WEBVTT 00:00:00.000 --> 00:00:01.879 Okay, let's unpack this. We spend a lot of time 00:00:01.879 --> 00:00:04.559 on this show talking about investments, and I 00:00:04.559 --> 00:00:09.919 feel like there is this Pavlovian response we 00:00:09.919 --> 00:00:12.660 all have. I say investing, and you immediately 00:00:12.660 --> 00:00:14.939 picture a ticker scrolling across the bottom 00:00:14.939 --> 00:00:17.559 of a TV screen or maybe some guy in a fleece 00:00:17.559 --> 00:00:19.460 vest screaming about quarterly earnings calls. 00:00:19.559 --> 00:00:21.739 Right. It's all very digital. It's all very digital, 00:00:21.839 --> 00:00:24.300 very abstract. It's numbers on a screen. It feels 00:00:24.300 --> 00:00:26.920 ephemeral, like it could just vanish. Exactly. 00:00:28.079 --> 00:00:30.460 But today we are pivoting hard. We are talking 00:00:30.460 --> 00:00:32.520 about something that is arguably the complete 00:00:32.520 --> 00:00:34.700 opposite of ephemeral. We are talking about the 00:00:34.700 --> 00:00:39.670 dirt, the steel, the concrete, the... the physical 00:00:39.670 --> 00:00:42.310 container that the entire global economy sits 00:00:42.310 --> 00:00:44.729 inside. And significantly the largest asset class 00:00:44.729 --> 00:00:47.869 in existence, period. That is the headline here. 00:00:47.969 --> 00:00:50.409 We are doing a deep dive into real estate investing. 00:00:50.710 --> 00:00:53.270 And I wanted to contextualize the scale immediately 00:00:53.270 --> 00:00:55.969 because the sources, they just, they blew my 00:00:55.969 --> 00:00:57.950 mind on this. It's staggering when you see the 00:00:57.950 --> 00:01:00.390 numbers. It really is. If you take the global 00:01:00.390 --> 00:01:03.210 equity market, every single stock in the world, 00:01:03.329 --> 00:01:05.790 and you combine it with the global bond market, 00:01:06.010 --> 00:01:09.000 real estate is still bigger. It's bigger than 00:01:09.000 --> 00:01:11.840 both combined by total market capitalization 00:01:11.840 --> 00:01:14.739 in many estimates. It just it dwarfs everything. 00:01:14.859 --> 00:01:16.859 It's the elephant in the room of global finance. 00:01:17.099 --> 00:01:21.599 So our mission today is pretty specific. We aren't 00:01:21.599 --> 00:01:24.200 here to talk about buying a home and the emotional 00:01:24.200 --> 00:01:27.299 white picket fence sense of the word. No, we're 00:01:27.299 --> 00:01:29.659 taking the sentimentality out of it. We are here 00:01:29.659 --> 00:01:32.340 to strip away the sentimentality and look at 00:01:32.340 --> 00:01:34.680 the mechanics of this machine. We want to understand 00:01:34.680 --> 00:01:37.280 how real estate actually functions as a profit 00:01:37.280 --> 00:01:41.989 generating vehicle. a tool for long -term wealth 00:01:41.989 --> 00:01:44.670 preservation. Which requires a fundamental shift 00:01:44.670 --> 00:01:46.689 in mindset. It really does. Most people interact 00:01:46.689 --> 00:01:48.730 with real estate as a consumer good. It's something 00:01:48.730 --> 00:01:51.049 you use. You live in it. You sleep in it. It's 00:01:51.049 --> 00:01:53.670 shelter. It's shelter. Converting that view to 00:01:53.670 --> 00:01:56.209 seeing it as an asset, or as we'll get into a 00:01:56.209 --> 00:01:58.569 capital stack, that's a difficult leap for a 00:01:58.569 --> 00:02:01.390 lot of people to make. And we have a massive 00:02:01.390 --> 00:02:04.030 stack of sources to help us make that leap today. 00:02:04.349 --> 00:02:07.909 We've got historical legislation that goes all 00:02:07.909 --> 00:02:09.389 the way back to the Eisenhower administration. 00:02:09.960 --> 00:02:12.240 Which is a story in itself. It really is. We 00:02:12.240 --> 00:02:14.180 have technical breakdowns of deal structures, 00:02:14.319 --> 00:02:17.099 and we have some fairly heavy academic papers 00:02:17.099 --> 00:02:20.080 on the, well, the societal impacts of all this, 00:02:20.199 --> 00:02:22.159 particularly housing affordability. We're going 00:02:22.159 --> 00:02:24.360 to cover the whole life cycle. We'll look at 00:02:24.360 --> 00:02:27.259 how the game has changed from this, like, tycoon 00:02:27.259 --> 00:02:29.780 -only club to something that's actually accessible 00:02:29.780 --> 00:02:32.139 to the average person. Right. And we're going 00:02:32.139 --> 00:02:35.379 to dissect the capital stack. Which is my favorite 00:02:35.379 --> 00:02:38.139 part because it's kind of the secret code. It's 00:02:38.139 --> 00:02:41.259 the key to understanding risk in any deal. And 00:02:41.259 --> 00:02:42.539 we'll get into the strategies. We'll talk about 00:02:42.539 --> 00:02:45.879 things like BRRRR, and that's not the temperature, 00:02:46.000 --> 00:02:48.259 it's an acronym, and how people actually force 00:02:48.259 --> 00:02:50.680 value out of a property. Yeah, how they manufacture 00:02:50.680 --> 00:02:53.219 equity. But before we get into the weeds, I think 00:02:53.219 --> 00:02:55.719 we need to draw a hard line in the sand. I feel 00:02:55.719 --> 00:02:57.780 like the terms real estate development and real 00:02:57.780 --> 00:03:00.379 estate investing get used interchangeably all 00:03:00.379 --> 00:03:02.620 the time, but they're totally different beasts. 00:03:03.210 --> 00:03:05.810 Oh, they are night and day. They overlap, sure, 00:03:05.949 --> 00:03:08.870 but the skill sets are completely distinct. So 00:03:08.870 --> 00:03:10.830 what's the core difference? Real estate development 00:03:10.830 --> 00:03:14.409 is the act of creation. It's manufacturing. You 00:03:14.409 --> 00:03:18.159 are taking a raw material, a plot of dirt. or 00:03:18.159 --> 00:03:21.280 maybe a dilapidated warehouse and you are physically 00:03:21.280 --> 00:03:23.759 altering it. You're building the thing. You're 00:03:23.759 --> 00:03:25.960 building the thing. You're dealing with zoning 00:03:25.960 --> 00:03:29.240 boards, architects, construction crews, supply 00:03:29.240 --> 00:03:32.599 chains for lumber and steel. It's high stress. 00:03:32.780 --> 00:03:34.780 It's high operational intensity. It's a full 00:03:34.780 --> 00:03:38.020 time boots on the ground job. It's the making 00:03:38.020 --> 00:03:40.840 of the thing. Right. Real estate investing, which 00:03:40.840 --> 00:03:42.860 is our focus, is about the capital allocation. 00:03:43.219 --> 00:03:46.180 It involves purchasing, owning, managing, renting, 00:03:46.240 --> 00:03:49.340 or selling the asset to generate a return. So 00:03:49.340 --> 00:03:50.939 you don't have to swing a hammer. You can be 00:03:50.939 --> 00:03:53.539 a wildly successful real estate investor and 00:03:53.539 --> 00:03:55.240 never touch a hammer. You don't even need to 00:03:55.240 --> 00:03:57.560 own a hard hat. So the developer is the one sweating 00:03:57.560 --> 00:04:00.219 on the job site, dealing with a delayed concrete 00:04:00.219 --> 00:04:02.840 pour. Yes. The investor is the one analyzing 00:04:02.840 --> 00:04:05.419 the spreadsheet and cutting the check. In a simplified 00:04:05.419 --> 00:04:08.719 sense, yes. The investor's primary tool isn't 00:04:08.719 --> 00:04:10.979 a bulldozer. It's strategic decision making. 00:04:11.419 --> 00:04:14.139 It's about understanding market cycles, interest 00:04:14.139 --> 00:04:17.500 rates, tenant demographics and risk. OK, that's 00:04:17.500 --> 00:04:19.339 a great distinction. So let's zoom out for a 00:04:19.339 --> 00:04:21.560 second. We mentioned the scale of the asset class, 00:04:21.800 --> 00:04:24.860 but I think the cultural attachment to real estate 00:04:24.860 --> 00:04:27.639 is just as heavy as the financial one. It's not 00:04:27.639 --> 00:04:31.360 just money. It's safety. It's home. Absolutely. 00:04:31.519 --> 00:04:33.519 And that varies wildly depending on where you 00:04:33.519 --> 00:04:35.939 are in the world. One of the most striking data 00:04:35.939 --> 00:04:37.560 points we have, and we mentioned this earlier, 00:04:37.680 --> 00:04:41.199 comes from China. The 70 % figure. Yes. In China, 00:04:41.220 --> 00:04:43.779 it is estimated that nearly 70 % of household 00:04:43.779 --> 00:04:46.079 wealth is stored in real estate. That is staggering. 