that pays a fixed
8:30
amount. Anyway, learn how cap rates work. It
8:33
is the same concept for buildings as it is for
8:37
bonds or anything else. Learn some basic accounting.
8:41
I mean, realize that NOI is simply what you make
8:45
minus what you have to pay to make it to get
8:47
your NOI. And that's the above number. And then
8:50
you got to pay your debt on it and some other
8:52
stuff. Insurance is an operating expense. Debt
8:54
is not an operating expense. So learn a little
8:58
bit about that. And you don't have to know it
9:00
immediately, but it's worth getting comfortable.
9:04
And if you're going to play this game, a lot
9:05
of the benefits come from taxes. Understand how
9:08
taxes work. When I was a kid, one of my friend's
9:12
father, and it wasn't actually true at the time,
9:14
but if he made another dollar, they were going
9:15
to take 70 % of all of his money or something
9:18
like that. We live in a world, or at least the
9:24
United States, where we have a bracketed system.
9:27
I can tell you my political views, but that's
9:29
a different thing. But essentially, every time
9:31
you make a dollar, you have to look at your marginal
9:33
tax rate and figure out how much of that you're
9:36
going to keep. So if you can lower your marginal
9:38
tax rate, then you get to keep more money. And
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so when we talk about depreciation, which is
9:44
a big facet of how real estate works, you can
9:47
sort of figure out how it all works together
9:49
and what taxes, the depreciation, all the benefits
9:53
are, you know, ooh, what about capital gains?
9:55
Well, I want to make capital gains. You know,
9:57
I'm old. You can tell I'm old and I don't want
10:01
income. Income charges me a certain tax rate.
10:03
Capital gains charges me to lower tax rate. I
10:06
want to be at the lower tax rate. So I want capital
10:08
gains. I don't want income. In fact, right now
10:12
you can pay zero taxes on a certain amount of
10:17
capital gains up to about $80 ,000. So if you
10:20
can keep your other income down to 60, you can
10:22
make 20 ,000 at nothing. Now, for the people
10:25
I'm talking to, those are like peanuts numbers.
10:27
And I realize that. But by and large, at some
10:29
point in your life, it may come in handy on a
10:31
year. And you go, oh, I can sell that stock,
10:34
sell that building, whatever. I can hide that
10:36
money and pay no taxes. So it's just nice to
10:39
know how all that works. Let's see. Oh, and I
10:42
had something on individual retirement accounts.
10:45
Most of you are playing in real estate, but if
10:46
in fact you still have IRAs out there or 401ks,
10:51
I'm not a fan of sticking that stuff into real
10:54
estate. For each person, there's a different
10:57
answer. If you've got a 401k IRA and that money
11:01
is qualified money such that it is traditional,
11:04
i .e. pre -tax, once you get to my age, guess
11:10
what that pre -tax money does? It comes out as
11:12
income. What did I say a moment ago? I don't
11:14
want income. So do yourself a favor, do some
11:18
math, figure out, do I want that money to sit
11:22
there in a pre -tax and grow and then bite my
11:25
butt? You can see my opinion. Come back and bite
11:29
me when I get that money out. Cause realize every
11:32
time I take a dollar out of a pre -tax account,
11:35
and I have to take the dollar. I can't leave
11:37
it there because there's something called R &Ds.
11:39
Go calculate or go click on R &Ds and figure
11:41
out what they do. So they forced me to take a
11:44
dollar out. Once I pull that dollar out, that
11:47
income that I get is now, you know, I'm old,
11:50
I got Medicare. So that Medicare bill goes up
11:53
and I, instead of getting to pay the nice, lovely,
11:56
I think it's about $140 a month now. For a normal
11:59
person, I get to pay a little over $400 a month
12:02
because I make too much. Lucky me, but I get
12:05
the better appointments and the better doctors.
