Latest / The Wealth Vibe Show / Episode #113 Top Three Real Estate Myths busted
Transcript
- 0:00in business?I really enjoy now helping other investorsor people invest in real estate,and when they get their first passiveincome and they send me a text like Winkythat really like brings so much powerin my heart that I want to do it again.When it comes to my familyand my friends and my loved ones.It's the the time spent on unplannedafternoons and evenings over coffeeor tea or wine.So I just. Invaluable.That's invaluable.Those are the good memories,And swipesat Mommy Apple's Winky Lumbacommercial real estate investor.And today I have a really, really specialguest, my good friend Kunal Diwan.Welcome, Kunal, to that.You'll see why you.Excited to be here.Thank you for having me, Winky.Of course.Let a bit about Kunal acknowledgesome engineer by education,entrepreneur by choiceand real estate investor by passion.Oh my God, I love that simple bio.Awesome.So today I will discuss the topthree passive real estateinvesting myths, buster.Wow. I love that title. So, real estate.Massive real estate investing myths.Busted.Before we get started, Kunal,I wanted to ask you if you canbriefly share your background with me,who you are, and how did you get here?Absolutely.Winky.Those those ten wordskind of summarize who I am,where I came from,and what I do right now.Engineerby education, Entrepreneur by choiceand a real estate investor by passion.11 WordsI came in first generation immigrantto this country almost two decades agonow came for my engineering, my master'sin engineering, studied in civiland structural engineering,did that and started a regular W2 job.The immigrant challengesbroke as everybodyI was able to come to this country.I was the first one in my entire familyto actually sit on the airplane, worryabout coming international, and the wayI was able to pursue a higher educationin a number one country in the worldis through my 100% scholarship.So that's how I got started.Did my engineer.Yeah, I was blessed and fortunate.Did my engineering start working ontall buildings in Southern Californiain a complex seismic analysisand then moved onto a healthcare project and then mixed useand then apartment building.So that was the journey of actuallydesigning and working in constructionof buildings andmy career was doing greateven in the time of the Great Recession.But mypersonal net worth and balancesheet was not growing at all.And that'swhen I started looking into investing.So my first investmentwas a condo back thenin the end of the first decadeand started getting that passive income,the paycheck after paying their mortgageand property taxes, the money coming in.That was fantastic.And that's when I got hookedto passive investing by the same time.And I mean $100,000 will only buyso much so fast.It's hard to save moneywhen you have a W2 job.So it's not looking to extra income.So I started my first businessand the end of the first decadewith 20 $500 and then over the next5 to 7 years took that to a multiple,multiple sevenfigure multi-unit business with my W2.And that was the realizationof entrepreneurshipas the entrepreneur by choice.And then while I was doing this,I was stillgetting that paycheck from the person.Investment started scaling up real estateinvestments in residential sectorin Southern California, in Ventura County,Santa Barbara County,and duplex and triplex at four blocks.The small apartment familyand then just a few years agostarted scaling upto real estate syndications.So I realized my passionas I was going throughthis entrepreneurial journeyand then to combine both the businessand the investingand hence the Liberty Capital was born.And here I am doing full time real estateinvesting and making that impactfor other W-2 and other business ownersof investing in real estate passively.Wow, I love that trajectory.And today, as you gave me the topicthat we're going to be talking about,passive real estate meds, you know,and we can not be nearly in the topthree of them.So what are some of the misconceptionsabout passive investingand how do they differ from that?Active investing Because you were passive,so now you're active.So you have played both roles.Correct?And I'm actually passive today.Also, I still invest with other peoplelike yourselfwhere there is expertiseand they take the lead, and I'mjust passively investing the money.So before I answer your question though,you know, I have come through the journeyof being a landlordof one property than landlords,but multiple properties.And then I have gonethrough the challenges of the tenantsand the toilets and the termitesand all that wonderful stuff.I made a lot of mistakes as well.Oh, honey, I've been burned a lotbecause I didn't know any betterten years ago.because I didn't know any betterten years ago.So now that when you scale upthe challenges, don't go away.So now that when you scale upthe challenges, don't go away.They also scale up as well.So what I can seeas a passive investor versuswhat somebody else is seenas a passive investor who have never donean investing in the truly.Just putting their trust on the sponsorare denied scenarios.So to begin to talk about the topthree myths of passive investing,my vision is coming from that mistakesand scars of investing from past 15 years.Awesome.You know what?I have heard this terminologymarket efficiency.People talk about that a lotwhen you are passively investing.So I wanted to bring that intobefore we dig deep in the math, you know,so how does that market efficiency playsa role in passive investingor how would you define that?I beautiful I mean, that'sprobably it kind of really tiesto the first myththat I want to