00:04:46.259 --> 00:04:49.620 Let that sink in for a moment. 70%. It is. If 00:04:49.620 --> 00:04:51.379 you compare that to the U .S., we're much more 00:04:51.379 --> 00:04:54.199 diversified. We have the 401k system, deep stock 00:04:54.199 --> 00:04:56.680 markets, bonds, all these other vehicles. Right. 00:04:56.759 --> 00:04:59.819 Our pie chart has more slices. Exactly. But in 00:04:59.819 --> 00:05:02.360 China, due to a combination of capital controls 00:05:02.360 --> 00:05:05.759 and a historically volatile equity market, real 00:05:05.759 --> 00:05:08.639 estate became the de facto piggy bank. It's the 00:05:08.639 --> 00:05:10.379 only place people really trusted to put their 00:05:10.379 --> 00:05:12.560 money for the long term. It really highlights 00:05:12.560 --> 00:05:15.180 that tangibility factor we started with. If the 00:05:15.180 --> 00:05:17.459 stock market crashes, your money feels like it 00:05:17.459 --> 00:05:20.259 vanished into thin air. It's gone. But if the 00:05:20.259 --> 00:05:22.579 real estate market crashes, you can still walk 00:05:22.579 --> 00:05:24.740 up and touch the building. It's still there. 00:05:24.839 --> 00:05:27.410 You still own the bricks. Exactly. It offers 00:05:27.410 --> 00:05:29.389 a psychological floor that other assets just 00:05:29.389 --> 00:05:31.889 don't have. Yeah. But, and this is a big but 00:05:31.889 --> 00:05:34.870 historically, accessing that asset class, especially 00:05:34.870 --> 00:05:38.290 high value commercial stuff, was incredibly difficult. 00:05:38.569 --> 00:05:40.589 This is the country club era of real estate you 00:05:40.589 --> 00:05:43.350 mentioned. Right. Go back to the 1950s. If you 00:05:43.350 --> 00:05:45.629 wanted to invest in a shopping center or a large 00:05:45.629 --> 00:05:48.230 apartment complex, you basically needed to be 00:05:48.230 --> 00:05:51.120 a tycoon. A Rockefeller. You needed a top hat 00:05:51.120 --> 00:05:53.019 and a monocle. Pretty much. You needed massive 00:05:53.019 --> 00:05:55.100 amounts of capital up front. And maybe even more 00:05:55.100 --> 00:05:56.819 importantly, you needed the connections to even 00:05:56.819 --> 00:05:59.060 find the deal. It was a closed loop. The public 00:05:59.060 --> 00:06:01.379 was completely locked out. And this brings us 00:06:01.379 --> 00:06:04.459 to a really surprising piece of history. I honestly 00:06:04.459 --> 00:06:06.240 did not expect to be talking about Dwight D. 00:06:06.300 --> 00:06:09.019 Eisenhower in a real estate deep dive. But here 00:06:09.019 --> 00:06:13.040 we are. September 14th, 1960. A very, very important 00:06:13.040 --> 00:06:15.240 day for your portfolio, even if you don't know 00:06:15.240 --> 00:06:17.720 it. Eisenhower signs a legislation that creates 00:06:17.720 --> 00:06:20.620 the Real Estate Investment Trust, or what we 00:06:20.620 --> 00:06:23.339 all know as the REIT. So let's explain this. 00:06:23.759 --> 00:06:26.459 What problem was Eisenhower actually trying to 00:06:26.459 --> 00:06:28.480 solve here? This wasn't just some random idea. 00:06:28.699 --> 00:06:31.300 He was trying to democratize access. The argument 00:06:31.300 --> 00:06:34.459 was basically this. Why should the best, most 00:06:34.459 --> 00:06:37.459 stable income producing assets in America only 00:06:37.459 --> 00:06:40.360 be available to the ultra rich? He wanted a way 00:06:40.360 --> 00:06:42.639 for the average American, the school teacher, 00:06:42.819 --> 00:06:45.319 the factory worker to own a slice of the commercial 00:06:45.319 --> 00:06:47.240 real estate market. To get a piece of the action. 00:06:47.279 --> 00:06:49.300 To get a piece of the action. He called it creating 00:06:49.300 --> 00:06:53.259 a nation of Main Street capitalists. So how does 00:06:53.259 --> 00:06:56.139 a REIT mechanically work? Because it's not just 00:06:56.139 --> 00:06:57.839 a company that buys buildings, right? There's 00:06:57.839 --> 00:07:00.699 a very specific and very important tax nuance 00:07:00.699 --> 00:07:03.399 here. This is the key. This is the secret sauce. 00:07:03.680 --> 00:07:07.139 A REIT is a company that owns, operates, or finances 00:07:07.139 --> 00:07:10.579 income -producing real estate. But to qualify 00:07:10.579 --> 00:07:14.120 as a REIT, they are required by law to distribute 00:07:14.120 --> 00:07:17.079 at least 90 % of their taxable income to shareholders 00:07:17.079 --> 00:07:20.560 in the form of dividends. 90%. That's almost 00:07:20.560 --> 00:07:24.259 everything. 90%. In exchange for doing that, 00:07:24.379 --> 00:07:26.259 the REIT itself doesn't pay corporate income 00:07:26.259 --> 00:07:28.459 tax. Whoa, okay. It's a pass -through entity. 00:07:28.879 --> 00:07:32.379 So unlike buying Apple stock where Apple pays 00:07:32.379 --> 00:07:34.459 tax on its profits and then you pay tax on your 00:07:34.459 --> 00:07:37.779 dividends, that's double taxation, the REIT skips 00:07:37.779 --> 00:07:40.439 that first layer. It makes it an incredibly efficient 00:07:40.439 --> 00:07:43.120 way to generate income for investors. That's 00:07:43.120 --> 00:07:45.439 huge. It basically turned a skyscraper into a 00:07:45.439 --> 00:07:47.899 stock. You could buy a share of the Empire State 00:07:47.899 --> 00:07:50.779 Building. conceptually for the price of a nice 00:07:50.779 --> 00:07:52.860 dinner. Right. And you'd get a check in the mail 00:07:52.860 --> 00:07:54.899 every quarter from the rent paid by all those 00:07:54.899 --> 00:07:57.639 corporate tenants. Precisely. It merged the benefits 00:07:57.639 --> 00:07:59.720 of real estate, which is the stable rent checks, 00:07:59.860 --> 00:08:01.379 with the benefits of the stock market, which 00:08:01.379 --> 00:08:03.740 is liquidity. You can sell it in a second. But 00:08:03.740 --> 00:08:06.259 there was a catch. There's always a catch. Initially, 00:08:06.399 --> 00:08:09.300 these REITs were very passive. They were allowed 00:08:09.300 --> 00:08:10.899 to own the building, but they weren't really 00:08:10.899 --> 00:08:12.500 allowed to run the building. They had to hire 00:08:12.500 --> 00:08:14.540 third party managers for everything. So they 00:08:14.540 --> 00:08:16.970 were just holding companies. Like a landlord 00:08:16.970 --> 00:08:19.610 who lives in another state. Pretty much. Until 00:08:19.610 --> 00:08:23.810 1986. The Tax Reform Act of 1986 was the second 00:08:23.810 --> 00:08:26.910 big revolution. It allowed REITs to actively 00:08:26.910 --> 00:08:29.629 manage and operate their own properties. Ah, 00:08:29.790 --> 00:08:31.910 so they could get their hands dirty. This turned 00:08:31.910 --> 00:08:34.870 them from these passive holding tanks into dynamic 00:08:34.870 --> 00:08:37.389 operating companies. They could hire their own 00:08:37.389 --> 00:08:39.350 leasing agents, their own property managers. 00:08:39.649 --> 00:08:41.769 They could have a strategy. They could actually 00:08:41.769 --> 00:08:45.730 add value. And today, this model is... It's global. 00:08:45.889 --> 00:08:48.429 It's the gold standard. Something like 40 countries 00:08:48.429 --> 00:08:50.929 have adopted the U .S. REIT model. So now you 00:08:50.929 --> 00:08:52.929 can sit in New York and buy a REIT that owns 00:08:52.929 --> 00:08:55.850 data centers in Singapore or warehouses in Berlin. 00:08:56.009 --> 00:08:58.950 The access is incredible. Which segues perfectly 00:08:58.950 --> 00:09:01.610 into the complexity of globalization. Because 00:09:01.610 --> 00:09:04.110 while you can buy that REIT in Singapore, actually 00:09:04.110 --> 00:09:05.789 going there trying to buy a building yourself 00:09:05.789 --> 00:09:09.000 is, well, it's a nightmare. It's the information 00:09:09.000 --> 00:09:11.940 asymmetry problem. This is a concept we're going 00:09:11.940 --> 00:09:14.299 to keep coming back to again and again today. 