12:07
Not really. Hey guys, it's Angel. In case you
12:13
didn't know, I put on a three -day virtual summit
12:15
twice a year. It's the Real Estate Investing
12:18
Rocks Summit, and I've been hosting it since
12:20
March of 2020. The next one, number 11, is March
12:24
25th, 26th, and 27th. Three full days, no cost
12:28
to you. My friend Sandy is speaking and she's
12:31
supported me at every single summit since I started.
12:35
Joe Fairless, Kathy Fedke, a Tony Award winner,
12:38
another friend who's raised literal millions
12:40
from people met on LinkedIn, and the list goes
12:43
on. You have to join our Mighty Networks community
12:46
to gain access. And that link, it's in the show
12:49
notes. Anyway, so just realize this thing's called
12:56
Irma, I -R -M -A -A. Google that puppy. But you
12:59
will find that if you have a lot of income, then
13:03
it will cause your Irma to go up. And it's insidious
13:07
because once your RMDs start, there's almost
13:09
no way to turn them off at that point because
13:11
you can't get it out because your Irma will come
13:14
back to bite you. There's all sorts of things.
13:16
And I can't swear that social security will stay
13:18
around us, especially in its current form. I'm
13:21
not that dumb. old people vote. So something,
13:25
social security will stay in some form. God knows
13:28
what form I can't answer that. But right now,
13:30
for instance, if you take out a certain amount,
13:33
they charge you zero. If your income is low,
13:36
you get to have all of your social security at
13:38
nothing. You people on real estate, you will
13:40
never see that number. And I will never see that
13:42
number. You get up to a certain level and they
13:44
charge you 50%. Now there's some small chance
13:47
that I will get to that 50 % level. Not very
13:49
good, but it's a small chance. And so At another
13:53
point, they will start charging you 85 % and
13:55
not 85 % of your total, but 85 % of your social
13:58
security will be taxed. It's called the tax torpedo.
14:01
You can Google up tax torpedo and it says that
14:04
in a certain level of income, you will end up
14:07
for a small period, paying an incremental rate
14:09
of 45%. Oh, that's painful. Especially if you're
14:13
sitting at the 30 % right below it, you get pushed
14:16
into the 45 % every year. That gets to be painful.
14:20
And if that's happening, jerk some money out
14:22
and put yourself way over it. So at least you
14:24
get your money, your money's worth on that thing.
14:26
But by and large, it is insidious on how the
14:29
taxes work that bites old people a little bit.
14:33
I'm not complaining. These are rich people problems.
14:36
But anyway, be aware of how some of those things
14:38
work. Social Security, RMDs, and ERMAs are all
14:41
fighting to get your money. So when you get old,
14:43
it's so much simpler, so much nicer to use those
14:46
Roth accounts. Should you do Roth or should you
14:49
do anything in real estate. Well, I will say
14:53
that if you're going to do IRAs, either Roth
14:56
or traditional, be aware there's something called
14:59
UDFI. UDFI comes back to tax you. People will
15:02
debate you on, oh, it's not very much. It can
15:05
be a lot. If it's a deal that works out very,
15:08
very well, it will bite you quite, quite viciously.
15:11
But you can always hope that the deal doesn't
15:13
make any money. So therefore you don't pay any
15:15
tax. I can't believe she didn't even smile for
15:18
that one. Well, I'm still backing up. I'm still
15:22
calculating here. Come on. If you don't make
15:26
any money, you don't pay any tax. See, that's
15:27
the benefit of making no money in a real estate
15:29
deal. But that's not what we want to do. No,
15:32
it isn't. That was the point. Now I'm following.
15:35
I was like... There you go. All right. So essentially,
15:40
if you're doing it through an IRA, be aware there
15:43
is UDFI. Research it a little bit. You will find
15:46
that if you do a really good deal, it can come
15:49
back to bite quite a large amount of your nugget.
15:54
If you do a solo 401k, which is sort of the alternative
15:57
to that, no UDFI. But then if it's a traditional
16:03
solo 401k, what you're doing by doing that is
16:08
you're taking what is currently capital gain,
16:13
lower rate taxes, and turning it into future
16:18
income, higher rate taxes in your retirement.