share with you today.So let's start with the first me.The first myth is people talk aboutif I buy in a great market, you know, agateway market or fancy market,you know,everything else will fall in place.Or if I have a sponsor who can talk, well,speak well.Oh, everything will just happen after.Because the market is great,the data is great.Well, not really.So what they really need tolook at the passive investor to look atis the property manager.Not enoughweight is placed on property management.We do our due diligence on the market,the population growth, the incomegrowth, the demographics.We talk about the duediligence on our sponsor.What about the property manager,the actual leasingagent who's going to sell the productat the market rent?Who's going to capturethat rent gap in your property?Who's going to make the improvementson the property, the maintenance tech, thethe contractor?So it kind of ties with the marketefficiency that you're talking aboutis if the PM, the property manager,has a very small footprintin that marketand they are scaling with you.Well,they are going through the learning curve.That is that's a no no, that's a no no.So if you have a large property,let's say a 300 unit building in a marketis what's the trackrecord of property managerfor building of that size,what are the challengesthey have based in their past projects,making CapEx improvements of propertyand that size in that marketor even submarket?You know,how is their payroll looking right now?Labor market is really tight.It's hard to find good peopleand then retain them.So what's the impact of theircompany culture on your on your property?These are very soft and intangible.The non tangible item that will createtangible impact on your property.So when we talk about market efficiency,the property managerplaysa big role in their market efficiency.If I have a thousand doors in a marketand I have one teammanaging all my thousand doors,my investors will be very efficientbecause my PM has a track record.My hopefully the culture's greatis keeping the staffand the staff is going with them,The regionals are going at them, the salesagents are going with the companywith you from 1000 to 2000 door.So that's a top myth.You know, I with my partners right now,we are a vertically integrated firm.We knowwhat's going on in the lifeof our regional business.There is a culture of maintenancecomes over to the houseand sometimes have coffeebecause there is a bond,so that bonds really brings the commitmentand commitmentbrings productivity, and productivitybrings efficiency.When you're scaling, you really.I like that.But as a passive investor,this is a question for you.So passing muster is trying to workthe sponsoras you know, you're betting on a horse.I'm sorry, betting on a jockey,not the horse,because but has to be on the jockey.And jockey has to bewell trained to take the horse and horsein our scenario is the property buy, sellin whatever market.So as a passive investor,I’m betting the sponsornot knowing much about the propertymanager or who the property managementcompany is going to be alignedwith this particular sponsor.How would you go about thatbeing a passive investor,or do you trust your sponsorthat they are making that decisionwith the right propertymanager, property management companyif they don't have it in-house?Absolutely.So in that analogy,the jockey and the horse,the way I visualize it big,the property manageris the caretaker of that horse.What's that caretaker feeding the horse,you know, exercising or health, all that.That's the caretaker.So a lot of weight does the lot of owners.The responsibility still lieson the sponsor picking the right caretakerfor the horse which is picking the rightproperty management company for the horse.And as a passive investor,there should be direct questionsto the sponsorabout the property management company,just the way a passive investorask the sponsor.Can you show a track record?Can you share some referrals?Can you share some challenges?All of that questions must be targetedto a property management company as well.So Mister Sponsor,can you share your experienceworking with this property manager?Can you share some challenges that thisproperty management company is facing?How is the reporting looking like fromthe property management company to you?How often would you guys meet?What are your expectationsof the property managerand how would you overcomethose challenges?We can talk about that for the next30 minutes just on this topic.But what I want to bring to the limelightfor all the passive investors outthere is Don't stop.You're on the sponsor.Dig deeperwhen it comes to the property manageras well.Awesome.So this is the Mets number one, right?The market deficiency.What is the second Mets.Second, which might ruffle some feathersand that ispassive investor looks at the data.It's actually selective data.U-Haul.Sure so many people moving inand there's a population growth is incomegrowth is demographics.There is employers moving all thatbeautiful fancy stuff at a macro level,which is great.Don't take me wrong, it's very important.But at the same time,how does this relateto your neighborhoods,to your ultra local market?You know, so there's a sponsor, thenthere's a market and then there's a gate.The the data.How does all this relate toat a very extremely local micro level?Because we know real estate is not localresources, ultra local.We know we live in Southern Californiaand we know the property valueon this side of the streetand the property value Other side ofthe street is totally different.There are properties on this sideof the street where people want to liveand there's a waiting listand people's