00:09:14.480 --> 00:09:16.940 Okay, define that for us. In the stock market, 00:09:17.139 --> 00:09:20.279 information is relatively symmetrical. You and 00:09:20.279 --> 00:09:22.879 I both have access to Apple's 10K report at the 00:09:22.879 --> 00:09:25.519 exact same second it's released. We're on a level 00:09:25.519 --> 00:09:27.500 playing field. Right. It's all public. In real 00:09:27.500 --> 00:09:31.440 estate, information is wildly asymmetrical. If 00:09:31.440 --> 00:09:33.879 you are trying to buy an office building in Tokyo 00:09:33.879 --> 00:09:36.460 and you are sitting in Chicago, you are at a 00:09:36.460 --> 00:09:39.019 massive disadvantage. I'm telling you now. You 00:09:39.019 --> 00:09:41.100 don't know the local zoning nuances. You don't 00:09:41.100 --> 00:09:43.360 know that the subway station next door is closing 00:09:43.360 --> 00:09:46.139 for repairs for three years. local tenant laws. 00:09:46.340 --> 00:09:48.139 You don't know the right people. So the local 00:09:48.139 --> 00:09:50.940 operator always wins. Almost always. That's why, 00:09:51.059 --> 00:09:53.440 despite globalization, real estate remains a 00:09:53.440 --> 00:09:56.480 deeply, deeply local game. The sources note that 00:09:56.480 --> 00:09:58.720 information quality has improved significantly 00:09:58.720 --> 00:10:02.019 in the 21st century. We have better data, satellite 00:10:02.019 --> 00:10:04.360 imagery, all of that. Sure. But you can never 00:10:04.360 --> 00:10:07.100 fully eliminate the home court advantage. Someone 00:10:07.100 --> 00:10:09.059 on the ground will always know more than you 00:10:09.059 --> 00:10:11.240 do. Okay, so that's the Mac Review. We've gone 00:10:11.240 --> 00:10:14.159 from Eisenhower to the global market. Now I want 00:10:14.159 --> 00:10:15.960 to bring it down to the ground level. Let's say 00:10:15.960 --> 00:10:18.019 I have the capital and I want to be a direct 00:10:18.019 --> 00:10:20.240 investor. I want to buy a building. It's not 00:10:20.240 --> 00:10:21.879 as simple as walking into a store and picking 00:10:21.879 --> 00:10:24.559 one off the shelf, is it? No, not at all. We 00:10:24.559 --> 00:10:27.419 call this the deal life cycle. And thinking of 00:10:27.419 --> 00:10:29.620 it as a cycle is really important because it's 00:10:29.620 --> 00:10:32.600 a process with distinct phases. And each of those 00:10:32.600 --> 00:10:35.539 phases has its own unique risks. Let's walk through 00:10:35.539 --> 00:10:39.559 phase one, sourcing, finding the deal. This is 00:10:39.559 --> 00:10:42.200 the hunt. And I think this is where most amateurs 00:10:42.200 --> 00:10:45.740 fail immediately. They think sourcing means going 00:10:45.740 --> 00:10:48.460 on a public listing site, like a Zillow for commercial 00:10:48.460 --> 00:10:50.679 properties, and just scrolling through what's 00:10:50.679 --> 00:10:52.919 for sale. Why is that a problem? Isn't that where 00:10:52.919 --> 00:10:55.679 the deals are? Because by the time a good deal 00:10:55.679 --> 00:10:58.100 hits the public market, the professionals have 00:10:58.100 --> 00:11:00.480 likely already seen it and passed on it for some 00:11:00.480 --> 00:11:03.200 reason. In the institutional world, the best 00:11:03.200 --> 00:11:06.080 deals are found off market. Pocket listings. 00:11:06.559 --> 00:11:09.870 The secret menu. Exactly. It's all about relationships. 00:11:10.389 --> 00:11:12.289 It's a broker you've worked with for 10 years 00:11:12.289 --> 00:11:14.570 calling you and saying, hey, the owner of that 00:11:14.570 --> 00:11:17.129 warehouse on 5th Street is thinking about retiring. 00:11:17.330 --> 00:11:19.769 He hasn't listed it yet, but if you make a clean, 00:11:19.850 --> 00:11:23.289 all -cash offer, he might bite. That is where 00:11:23.289 --> 00:11:26.009 the real money is made. So phase one is basically 00:11:26.009 --> 00:11:29.649 networking and sleuthing. 100%. Okay, once you 00:11:29.649 --> 00:11:31.289 find the target, you move to the next stage. 00:11:31.470 --> 00:11:34.370 Underwriting and due diligence. The homework 00:11:34.370 --> 00:11:38.200 phase. And this is... It's forensic. You are 00:11:38.200 --> 00:11:40.559 tearing that building apart both physically and 00:11:40.559 --> 00:11:43.120 financially, piece by piece. Give us an example 00:11:43.120 --> 00:11:44.639 of what you're looking for. What's a classic 00:11:44.639 --> 00:11:47.759 gotcha in due diligence? Okay, financially, you're 00:11:47.759 --> 00:11:50.120 looking at the rent roll. This is the list of 00:11:50.120 --> 00:11:52.620 all tenants, what they pay, and when their leases 00:11:52.620 --> 00:11:55.679 expire. You need to verify it. Is tenant C actually 00:11:55.679 --> 00:11:58.940 paying or are they six months behind? You're 00:11:58.940 --> 00:12:01.679 also checking the operating expenses. Did the 00:12:01.679 --> 00:12:04.059 seller forget to include the bill for the roof 00:12:04.059 --> 00:12:06.019 repair they did last year? You're a detective. 00:12:06.360 --> 00:12:08.740 You have to be. And physically, you're looking 00:12:08.740 --> 00:12:11.379 for the nightmares. I know an investor who was 00:12:11.379 --> 00:12:14.139 buying a small apartment complex. During due 00:12:14.139 --> 00:12:16.200 diligence, they paid a plumber a few hundred 00:12:16.200 --> 00:12:18.340 bucks to scope the main sewer line with a camera. 00:12:18.639 --> 00:12:22.019 Never a fun job. Never. But they found that the 00:12:22.019 --> 00:12:24.299 main cast iron line had collapsed years ago, 00:12:24.419 --> 00:12:28.009 and the previous owner had just... Kind of rigged 00:12:28.009 --> 00:12:29.850 it. It was a ticking time bomb. It was going 00:12:29.850 --> 00:12:32.289 to cost $50 ,000 to dig up the parking lot and 00:12:32.289 --> 00:12:35.110 fix it. Ouch. But because they found that during 00:12:35.110 --> 00:12:37.269 the due diligence period, they could go back 00:12:37.269 --> 00:12:39.950 to the seller and say, knock $50 off the price 00:12:39.950 --> 00:12:42.830 or we walk. And if they hadn't looked? They would 00:12:42.830 --> 00:12:44.570 have bought the building. The sewer would have 00:12:44.570 --> 00:12:46.409 backed up a week later and they would have been 00:12:46.409 --> 00:12:49.889 out $50 ,000 on day one. Due diligence is about 00:12:49.889 --> 00:12:52.509 risk mitigation. You are actively looking for 00:12:52.509 --> 00:12:55.250 reasons not to buy the deal. Okay. Assuming the 00:12:55.250 --> 00:12:57.549 sewer is fine and the numbers check out, we move 00:12:57.549 --> 00:13:01.289 to phase two, execution. This is the closing. 00:13:01.629 --> 00:13:04.429 This is the legal and financial heavy lifting. 00:13:04.570 --> 00:13:07.070 You're signing stacks of papers. You're transferring 00:13:07.070 --> 00:13:09.730 the title. And crucially, you are funding the 00:13:09.730 --> 00:13:12.009 deal. We will talk about the funding structure, 00:13:12.309 --> 00:13:14.490 the capital stack in a lot more detail in a minute. 00:13:14.649 --> 00:13:18.009 And then phase three, the deal is done. You own 00:13:18.009 --> 00:13:21.509 it. Now what? Now the real work begins. Ownership 00:13:21.509 --> 00:13:24.629 and exit. We call this asset management. And 00:13:24.629 --> 00:13:27.629 this is another huge misconception. People hear 00:13:27.629 --> 00:13:29.409 the phrase passive income and think it means 00:13:29.409 --> 00:13:31.110 you do nothing. Yeah, you just sit on the beach 00:13:31.110 --> 00:13:33.129 and check your bank account once a month. That's 00:13:33.129 --> 00:13:36.590 a fantasy. In reality, asset management is extremely 00:13:36.590 --> 00:13:39.490 active. You are constantly trying to optimize 00:13:39.490 --> 00:13:42.529 the net operating income or NOI. How do you do 00:13:42.529 --> 00:13:45.230 that? Two ways. Yeah. Increase revenue or decrease 00:13:45.230 --> 00:13:48.370 expenses. Maybe the lobby is dated and depressing, 00:13:48.649 --> 00:13:51.429 so you spend $100 ,000 renovating it to justify 00:13:51.429 --> 00:13:54.250 raising rents by $200 a unit across the building. 