16:22
Ooh, and then I get to pay Irma when the RMDs
16:25
kick in. Oh, that's really lovely. Not a good
16:28
idea. And so there is this thing you can convert,
16:31
but every time you convert it becomes income.
16:34
And so you get to pay the taxes and if you're
16:36
over 62, 63, sorry, 63, Irma's kick in because
16:40
it's a two year look back. So, you know, there's
16:44
a window of time when you quit working and You
16:47
might be on Medicare at that point before your
16:49
R &Ds kick in. You've got a window of time that
16:51
Roth conversions do make some sense, but they're
16:55
still painful. You've got to come up with a lot
16:57
of tax money to pay it. So do yourself a favor
17:00
when you're old and gray. Don't set yourself
17:02
up for a lot of large taxes in the future. Now,
17:05
the one thing I didn't say was a solo 401k Roth
17:09
or a Roth solo 401k. That one is probably, you
17:13
know, a really good place to do because once
17:15
it grows, you pay no tax. Hard to argue with
17:18
no tax, but realize to get money into that thing,
17:24
you have to pay to convert it because you cannot
17:27
take a Roth IRA and put it into a Roth Solo 141k.
17:32
You cannot put Roth money out of an IRA into
17:37
a Solo 41k. You can take regular traditional
17:41
traditional IRA money and move it to a solo 401k
17:44
and then convert it after that. But, you know,
17:47
you can't, to get the amount of money in there
17:49
that you want to do it with will cost you a lot
17:52
of taxes as you're doing it. So, you know, they've
17:54
got you hamstrung in almost every direction.
17:57
So let's see here. Did I, that's pretty much
18:00
where I wanted to get to on all my stuff. I will
18:02
say that, you know, if you go out to bigger pockets
18:05
and all these other places, you'll see people
18:06
are going, oh, I'm doing multifamily, five units.
18:10
anything over four units is multifamily. So you
18:13
gotta be real careful when they're saying, oh,
18:14
I got a multifamily deal. By the way, I should
18:18
qualify my position on this. I do have an investment
18:21
in 33 deals, it was 70, but realize that I have
18:25
a limited amount in each place. So I own perhaps
18:28
the doorknob on 5 ,000 apartments. I might actually
18:33
own the sawdust that they put the little peephole
18:35
through on the doors. I don't own you know, a
18:39
large number. I'm invested in around 5 ,000 or
18:42
so apartments. Yay, me. You know, the number
18:45
means nothing. You sort of have to know the percentage.
18:48
It is non -trivial. And, you know, I play at
18:50
this for real, for real, but by and large, I'm
18:53
not a big player in this game. There are people
18:55
that own tens of thousands of their own units.
18:57
Yay. So, you know, keep me with a grain of salt
19:00
on that one. Let's see. So when we go back to
19:04
Multifamily, people talk, it's five units or
19:06
more, but you know, you gotta say, well, I'm
19:07
talking large multifamily, over 60, over a hundred,
19:10
whatever you want to talk about. The syndication,
19:12
you know, we talked about investing, you pool
19:14
the money together and you depend on the lead
19:16
to make you some money. Gross potential rent,
19:18
that's a sort of a confusing one. You know, you
19:20
take all of the apartments you got, you got a
19:22
hundred apartments, the rent is a thousand dollars
19:26
on each one. So your gross potential rent is
19:27
going to be a hundred thousand dollars a month.
19:30
But then of course you got to subtract out, you
19:32
know, who didn't pay me. Which ones are vacant?