property on this sidehave a rent drop and nobody wants to gothere, whatever the reason might be.So macro data is goodsponsors marketing in that market.The micro data is great,but ask the questionsabout micro level.So what I do is I draw on maps.Half mile radius.One mile radius, three mile radius,five mile radius.And the ten I mean, I go deep.Then each of those radius,I collect the populationand I collect the average incomeand the median income.All this data is available.Easy to find and do my ownresearch when it comes to okay,this is my income and I backtrack itwhen it comes to the rent roador when it comes to the actual mart,the gap in the rent.So don't just rely on the reportson the poster or what the broker gives youor the free websites give you, but ratherdig deeper and then take thisand compare this to the business planthat the sponsor is creating.It's a little bit of work.But it's not a little bit of work.It's a lot of work.And then people,especially being a passive investor,they might not bein that particular market.And then if the sponsor is providing youwith the datawithin the one mile radius, andif you can quickly get the datafrom somewhere, sometimes you just relyon that versus, you know, going in thereyourself and researchingwhich is going to take hours and hoursor maybe days to figure it out.What is what is right, what is wrong,Because you are not in that market.Let's say you're in California,for example,and you're trying to invest in Texas.How much you know about the Texas market,especially Houston?Houston has a similar scenariolike one block, the on the block.When I was in Houston earlierthis this year, I was like, surprisedto see that like,wow, there's a dramatic differencein properties, you know,like a block away from each other.So it's very super hardbeing on the passive side for myselfto figure out whether it's a good dealor not until long, as you know,I trust the sponsor that the data is beingrelayed to me is accurate.And then I know a little bitsome of the tools that I can goonline and check the data.I'll get to validated.But if I have to do all the researchfrom the scratch, it's super hardfor sure.So let me clarify.This research is not a responsibilityof the passive investor.Passive one.Mr. needs to ask his question.The responsibility lies on the sponsor.Right.I know you are so riskywhen it comes to data.I mean, your questions are.So we have been talking forlike so many years andwe know that the depthwe have in our conversationwhen it comes to data and underwriting,right, we just hear this apart.The passive investormust ask these questions to the sponsor,grade the owner and the PM showstheir $80,000 income in the five mileradius.Can you please share with methe income in a half mile radius, aroundone mile radius and three mile radiusthat this conversation,the myths about passive investing is togive passive investor toolsto go back to the sponsor.Come back to me, come back to you.Share this data with meso I can invest my 100,000with you and sleep peacefullyso that you have donewhat you were supposed to dobefore you created this marketing pitch.Yeah. That's true.And I like that.I mean, it's always all the information,the more information you have,it's better for youto make more informed decision.And that's what we do.You know,whatever dealswe bring to our passive investors orwhatever deals we are in restingand as a passive investors ourselves,you know,we just do our due diligence on our part.So make sure that we are getting out ofway, that whatever we are looking for.So let's move on to our Mets.Number three,because I have tons of questions for you,but I wanted to go throughall the markets before, so go ahead.Tell me about the third met number three.And this is, again, very controversialand someone who has been in business,especially in constructionbusiness and rental marketbusiness, will understand this.It's called too much value add.I not you know, everyevery rental market has a cap.That cap has a lot of factorsthat depends on the income,that depends on the growth the employerall the things that we already know.Right.So but after a certain point,it is only so much improvementsyou can make on the propertyand create an increase in rent.What I mean bythat is this If you plot a graphwhere there is alet's say a traditional propertyelectromagnetic tradition, like a classicunit, you see, you know what, I'm goingto change the flooring and there you go,boom, 60 bucks a month extra.Makes sense.And I'm going to change the countertopin the kitchen.Another 40 bucks a month,I'm going to change Teresa'slighting, another 20 bucks,whatever that number is,depending on the market. Right.And you drew a plot, a graph where amountspend and the return received.The returnon the first, let's say$5,000 will be very high.So the slope of the graphwill be very high.But and you keep on spending moneyon the property,interior or exterior,depending of that market, that submarket,you know,that graph is going to plateau out.So the work there will be up point after10,000, 12,000, 50, whatever that propertyin the market is, you're not goingto get 80 bucks for every $5,000 spent.Right.You might even,you might get five bucks at ten bucks.So the question that the passive investormust askthe sponsor is,in your business plan,you are doing all this CapEximprovement and you're spendingall this money into your next yearand you're expecting this much rent growthover this period of time, right?That's a classic value add.How does that compare to the local marketand the local rent in as is scenario?You know, I have a property of myselfwhere the rental incomeon a simple makeready is 1250.So the existing rent is 900 