00:13:54.429 --> 00:13:57.169 That's increasing revenue. Okay. Or maybe you 00:13:57.169 --> 00:13:59.350 realize the heating system is 40 years old and 00:13:59.350 --> 00:14:01.669 incredibly inefficient. You replace it with a 00:14:01.669 --> 00:14:03.830 modern system to lower your monthly utility bills. 00:14:03.970 --> 00:14:06.370 That's decreasing expenses. You are actively 00:14:06.370 --> 00:14:08.649 manufacturing value. And eventually you sell. 00:14:08.809 --> 00:14:12.169 Disposition. the exit hopefully you sell for 00:14:12.169 --> 00:14:14.889 a healthy profit pay off your investors take 00:14:14.889 --> 00:14:17.070 your cut and then usually you roll that money 00:14:17.070 --> 00:14:20.090 into a bigger deal and the cycle starts all over 00:14:20.090 --> 00:14:22.269 again i love that framework it makes it feel 00:14:22.269 --> 00:14:25.389 like a real business not a gamble but there is 00:14:25.389 --> 00:14:28.029 one variable in that cycle that drives me crazy 00:14:28.029 --> 00:14:30.070 and it drives all the stock market people crazy 00:14:30.070 --> 00:14:34.759 too valuation Ah, yes. The age -old question 00:14:34.759 --> 00:14:37.500 of what is it worth? Right. If I ask you what 00:14:37.500 --> 00:14:39.919 a share of Microsoft is worth, you can pull up 00:14:39.919 --> 00:14:41.679 your phone and tell me down to the penny right 00:14:41.679 --> 00:14:44.559 now. It's instant. It's liquid. It's a single, 00:14:44.720 --> 00:14:46.899 undisputed number. But if I ask you what that 00:14:46.899 --> 00:14:49.559 office building across the street is worth, the 00:14:49.559 --> 00:14:53.220 answer is it depends. It depends on a dozen factors 00:14:53.220 --> 00:14:55.620 and who you ask. This is because real estate 00:14:55.620 --> 00:14:58.279 markets are highly inefficient. No two buildings 00:14:58.279 --> 00:15:00.960 are perfectly interchangeable. Uniqueness. Uniqueness. 00:15:01.470 --> 00:15:04.830 and most importantly, location. You can have 00:15:04.830 --> 00:15:07.850 two absolutely identical buildings, same bricks, 00:15:08.029 --> 00:15:10.190 same architect, same everything, but they'll 00:15:10.190 --> 00:15:12.929 have vastly different values if one is next to 00:15:12.929 --> 00:15:15.409 a brand new subway station and the other is next 00:15:15.409 --> 00:15:17.870 to a noisy highway. You can't move the building. 00:15:18.070 --> 00:15:20.769 So how do the pros do it? If there is no ticker 00:15:20.769 --> 00:15:23.460 symbol, how do we agree on a price? There are 00:15:23.460 --> 00:15:25.480 three main methods. And depending on who you 00:15:25.480 --> 00:15:29.000 are, an investor, an insurer, a homebuyer, you'll 00:15:29.000 --> 00:15:31.919 lean on different ones. But the first and the 00:15:31.919 --> 00:15:35.100 absolute Bible for investors is the inky approach. 00:15:35.320 --> 00:15:37.120 OK, let's drill down on this. This is where the 00:15:37.120 --> 00:15:39.480 math comes in. I want to go slow here. It's simple 00:15:39.480 --> 00:15:42.179 algebra, but it's incredibly powerful. The core 00:15:42.179 --> 00:15:45.080 metric is NOI net operating income. Right. You 00:15:45.080 --> 00:15:47.500 mentioned it before. NOI is your gross rental 00:15:47.500 --> 00:15:49.899 revenue minus all your operating expenses. That's 00:15:49.899 --> 00:15:52.299 taxes, insurance, maintenance, property management 00:15:52.299 --> 00:15:54.980 fees, utilities, everything. What it does not 00:15:54.980 --> 00:15:57.179 include is your mortgage payment. That's a financing 00:15:57.179 --> 00:15:59.659 cost, not an operating cost. Okay. So it's the 00:15:59.659 --> 00:16:02.159 pure profit the building itself generates before 00:16:02.159 --> 00:16:05.240 any debt. Exactly. Let's say your building generates 00:16:05.240 --> 00:16:08.899 $50 ,000 a year in NOI. Okay, I have my NOI. 00:16:09.019 --> 00:16:12.019 Now what? Now you need the cap rate or capitalization 00:16:12.019 --> 00:16:13.799 rate. This is the number that confuses everyone, 00:16:13.879 --> 00:16:16.159 but it's the most important number in commercial 00:16:16.159 --> 00:16:19.419 real estate. Break it down for me. Think of the 00:16:19.419 --> 00:16:22.139 cap rate as a measure of market sentiment and 00:16:22.139 --> 00:16:25.059 risk. It is the annual return you would expect 00:16:25.059 --> 00:16:27.360 to get if you bought the building with all cash. 00:16:27.840 --> 00:16:31.440 So if a building costs $1 million... And it generates 00:16:31.440 --> 00:16:35.059 $50 ,000 in NOI. That's a 5 % return. So it's 00:16:35.059 --> 00:16:38.000 a five cap property. You got it. Now, here is 00:16:38.000 --> 00:16:40.840 the magic or the madness, depending on your perspective. 00:16:41.399 --> 00:16:44.320 The market determines the cap rate. Investors 00:16:44.320 --> 00:16:46.460 collectively decide what an acceptable return 00:16:46.460 --> 00:16:48.860 is for a certain type of property in a certain 00:16:48.860 --> 00:16:50.879 location. So it's supply and demand for deals. 00:16:51.159 --> 00:16:53.269 Precisely. If everyone wants to own apartment 00:16:53.269 --> 00:16:55.289 buildings in New York City because they are seen 00:16:55.289 --> 00:16:57.629 as safe, investors might be willing to accept 00:16:57.629 --> 00:17:01.149 a very low return, say a 4 % cap rate. But if 00:17:01.149 --> 00:17:03.330 you are buying a sketchy strip mall in a dying 00:17:03.330 --> 00:17:06.190 town, that's risky. You'd demand a much higher 00:17:06.190 --> 00:17:08.789 return, maybe a 10 % cap rate. Okay, so the formula 00:17:08.789 --> 00:17:12.430 is NOI divided by cap rate equals the property 00:17:12.430 --> 00:17:15.490 value. That's the holy grail formula right there. 00:17:15.970 --> 00:17:18.890 Now let's play with that $50 ,000 NOI we talked 00:17:18.890 --> 00:17:21.609 about. In a safe, hot market where investors 00:17:21.609 --> 00:17:24.430 will accept a 5 % cap rate, that building is 00:17:24.430 --> 00:17:28.250 worth $1 million. 50 ,000 divided by 0 .05. Right. 00:17:28.269 --> 00:17:30.380 Makes sense. But what happens if the market turns? 00:17:30.640 --> 00:17:33.299 Let's say interest rates spike, a big employer 00:17:33.299 --> 00:17:35.720 leaves town, and investors suddenly perceive 00:17:35.720 --> 00:17:38.420 that area as much riskier. Now, they demand a 00:17:38.420 --> 00:17:41.000 10 % cap rate to invest there. Okay, so then 00:17:41.000 --> 00:17:45.660 it's $50 ,000 divided by 0 .10, which is $500 00:17:45.660 --> 00:17:48.359 ,000. Exactly. You just lost half your value. 00:17:48.539 --> 00:17:50.859 Whoa. Your building is generating the exact same 00:17:50.859 --> 00:17:53.480 amount of cash, $50 ,000, but it is worth half 00:17:53.480 --> 00:17:55.900 as much simply because the perception of risk 00:17:55.900 --> 00:17:58.559 in the market changed. That is why... professional 00:17:58.559 --> 00:18:01.400 investors obsess over cap rates. That is wild. 00:18:01.599 --> 00:18:03.279 So you could be doing a great job as an owner, 00:18:03.359 --> 00:18:05.559 but your net worth gets cut in half because of 00:18:05.559 --> 00:18:07.240 something completely out of your control. Welcome 00:18:07.240 --> 00:18:09.500 to real estate economics. It's a powerful force. 00:18:09.700 --> 00:18:11.700 OK, what about the other methods, the cost approach? 00:18:11.960 --> 00:18:14.299 Would you use that? This is more for insurance 00:18:14.299 --> 00:18:17.160 purposes or for unique properties that don't 00:18:17.160 --> 00:18:19.500 generate income, like a school or a church or 00:18:19.500 --> 00:18:22.180 a government building. It asks a simple question. 00:18:23.000 --> 00:18:26.299 What would it cost to build this brand new today? 00:18:26.839 --> 00:18:30.660 Replacement cost. Yes. If you are buying a 100 00:18:30.660 --> 00:18:32.680 -year -old historic church, there aren't many 00:18:32.680 --> 00:18:35.319 comps for that. So you calculate the cost of 00:18:35.319 --> 00:18:37.940 the land plus the cost of the bricks and labor 00:18:37.940 --> 00:18:40.420 and materials to build it today, and then you 00:18:40.420 --> 00:18:43.059 subtract depreciation for the age and wear and 00:18:43.059 --> 00:18:46.799 tear. It sets a ceiling. No rational buyer will 00:18:46.799 --> 00:18:49.680 pay $5 million for an old building they could 00:18:49.680 --> 00:18:51.660 build themselves from scratch for $3 million. 