19:34
You're not going to get anything out of those
19:35
people. Which ones are below market? Because
19:38
they've got a lease on the place, and the market
19:39
rent went up. It was making $900 a month two
19:44
months ago, and it went up to $1 ,000. So now
19:47
I've got a $200 lost to lease on that one. So
19:49
that's what they mean by lost to lease. Oh, market
19:52
rent we talked about. That's the best you can
19:54
make on anything, on your next rental, lost leases,
19:57
that. Let's see, operating income. I talked about
19:59
that before. NOI was just the difference between
20:01
operating income, operating expenses. DSCR is
20:03
one you'll run across. And what that's telling,
20:07
that's a bank number to tell them that, hey,
20:09
no matter what happens, if your DSCR stays above
20:12
one, you can pay the bank, because that's all
20:13
they care about. They could care less if I get
20:15
paid dirty dogs. Anyway, that's sort of what
20:19
I thought of. Angel has a couple of questions
20:22
or something like that and I'm sorry if I bored
20:24
you for this period of time. Okay number one
20:26
I think that it's so important for people to
20:28
hear that there are good stories and not good
20:32
stories because all we see is like if we're looking
20:36
on socials all we see is the highlights row and
20:40
that just it's an inaccurate picture. Well one
20:44
of the things I like you know I have chosen to
20:46
stay a an LP And I've been approached to be a
20:50
GP all the time. Well, there's a couple of reasons.
20:52
One is my job wouldn't let me do it when I was
20:54
working. Now it's sort of an ethics thing. I
20:57
don't want to put my name on something if I'm
20:59
not actually running it and I'm too lazy to run
21:01
it. So, you know, I'm not likely to do that.
21:04
And given that I stay in the LP world, I can
21:06
tell you what I want to tell you because I'm
21:08
not after your money. you know I can express
21:11
my opinion and they could still be wrong because
21:13
they're worth everything you paid for just now
21:15
but by and large they are my opinions and they're
21:18
not dictated because I want your money to invest
21:21
in a deal. Yeah no absolutely you know Charles
21:24
thank you for being here and sharing that massive
21:28
amount of information. Let me there's one more
21:30
thing and that's depreciation. and it will peter
21:33
off uh we had this thing called cost seg where
21:35
they then take a bonus depreciation and so everybody
21:39
tells you oh last year was 100 this year it's
21:41
80 so let me go back to last year because it's
21:43
easier to talk about it just a little bit less
21:45
this year we've got 100 depreciation so if you
21:48
put in 100 000 you can get um let's call it 50
21:53
and i've seen them up to right at 100 but by
21:56
and large you can get 50 50 i put in 100 000
21:59
i get 50 000 worth of depreciation Now, I'm a
22:02
little bit different than perhaps the beginner.
22:04
So this is for the beginner. OK, you get $50
22:08
,000 worth of depreciation. What are you going
22:09
to do with it? Oh, you get to carry it forward.
22:12
So it sits in the bucket until I sell the place.
22:17
And then it just returns me to where I would
22:19
have been had I not gotten the depreciation in
22:21
the first place. Yeah, that did me a lot of good.
22:24
Now, what it does for me is because I can get
22:27
depreciation. And again, last year, we sold a
22:30
bunch of places, we bought a bunch of places.
22:32
So if I made $200 ,000 and I put the $200 ,000
22:37
into something and I got 50 % of the depreciation,
22:40
I now have $100 ,000 that makes $100 ,000 of
22:44
that gain disappear, so I don't pay tax on it.
22:47
Big benefit to me, but I'm not a beginner. So
22:50
if you are a beginner, all of this hubbub about
22:54
depreciation will not affect you. until you buy
22:57
one and sell one, or more accurately, sell one
23:00
and buy one in the same year. So, you know, it
23:03
is not something to be twisted around or, you
23:07
know, to push you into something. The depreciation
23:09
is overblown until you're in the game. Sorry,
23:14
just I thought of that and I should have mentioned
23:15
it too. Absolutely. And amazing information.
23:17
Again, thank you for being here and thank you
23:20
for being our friend and in our circle and coming
23:22
to our meetups and just sharing the information
23:25
you share because you've got way more experience
23:29
than I do and know so much more about the different
23:33
pieces of it. So I think that it's just amazing
23:37
that you're sharing the information and sharing
23:38
your experiences and you know just thank you.
23:41
You're very welcome and please run the clock
23:42
so I get paid for the hours of listening. Absolutely
23:47
guys you heard it here first until next time.