something.We turn the unit boom,the carpet painted simpleless than $3,000 expenseand we get go from 900 something to 1250.I'm going to jump rightnow if we go over.So now we put some laminate flooring,we put some beautiful countertopsand kitchen cabinets, whatever that is.Let's say a ten grand expense,we get 150 extra.So I ask myself,3000 are actually less than $3,000,make readyand almost $300 bump or 10,000plus and 150.But it doesn't make sense, right?So I am not my mymy grass is slowly plateauing after that.1250 Right.And then if I let's do platinumand then I sell it and some otherbuyer comes in, I am going to add a valueto this property by,you know, changing the faucets or whateverthat is wi fi package.How much can you really go?Can you take it to 1500 6000?So I mean, you can,but you will pay in the economic vacancy.So that's a too much valuethat I'm talking about.So in a nutshell, passive investorsshould look at the business plan,look atthe existing market with the correct compsand go back to the sponsorand ask these questions abouthow much value Ed is creating,how much rental growth in this product.And that's true.I agree with you 100%,because each market sportsthe value add up to a certain level,you know, and also it dependsupon the class of the propertythat you're getting A, B, and C,you cannot really putthe upgrades of Class A into class Cbecause market one supported the classor the property one supported.So that's going to be a waste of effort,time and money.So all those thingsyou have to keep in mind as a sponsorwhen you are putting the deal togetheror whenever you're bringing in to theto your investor as well, you know,and plus you have to be in a good positionto explain where you're coming fromand how you're really adding value.Because by the end of the day, everybodyis looking for some good ROIC, right?If you're not getting the good return onyour investment is a waste of efforton everybody's part.So I wanted to ask you a couple questions.After all these Mets, you know, becauseI know the passive investingis a really good thing,but a lot of people think, you know,when I'm investing passively,I just sacrifice a control over the deal.I don't want it to passiveinvest with anybody.I just want to be on the active side.So I don't need to hear your take on that.What would you recommendbeing an active investorto begin with,or just start investing passively for us,Get the hang of it and then change ruleslike you did or I did?Wow. That's a very wide questionbecause there is no single answerthat will apply to all.So I'll try to answer from one segment.But understandthere are multiple layers to this.My kids are very young.I have a six year old.I have a two year old. Whom.No amount of moneyis worthlosing allthe time that I have with them right now.Right? That's me.I know a couple of people who still work16, 18 hours a day at their joband they have young kids and they comethey just eat dinner together,compare.So what is the value of that money?If you can be there with your child.With their family.And practice?You know, right now, everydayI go take my child to swimming practice.That's an hour and a half or deal.Then we also go for soccer.Then we play in thethere's a value in there right now,active real estate investing meansyou are doing all the workat the at the price of something, right.Versus passive investing.Let's see if you have a jobor if you have a business.What about that is you put your moneyto work and you do your own thing.6 hours, 8 hours, 10 hours.So you have time left.So when you ask the question,what's better, active or passive?Well, it just depends on the person,their personal life, how much their value,the time, their money goals,their ambitions, their long term goals.I do want to say that there'ssomething called compounding effect.You know, everybody learned thisin a third grade math,but very few actuallypracticing their life.And the compounding of it ismore amplified and passive investingand an active investing.How's that?That's if somebody has a tech job,let's say they live where you live inSan Francisco, where they havea business, where they have employeesworking in the leveraged.They keep on doing this,but every year they can invest100,000, 200,000, whatevertheir capacity is in a passive investment.Every year and keep on compounding.So the money keeps on churningfrom the business and your money keepson churning from the cashflowing assets right.And they're not putting any timeand they're getting tax advantages,which is this.So they're saving more, investmore, save more, invest more,save more, invest and keep on doing that.And yet they have the timeto do what they want to do.Right.How do youand if you can think about this scenariofor ten years,the results are far morethen the time valuethat you have, that the pricethat you pay, losing a lot of money.So every person should do this math.If money plays a really big role,yeah, of course.Come to active investing.The the money is great,but it comes with the price.So that's why I passive invest as well.Me too.Yeah. We both align.No amount of moneyin active investing is worth itand because and that's why passive invest.So I hope that answers to the questionbut we can.There are multiple layersin this question.So I think you put it very wellbecause the thing isthere's the intrinsic value of everything.Whatever you're trying to do,and then family always come first.If you ask anybodywhat you're passionate about,the first thing always going to be family.I'm passionate about my family.But how much do you how much timedo you spend with your family?That's our next question.A lot of times people get so carried awaywith their work, with their