00:18:52.099 --> 00:18:54.279 And the third one is the one we all know from 00:18:54.279 --> 00:18:56.900 buying houses. The comparison approach. Comps. 00:18:56.980 --> 00:18:59.380 You just look at what the nearly identical house 00:18:59.380 --> 00:19:01.960 next door sold for three months ago. Simple enough 00:19:01.960 --> 00:19:04.200 for houses, but for commercial properties, professionals 00:19:04.200 --> 00:19:06.380 take this a step further with something called 00:19:06.380 --> 00:19:08.460 hedonic regression. That sounds incredibly fancy. 00:19:09.150 --> 00:19:11.190 And complicated. It sounds like something from 00:19:11.190 --> 00:19:13.549 a sci -fi novel, but it's just statistics. It's 00:19:13.549 --> 00:19:15.670 a way of isolating all the different variables 00:19:15.670 --> 00:19:17.670 that make up a property's value. What do you 00:19:17.670 --> 00:19:19.690 mean? Well, if you just look at two buildings 00:19:19.690 --> 00:19:21.950 and one sold for more than the other, you don't 00:19:21.950 --> 00:19:24.730 really know why. Was it the extra floor? The 00:19:24.730 --> 00:19:27.470 better view? The new roof? The fact that it's 00:19:27.470 --> 00:19:29.589 100 feet closer to the train station? Right. 00:19:29.650 --> 00:19:31.930 Too many moving parts. Hedonic regression runs 00:19:31.930 --> 00:19:34.910 the sales data on thousands of properties to 00:19:34.910 --> 00:19:37.869 assign a specific dollar value to each individual 00:19:37.869 --> 00:19:41.500 feature. It can tell you in this specific zip 00:19:41.500 --> 00:19:46.319 code, a swimming pool adds exactly $12 ,500 to 00:19:46.319 --> 00:19:49.519 the value. Or each square foot is worth $200. 00:19:49.839 --> 00:19:53.880 Or being on a corner lot adds $5 ,000. So it 00:19:53.880 --> 00:19:55.859 removes the guesswork. You can build a price 00:19:55.859 --> 00:19:57.839 from the bottom up. Feature by feature. Exactly. 00:19:58.039 --> 00:20:00.519 It's an attempt to standardize that information 00:20:00.519 --> 00:20:03.039 asymmetry we talked about. It's how big data 00:20:03.039 --> 00:20:05.140 is trying to make an inefficient market more 00:20:05.140 --> 00:20:07.380 efficient. OK, so we've found the deal. We've 00:20:07.380 --> 00:20:09.619 done the diligence and we valued it at a five 00:20:09.619 --> 00:20:12.160 cap. Now comes the part that I think is the most 00:20:12.160 --> 00:20:14.059 sophisticated and maybe the most intimidating 00:20:14.059 --> 00:20:19.019 part of the industry. The outline uses this visual 00:20:19.019 --> 00:20:21.769 of the capital stack. I want to stay here for 00:20:21.769 --> 00:20:23.970 a bit because I think understanding this concept 00:20:23.970 --> 00:20:26.390 fundamentally changes how you see every single 00:20:26.390 --> 00:20:28.950 building in your city. I agree. Imagine a layer 00:20:28.950 --> 00:20:32.730 cake or a stack of pancakes. This stack represents 00:20:32.730 --> 00:20:34.930 all the different sources of money being used 00:20:34.930 --> 00:20:38.109 to buy the property, but the layers aren't equal. 00:20:38.210 --> 00:20:40.569 They have different priorities, different risks, 00:20:40.589 --> 00:20:42.690 and different rewards. Let's start at the bottom, 00:20:42.750 --> 00:20:45.289 the foundation of the cake. The bottom layer, 00:20:45.470 --> 00:20:48.089 the biggest and most stable layer, is senior 00:20:48.089 --> 00:20:51.670 debt. This is the boring stuff. This is the first 00:20:51.670 --> 00:20:54.309 mortgage you get from a big conservative institution 00:20:54.309 --> 00:20:57.049 like a bank or an insurance company. Why is it 00:20:57.049 --> 00:20:58.789 at the bottom? Because it is the foundation. 00:20:58.910 --> 00:21:01.390 And because it has the first claim on the asset. 00:21:01.849 --> 00:21:04.509 If the project goes bust and the property is 00:21:04.509 --> 00:21:06.849 sold in a foreclosure auction, the senior debt 00:21:06.849 --> 00:21:09.430 lender gets paid back every single penny of their 00:21:09.430 --> 00:21:11.829 loan before anyone else sees a dime. They're 00:21:11.829 --> 00:21:14.470 first in line. First in line, always. Because 00:21:14.470 --> 00:21:16.450 they are the safest, they are collateralized 00:21:16.450 --> 00:21:18.970 by the physical building. They charge the lowest 00:21:18.970 --> 00:21:21.390 interest rate. In our notes, this is typically 00:21:21.390 --> 00:21:25.289 in the 3 % to 8 % range. So low risk, low return. 00:21:25.589 --> 00:21:29.710 They are the bedrock. Okay, who sits on top of 00:21:29.710 --> 00:21:32.470 the bank? Now we enter what we call the messy 00:21:32.470 --> 00:21:34.930 middle. Sitting on top of the senior debt is 00:21:34.930 --> 00:21:37.809 mezzanine debt. Mezzanine, like the balcony level 00:21:37.809 --> 00:21:40.809 in a theater. It's in between. Exactly. It bridges 00:21:40.809 --> 00:21:42.430 the gap. Let's use an example. Say a building 00:21:42.430 --> 00:21:45.710 costs $10 million. The bank will only lend you 00:21:45.710 --> 00:21:48.529 60 % of that, so they give you $6 million in 00:21:48.529 --> 00:21:51.450 senior debt. But you only have $1 million in 00:21:51.450 --> 00:21:53.950 cash to put in yourself. You're making $3 million. 00:21:54.170 --> 00:21:55.950 You have a gap in your stack. You have a gap. 00:21:56.349 --> 00:21:58.589 So you go to a mezzanine lender to borrow that 00:21:58.589 --> 00:22:01.250 missing $3 million. What's their deal? What makes 00:22:01.250 --> 00:22:02.950 them different from the bank? They are taking 00:22:02.950 --> 00:22:04.930 way more risk. Think about it. If the building 00:22:04.930 --> 00:22:08.390 is sold at a loss for, say, $5 million, the bank 00:22:08.390 --> 00:22:10.369 gets their $5 million and the mezzanine lender 00:22:10.369 --> 00:22:11.890 gets completely wiped out. They get nothing. 00:22:12.329 --> 00:22:14.309 Because of that higher risk, they charge way 00:22:14.309 --> 00:22:17.029 more interest, maybe 8 % to 15%. Do they have 00:22:17.029 --> 00:22:20.180 any security at all? Usually their security isn't 00:22:20.180 --> 00:22:22.380 the property itself. It's the ownership structure 00:22:22.380 --> 00:22:25.359 of the property. If you do fault on the mezzanine 00:22:25.359 --> 00:22:28.180 loan, they can sometimes foreclose on your equity 00:22:28.180 --> 00:22:30.839 interest in the LLC that owns the building. So 00:22:30.839 --> 00:22:32.859 they can kick you out. They can kick you out 00:22:32.859 --> 00:22:34.880 and take over the project without having to go 00:22:34.880 --> 00:22:37.920 through a messy two -year court battle with the 00:22:37.920 --> 00:22:40.940 big bank. It's fast and brutal. High -stakes 00:22:40.940 --> 00:22:43.519 poker. Okay, and sometimes mixed in there is 00:22:43.519 --> 00:22:46.420 something called preferred equity. Right. Preferred 00:22:46.420 --> 00:22:49.240 equity is a hybrid. It acts like a loan because 00:22:49.240 --> 00:22:52.039 it gets a fixed or preferred return, say 10%, 00:22:52.039 --> 00:22:54.559 but it's legally considered equity. They get 00:22:54.559 --> 00:22:56.519 paid after all the debt, but before the regular 00:22:56.519 --> 00:22:58.599 owners get anything. So they have preference. 00:22:58.900 --> 00:23:00.819 They have preference. They get to eat before 00:23:00.819 --> 00:23:03.329 you do. They don't usually have foreclosure rights 00:23:03.329 --> 00:23:05.869 like debt does, but they might have rights to 00:23:05.869 --> 00:23:07.529 take control of the project if you miss their 00:23:07.529 --> 00:23:09.970 payments. Which brings us to the very top of 00:23:09.970 --> 00:23:12.869 the stack. Yeah. The cherry on the cake, common 00:23:12.869 --> 00:23:16.769 equity. This is you, the sponsor, the investor, 00:23:16.970 --> 00:23:19.809 the person who put the whole deal together. Why 00:23:19.809 --> 00:23:22.710 would anyone want to be in this position? You're 00:23:22.710 --> 00:23:25.430 last in line. You only get paid after the bank, 00:23:25.529 --> 00:23:27.690 the mezzanine guy, and the preferred equity guy 00:23:27.690 --> 00:23:30.390 all take their cut. Your money is the first to 00:23:30.390 --> 00:23:32.869 get lost if things go wrong. It's the position 00:23:32.869 --> 00:23:36.210 of highest risk, yes. But it is also the position 00:23:36.210 --> 00:23:38.529 of infinite upside. Explain that. What do you 00:23:38.529 --> 00:23:40.450 mean infinite? The bank only ever gets their 00:23:40.450 --> 00:23:43.170 5 % interest. Even if the building doubles in 00:23:43.170 --> 00:23:45.029 value and you make a massive profit, the bank 00:23:45.029 --> 00:23:47.450 still just gets their 5%. The mezzanine lender 00:23:47.450 --> 00:23:49.809 just gets their 12%. Their return is capped. 00:23:49.930 --> 00:23:53.269 Okay. But you... The common equity holder. You 00:23:53.269 --> 00:23:55.789 are the residual claimant. Once everyone else 00:23:55.789 --> 00:23:58.509 has paid their fixed amount, every single remaining 00:23:58.509 --> 00:24:01.660 dollar of profit belongs to you. So if the deal 00:24:01.660 --> 00:24:03.759 is a home run, the common equity makes all the 00:24:03.759 --> 00:24:06.160 profit. All of it. The returns for common equity 00:24:06.160 --> 00:24:10.220 in a successful deal can be 15%, 20%, 50%, even 00:24:10.220 --> 00:24:13.019 technically infinite if you refinance all your 00:24:13.019 --> 00:24:15.740 original cash out of the deal. That is the tradeoff. 00:24:15.759 --> 00:24:17.839 You take the first loss risk. If a value drops, 00:24:18.079 --> 00:24:20.099 your money is wiped out first. But in exchange, 00:24:20.259 --> 00:24:22.619 you get the unlimited upside. This is really 00:24:22.619 --> 00:24:26.079 the pure definition of leverage. Yes. Using OPM 00:24:26.079 --> 00:24:28.700 other people's money. Let's go back to that $10 00:24:28.700 --> 00:24:31.650 million building. Let's say I buy it with $2 00:24:31.650 --> 00:24:34.670 million of my own money, common equity, and $8 00:24:34.670 --> 00:24:36.970 million of debt. Now, let's say the building 00:24:36.970 --> 00:24:39.430 goes up just 10 % in value over the first year. 00:24:39.569 --> 00:24:42.109 So the building is now worth $11 million. Right. 00:24:42.190 --> 00:24:44.549 The building went up by $1 million in value, 00:24:44.710 --> 00:24:47.490 but I only put in $2 million of my own cash. 00:24:47.970 --> 00:24:50.650 So my equity went from $2 million to $3 million. 00:24:51.150 --> 00:24:53.990 That's a 50 % return on my money from a simple 00:24:53.990 --> 00:24:56.869 10 % move in the underlying asset. That is the 00:24:56.869 --> 00:24:59.500 magic of leverage. It magnifies your returns. 00:24:59.700 --> 00:25:01.839 And the danger, because if the value goes down 00:25:01.839 --> 00:25:04.200 10%. Your $10 million building is now worth $9 00:25:04.200 --> 00:25:07.480 million. You still owe $8 million. Your $2 million 00:25:07.480 --> 00:25:10.400 of equity is now only $1 million. You lost 50 00:25:10.400 --> 00:25:12.859 % of your money. Or all of it. If you are over 00:25:12.859 --> 00:25:15.140 leveraged, this is why banks have LTV or loan 00:25:15.140 --> 00:25:17.200 to value limits. They want you to have skin in 00:25:17.200 --> 00:25:19.599 the game. Typically 20, 30 % of the value. Exactly. 00:25:19.640 --> 00:25:21.900 They want to know that if the value drops, it 00:25:21.900 --> 00:25:23.819 burns through your money before it even gets 00:25:23.819 --> 00:25:25.740 close to touching their money. What about when 00:25:25.740 --> 00:25:28.700 the building is a total disaster? I'm thinking 00:25:28.700 --> 00:25:31.579 a boarded -up property with no roof. A traditional 00:25:31.579 --> 00:25:33.880 bank isn't going to lend on that, right? No chance. 00:25:34.079 --> 00:25:36.119 That's when you need hard money or bridge loans. 00:25:36.339 --> 00:25:38.839 These are the aggressive short -term lenders. 00:25:39.059 --> 00:25:42.000 They will lend on the as -repaired value, or 00:25:42.000 --> 00:25:45.200 ARV. They'll lend you money based on what the 00:25:45.200 --> 00:25:47.859 property will be worth after you fix it up. But 00:25:47.859 --> 00:25:50.180 I'm guessing it's expensive. Extremely. They 00:25:50.180 --> 00:25:53.279 might charge you 10, 12, 14 % interest plus huge 00:25:53.279 --> 00:25:56.440 upfront fees. It's a sprint, not a marathon. 00:25:56.599 --> 00:25:58.519 It's a bridge to get you to stability. Exactly. 00:25:58.759 --> 00:26:00.980 You use that expensive money to fix the roof, 00:26:01.059 --> 00:26:03.460 put in new kitchens, and get tenants in. Once 00:26:03.460 --> 00:26:05.500 the property's stabilized and generating income, 00:26:05.819 --> 00:26:08.539 you run to a regular bank and get a nice, cheap 00:26:08.539 --> 00:26:11.339 5 % long -term loan to pay off the expensive 00:26:11.339 --> 00:26:13.420 hard money guy. But while you're doing all that 00:26:13.420 --> 00:26:16.220 work... You have the carry cost. This sounds 00:26:16.220 --> 00:26:18.640 ominous. It's the silent killer of deals. While 00:26:18.640 --> 00:26:20.619 you are fixing that roof for six months, there 00:26:20.619 --> 00:26:22.940 is no rent coming in. But you still have to pay 00:26:22.940 --> 00:26:25.640 the insurance, the property taxes, and that very 00:26:25.640 --> 00:26:27.960 expensive hard money interest payment every single 00:26:27.960 --> 00:26:31.880 month. That is negative cash flow. You are feeding 00:26:31.880 --> 00:26:34.279 the beast every month out of your own pocket. 00:26:34.500 --> 00:26:36.839 And if you run out of cash before you finish 00:26:36.839 --> 00:26:40.380 the renovation and get a tenant in... The beast 00:26:40.380 --> 00:26:43.339 eats you that is how most beginner developers 00:26:43.339 --> 00:26:46.640 and investors go bankrupt They underestimate 00:26:46.640 --> 00:26:49.319 the carry cost this folds perfectly into the 00:26:49.319 --> 00:26:51.460 next segment We've talked about how to lose money 00:26:51.460 --> 00:26:53.599 through things like carry costs. Let's talk about 00:26:53.599 --> 00:26:56.920 how to make money. The sources outline four distinct 00:26:56.920 --> 00:27:00.119 profit centers in real estate. And I think most 00:27:00.119 --> 00:27:02.299 people only ever focus on one of them. Right. 00:27:02.420 --> 00:27:04.339 Most people, when they think of real estate profit, 00:27:04.579 --> 00:27:06.559 they focus on cash flow, the check you get every 00:27:06.559 --> 00:27:09.380 month. But sophisticated investors look at the 00:27:09.380 --> 00:27:12.259 four sources of return. Number one is that NOI 00:27:12.259 --> 00:27:15.089 cash flow. Simple enough. Rent comes in, expenses 00:27:15.089 --> 00:27:17.609 go out, what's left over is your profit. This 00:27:17.609 --> 00:27:19.650 is the money you can spend on groceries. Okay, 00:27:19.730 --> 00:27:21.910 number two is where it gets really interesting, 00:27:22.109 --> 00:27:24.950 especially from a tax perspective. Tax shelter 00:27:24.950 --> 00:27:27.990 offsets. This is arguably the most powerful tool 00:27:27.990 --> 00:27:30.789 in the entire kit. The U .S. tax code absolutely 00:27:30.789 --> 00:27:33.309 loves real estate investors. And the magic word 00:27:33.309 --> 00:27:37.339 here is depreciation. Yes. The IRS allows you 00:27:37.339 --> 00:27:39.779 to assume that your building is wearing out over 00:27:39.779 --> 00:27:43.359 a period of 27 .5 years for residential property. 00:27:43.700 --> 00:27:46.779 So every single year, you get to take a paper 00:27:46.779 --> 00:27:49.779 loss on your taxes that's roughly equal to 3 00:27:49.779 --> 00:27:53.059 .6 % of the building's value, not including the 00:27:53.059 --> 00:27:55.160 land. But you didn't actually lose that money. 00:27:55.200 --> 00:27:57.240 You didn't write a check to anyone for depreciation. 