job,or making money or whateverthey regret later on.So but here you have a choice,you know, with passive investing.So I'm going to ask you to share one successful passive investing example with me.My own.Yeah, sure.Or anybody else.I think it's probably fairif I share my own because then I can sharemy feelings as well.My, my, my first passive investmentwith somebody else.And I have never met them.Binky in person.This was during the Corbett time.Even if I wanted to meet them,I cannot meet themIf this was all electronic,like zoom over the screen,I got to know that personwould like good,like two months or three months.I was talking to them every other week.Now, I could have invested a wholelot more at that time,but I chose to invest smallbecause you have that risk, right?But once you get to know that personand I understandtheir opinion about familyand about business opinion about money,how they perceive their own moneyis what I really wanted to capture.Once I got that, I felt comfortable,then my money with this personwould be also taken care ofbecause this persontakes care of his own money in certainway, the priorities in business sense.So the success story is more ofthe journey that I went through.That person and not an investmentwill perform if the person performs.So my success is the partnershipthat journey of three months,understanding the person.I like that I really, really like thatbecause I just feel likeexperience is more importantthan anything else.When you're trying to investor trying to do something, you're creatingexperience and experience is somethingthat you haven't experienced beforeor is not part of your knowledgebase is something new, right?If that experience is good,you're going to do it over and over again,and that's what you just shared.I love that.Thank you. So I think we are out of time.Can you share one goldennugget with my audience?Beside whatever you share.One golden nugget is stick to your buybox, stick to your investment thesis,stick to your financial goals,stick to your financial plans,Talk to as many sponsors as you can.If somebody talks to meand you versus talks to, let's say, Johnor Steve just making up names,they will get the perspectiveof each personand continue talking to them, continuefollowing them, continuereading about them, their perspective,and you will find the vehiclewhere you will feel safe with that sponsorwith your first hundred thousandor down the line, your first million.Right?Awesome.So this brings us to our rapid fire round.I'm going to ask you five questions.You're going to answer in one word,one sentence only.Are you ready?Oh, boy. Let's do it. Right.The first question iswhat is one of the most important thingthat you have learned in your lifeand how did it change your lifeafter learning it?There's nothing more valuable than time.And I used to burn time at my joband my first businessthat my second businesswhen my first child was born.It totally changed my perspective.So no amount of money is worththe the time that you can spendwith loving things.What you want to do with your family,beat your passions.I love that.What is one best book thatyou have readand recommend to my audience?If you are a business owner,I strongly suggest starting with E-Myth.It's a really old book.E-Myth and E-Myth Revisited.And if you are a young parentand you have kids and it's about parentingand it talks about how to talk to kids,so they listen and how to listenso they can talk.Wonderful book.And you can actually apply thisparenting book if you have a teamand you can apply the principles from thisbook to your business team as well.Exactly. That's what I was thinking.And it's all about listening.How carefully you're listeningand asking the right questions.I love that.In one word, what does life mean to you?Happiness.What is your biggest passionin business?I really enjoy now helping other investorsor people invest in real estate,and when they get their first passiveincome and they send me a text like Winkythat really like brings so much powerin my heart that I want to do it again.When it comes to my familyand my friends and my loved ones.It's the the time spent on unplannedafternoons and evenings over coffeeor tea or wine.So I just. Invaluable.That's invaluable.Those are the good memories,Those are the good memories,good start, good experiencethat they're creating power.So love that if you could turn backin time and talk to your younger self,So love that if you could turn backin time and talk to your younger self,what would that be and why?I would tell myself, Don't be scared.You know, when I was at my job,I was an immigrant.So there was a fear of immigration status,and then there was a fearof losing a job. Fear of losing the money.Fear, fear, fear.Like there was I was filled with fear.I was ambitious,but my actions were not because thatI want to grow fast or rather,I don't want to lose fast or lose it.Right? So it was fear driven.Once I made the shiftand started believing in myself.And that was my first investmentand the business journey,I started seeing thingsin a very different way.So don't fear.Why I love that.I mean, been there, donethat kind of thing, you know,for everybody, you know,because we complicate our lives.Life is very simple.It's a smooth sailing.If you just two step processand keep on walking.So how can people reach out to youand all.The best wayto reach out to me is on LinkedIn,my full name can all be one on LinkedIn.my full name can all be one on LinkedIn.Oh my God.That was a really,really good conversation today.I really enjoyed the show with you today.It's a pleasurebeing always great chatting with you.You have this powerof asking great questions, so