00:27:57.400 --> 00:28:00.440 Exactly. It's a phantom expense. So let's say 00:28:00.440 --> 00:28:03.480 you make $10 ,000 in actual cash profit from 00:28:03.480 --> 00:28:06.210 rent this year. But on your tax return, you also 00:28:06.210 --> 00:28:09.829 show a $10 ,000 depreciation expense. Your taxable 00:28:09.829 --> 00:28:12.750 income is now zero. You get to keep the $10 ,000 00:28:12.750 --> 00:28:16.460 in cash, but you pay no income tax on it. That 00:28:16.460 --> 00:28:18.700 feels like a cheat code. It really does. It feels 00:28:18.700 --> 00:28:20.920 that way. And if you have carryover losses from 00:28:20.920 --> 00:28:23.059 depreciation, you can sometimes use those paper 00:28:23.059 --> 00:28:25.299 losses to offset income from other sources, like 00:28:25.299 --> 00:28:27.440 your day job. It's why you often see headlines 00:28:27.440 --> 00:28:29.460 about billionaire developers paying very little 00:28:29.460 --> 00:28:31.440 in personal income tax. They aren't evading it. 00:28:31.579 --> 00:28:34.180 They are legally using depreciation. Okay, that's 00:28:34.180 --> 00:28:36.720 a huge one. Number three on the list. Yeah. Equity 00:28:36.720 --> 00:28:39.019 buildup. I like to call this the forced savings 00:28:39.019 --> 00:28:41.680 account. This is just simple loan amortization. 00:28:42.180 --> 00:28:45.170 Every month, your tenant pays you rent. You take 00:28:45.170 --> 00:28:47.650 a portion of that rent and pay the bank your 00:28:47.650 --> 00:28:50.170 mortgage. A part of that payment goes to interest, 00:28:50.369 --> 00:28:52.849 but another part pays down the principal of the 00:28:52.849 --> 00:28:55.470 loan. So even if the property value stays completely 00:28:55.470 --> 00:28:58.369 flat and you break even on cash flow every month, 00:28:58.569 --> 00:29:01.029 you are still getting richer because your debt 00:29:01.029 --> 00:29:03.309 is shrinking. The tenant is buying the house 00:29:03.309 --> 00:29:06.069 for you one mortgage payment at a time. It's 00:29:06.069 --> 00:29:07.950 a beautiful thing. And finally, number four, 00:29:08.029 --> 00:29:11.390 the one everyone hopes for and talks about, capital 00:29:11.390 --> 00:29:14.440 appreciation. The value of the asset going up 00:29:14.440 --> 00:29:17.440 over time due to inflation, market demand, or 00:29:17.440 --> 00:29:19.559 improvements you've made. But there is a huge 00:29:19.559 --> 00:29:21.440 warning label here in our notes about this one. 00:29:21.519 --> 00:29:24.299 A massive one. If you buy a property that loses 00:29:24.299 --> 00:29:26.819 money every single month, it has negative cash 00:29:26.819 --> 00:29:28.859 flow. Just because you think it will be worth 00:29:28.859 --> 00:29:32.359 more in 10 years, you are not investing. You 00:29:32.359 --> 00:29:35.549 are speculating. Gambling on appreciation. And 00:29:35.549 --> 00:29:38.170 that's a dangerous game because if the market 00:29:38.170 --> 00:29:40.829 turns or if appreciation doesn't happen as fast 00:29:40.829 --> 00:29:43.170 as you hoped, you are left holding a bag that 00:29:43.170 --> 00:29:45.829 is costing you money every month. Smart investors 00:29:45.829 --> 00:29:48.750 view appreciation as the icing on the cake, not 00:29:48.750 --> 00:29:50.910 the cake itself. The cake has to be the cash 00:29:50.910 --> 00:29:53.049 flow. Okay, so we have the for -profit centers. 00:29:53.670 --> 00:29:55.910 Let's talk about the specific strategies people 00:29:55.910 --> 00:29:58.069 use to capture them. We tease this in the intro. 00:29:58.289 --> 00:30:02.690 B -R -R -R. The sound of cold cash. It stands 00:30:02.690 --> 00:30:07.630 for buy, rehab, rent, refinance, repeat. Let's 00:30:07.630 --> 00:30:09.269 walk through a hypothetical deal to show why 00:30:09.269 --> 00:30:11.329 this strategy is so popular with investors. Okay, 00:30:11.369 --> 00:30:14.430 let's do it. Step one, buy. You find a beat up 00:30:14.430 --> 00:30:17.710 ugly house. It's listed for $100 ,000. You buy 00:30:17.710 --> 00:30:19.410 it with cash or more likely with one of those 00:30:19.410 --> 00:30:21.630 expensive hard money loans we talked about. Step 00:30:21.630 --> 00:30:24.289 two, rehab. You spend $50 ,000 fixing it up. 00:30:24.369 --> 00:30:27.029 New kitchen, new floors, fresh paint. You make 00:30:27.029 --> 00:30:29.109 it beautiful. So now you are all in for a total 00:30:29.109 --> 00:30:32.029 of $150 ,000. Okay, I'm with you. Step three, 00:30:32.170 --> 00:30:34.849 rent. You find a great tenant who is happy to 00:30:34.849 --> 00:30:37.150 pay you $1 ,500 a month to live in this newly 00:30:37.150 --> 00:30:39.309 renovated home. Now the property is stabilized 00:30:39.309 --> 00:30:41.470 and generating income. And now the magic step, 00:30:41.710 --> 00:30:45.140 refinance. This is the key to the whole strategy. 00:30:45.440 --> 00:30:48.500 You go to a regular bank. The bank sends an appraiser 00:30:48.500 --> 00:30:50.900 out to the property. Because you fix it up so 00:30:50.900 --> 00:30:53.539 nicely, the appraiser says, this house is no 00:30:53.539 --> 00:30:56.440 longer a $100 ,000 house. It's now worth $200 00:30:56.440 --> 00:30:59.079 ,000. You force the appreciation through the 00:30:59.079 --> 00:31:01.920 rehab. Exactly. The bank agrees to give you a 00:31:01.920 --> 00:31:05.940 new long -term loan for 75 % of the new appraised 00:31:05.940 --> 00:31:11.710 value. 75 % of $200 ,000 is $150 ,000. They cut 00:31:11.710 --> 00:31:14.410 you a check for $150 ,000 to pay off your old 00:31:14.410 --> 00:31:17.650 loan. Wait a minute. You spent $100 ,000 to buy 00:31:17.650 --> 00:31:21.490 it and $50 ,000 to fix it. That's $150 ,000 total. 00:31:21.710 --> 00:31:23.849 The bank just gave you a check for $150 ,000. 00:31:24.170 --> 00:31:26.230 You have now pulled all of your original capital 00:31:26.230 --> 00:31:28.230 back out of the deal. You still own the house. 00:31:28.250 --> 00:31:29.809 You have a tenant paying the new mortgage for 00:31:29.809 --> 00:31:32.150 you. And you have $0 of your own money left in 00:31:32.150 --> 00:31:34.130 the deal. Your cash on cash return is technically 00:31:34.130 --> 00:31:36.809 infinite. And the final R, repeat. You take that 00:31:36.809 --> 00:31:39.750 $150 ,000 tax -free check, because it's loan 00:31:39.750 --> 00:31:42.150 proceeds, not income, and you go find another 00:31:42.150 --> 00:31:44.549 ugly house and do it all over again. That is 00:31:44.549 --> 00:31:46.650 how people can build massive rental portfolios, 00:31:46.670 --> 00:31:48.890 starting with relatively little cash. It's all 00:31:48.890 --> 00:31:50.750 about the velocity of money reusing the same 00:31:50.750 --> 00:31:53.250 capital over and over. But it relies on everything 00:31:53.250 --> 00:31:56.450 going perfectly. You have to find that deal where 00:31:56.450 --> 00:31:59.329 the numbers work. Which is very hard to do. And 00:31:59.329 --> 00:32:01.690 it carries real risk. If the appraisal comes 00:32:01.690 --> 00:32:03.829 in low or if interest rates spike in the middle 00:32:03.829 --> 00:32:06.349 of your project, you can get stuck holding that 00:32:06.349 --> 00:32:09.069 expensive hard money loan and get wiped out by 00:32:09.069 --> 00:32:11.289 the carry costs. And another strategy mentioned 00:32:11.289 --> 00:32:14.319 in the sources is foreclosure investing. This 00:32:14.319 --> 00:32:17.279 feels a little grittier. It is. This is investing 00:32:17.279 --> 00:32:20.660 in distressed situations. You have a few different 00:32:20.660 --> 00:32:24.039 entry points here. You can try to buy in pre 00:32:24.039 --> 00:32:26.920 -foreclosure. This is where you find a homeowner 00:32:26.920 --> 00:32:29.359 who has received a notice of default, but the 00:32:29.359 --> 00:32:31.900 bank hasn't sold the house yet. You might knock 00:32:31.900 --> 00:32:33.619 on their door and try to buy it directly from 00:32:33.619 --> 00:32:35.779 them before the bank takes it. Then there's the 00:32:35.779 --> 00:32:38.099 auction itself. The sheriff's sale on the courthouse 00:32:38.099 --> 00:32:39.900 steps. This is the wild west of real estate. 00:32:40.099 --> 00:32:42.539 You usually have to pay with a certified check 00:32:42.539 --> 00:32:45.119 right there on the spot. And sometimes you're 00:32:45.119 --> 00:32:46.900 buying it without ever having been inside the 00:32:46.900 --> 00:32:48.599 house. You could be buying a house that has been 00:32:48.599 --> 00:32:51.759 completely gutted by angry former owners. Or 00:32:51.759 --> 00:32:54.680 a house that has a massive IRS lien on it that 00:32:54.680 --> 00:32:57.160 you didn't know about. It's extremely high risk, 00:32:57.200 --> 00:32:59.460 high reward. If the property doesn't sell at 00:32:59.460 --> 00:33:02.059 the auction, it becomes an REO real estate owned. 00:33:02.359 --> 00:33:05.079 The bank now officially owns it. And banks are 00:33:05.079 --> 00:33:07.000 terrible landlords. They don't want to own property. 00:33:07.119 --> 00:33:08.940 They hate it. They are in the money business, 00:33:09.099 --> 00:33:12.480 not the toilet fixing business. So REOs can often 00:33:12.480 --> 00:33:15.000 be good opportunities because the bank is a motivated 00:33:15.000 --> 00:33:17.299 seller. They just want to get the non -performing 00:33:17.299 --> 00:33:20.500 asset off their balance sheet, often at a discount. 00:33:20.960 --> 00:33:22.480 And for those of us who don't want to deal with 00:33:22.480 --> 00:33:25.579 courthouse steps or angry contractors, there 00:33:25.579 --> 00:33:27.880 is a much more modern approach, crowdfunding. 00:33:28.059 --> 00:33:30.920 Yes, the 21st century model. This really exploded 00:33:30.920 --> 00:33:34.119 after the JOBS Act was signed in 2012. Before 00:33:34.119 --> 00:33:36.279 that, you couldn't really advertise private investment 00:33:36.279 --> 00:33:39.339 deals to the general public. The JOBS Act changed 00:33:39.339 --> 00:33:41.319 the rules and allowed for what's called general 00:33:41.319 --> 00:33:43.559 solicitation. Enter companies like Fundrise. 00:33:43.960 --> 00:33:46.900 Exactly. The sources mention Fundrise as the 00:33:46.900 --> 00:33:49.799 pioneer in the U .S. They allow for pooling of 00:33:49.799 --> 00:33:53.069 capital. You can put in $5 ,000. I can put in 00:33:53.069 --> 00:33:56.349 $5 ,000. And we can pool our money with 10 ,000 00:33:56.349 --> 00:33:58.930 other small investors online to go buy that $50 00:33:58.930 --> 00:34:00.890 million apartment complex that we could never 00:34:00.890 --> 00:34:03.450 afford on our own. It democratizes the capital 00:34:03.450 --> 00:34:06.069 stack. It lets the little guy finally sit in 00:34:06.069 --> 00:34:08.869 the common equity seat of a really big institutional 00:34:08.869 --> 00:34:11.730 quality deal. It does. It removes the operational 00:34:11.730 --> 00:34:14.190 headache, which is great. But the tradeoff is 00:34:14.190 --> 00:34:16.849 that it also removes your control. You can't 00:34:16.849 --> 00:34:19.469 decide to renovate the lobby or fire the property 00:34:19.469 --> 00:34:21.340 manager. the fund manager at the crowdfunding 00:34:21.340 --> 00:34:23.460 company makes all those decisions. We've spent 00:34:23.460 --> 00:34:25.360 a lot of time talking about the mechanics of 00:34:25.360 --> 00:34:28.300 profit, the nuts and bolts. But I want to pivot 00:34:28.300 --> 00:34:30.500 now to the final segment of our outline, which 00:34:30.500 --> 00:34:32.500 I think is arguably the most important. We have 00:34:32.500 --> 00:34:34.460 to talk about the consequences of all this. Because 00:34:34.460 --> 00:34:37.340 of what? When we talk about BRRR or cap rates 00:34:37.340 --> 00:34:40.260 or forced depreciation, we are fundamentally 00:34:40.260 --> 00:34:43.659 treating housing as a financial product, as an 00:34:43.659 --> 00:34:46.320 asset to be optimized. The academic term for 00:34:46.320 --> 00:34:49.039 it is the financialization of housing. Right. 00:34:49.260 --> 00:34:52.300 But housing isn't just a stock ticker. It's a 00:34:52.300 --> 00:34:55.260 fundamental human need. And the sources point 00:34:55.260 --> 00:34:58.619 out that there is a growing and very real tension 00:34:58.619 --> 00:35:02.079 between real estate as an asset and real estate 00:35:02.079 --> 00:35:05.260 as a home. That tension is acute right now all 00:35:05.260 --> 00:35:08.039 over the world. When you have institutional capital, 00:35:08.199 --> 00:35:10.679 I'm talking about large pension funds, private 00:35:10.679 --> 00:35:13.159 equity firms entering the single family rental 00:35:13.159 --> 00:35:16.019 market at scale. The dynamics of that market 00:35:16.019 --> 00:35:18.309 change completely. There's a case study from 00:35:18.309 --> 00:35:20.289 Ireland in our notes that was really striking. 00:35:20.389 --> 00:35:22.949 Yeah, this was a fascinating and pretty sobering 00:35:22.949 --> 00:35:25.530 study. The researchers looked at the influx of 00:35:25.530 --> 00:35:27.690 global institutional investors into the Dublin 00:35:27.690 --> 00:35:29.949 rental market after their housing crash, and 00:35:29.949 --> 00:35:33.090 they found a direct statistical correlation between 00:35:33.090 --> 00:35:36.699 this financialization. and a rise in homelessness. 00:35:37.139 --> 00:35:38.980 How do they connect those dots? What's the mechanism? 00:35:39.219 --> 00:35:42.260 It's about pricing power and incentives. Institutional 00:35:42.260 --> 00:35:45.260 investors have a fiduciary duty to their shareholders 00:35:45.260 --> 00:35:48.659 to maximize returns, to maximize that NOI. So 00:35:48.659 --> 00:35:50.940 they are very aggressive about raising rents 00:35:50.940 --> 00:35:54.139 to market rates. They are aggressive about repositioning 00:35:54.139 --> 00:35:56.619 assets, which is a polite term that often means 00:35:56.619 --> 00:35:59.539 evicting lower income tenants to do a high end 00:35:59.539 --> 00:36:01.760 renovation and bring in higher income tenants. 00:36:01.940 --> 00:36:04.039 Gentrification on steroids, basically. Exactly. 00:36:05.099 --> 00:36:07.699 Directly, these large funds have massive lobbying 00:36:07.699 --> 00:36:10.500 power. The sources show they can influence state 00:36:10.500 --> 00:36:12.940 and local policy to favor the build -to -rent 00:36:12.940 --> 00:36:16.739 model over policies that support affordable homeownership 00:36:16.739 --> 00:36:19.239 initiatives. It creates this fundamental conflict 00:36:19.239 --> 00:36:21.980 of interest at a societal level. The homeowner 00:36:21.980 --> 00:36:24.840 or the investor actively wants prices to go up. 00:36:24.860 --> 00:36:26.880 It makes them rich. It's the core of their strategy. 00:36:26.920 --> 00:36:29.280 Right. Appreciation is good for them. But the 00:36:29.280 --> 00:36:31.019 person trying to buy their first home or the 00:36:31.019 --> 00:36:33.519 renter struggling to make ends meet needs prices 00:36:33.519 --> 00:36:36.739 to stay flat or even go down. One person's asset 00:36:36.739 --> 00:36:39.019 appreciation is another person's housing crisis. 00:36:39.300 --> 00:36:41.980 You simply cannot have both at the same time. 00:36:42.159 --> 00:36:44.320 And the sources mention this gets even more cynical 00:36:44.320 --> 00:36:46.659 with things like immigration lobbying. This is 00:36:46.659 --> 00:36:49.400 a macro strategy. Some large scale real estate 00:36:49.400 --> 00:36:51.699 lobbies actively push for higher immigration 00:36:51.699 --> 00:36:54.820 levels, not necessarily for humanitarian reasons, 00:36:54.940 --> 00:36:57.360 but because population growth is the primary 00:36:57.360 --> 00:37:00.119 driver of housing demand. More people competing 00:37:00.119 --> 00:37:02.519 for the same number of units equals lower vacancy 00:37:02.519 --> 00:37:04.940 rates, which equals higher rents. It's treating 00:37:04.940 --> 00:37:07.780 population dynamics purely as a demand curve 00:37:07.780 --> 00:37:09.440 for a product. It's stripping all the humanity 00:37:09.440 --> 00:37:12.329 out of it. It is. And this leads directly to 00:37:12.329 --> 00:37:14.070 the political backlash we are seeing globally. 00:37:14.369 --> 00:37:16.889 When housing becomes fundamentally unaffordable 00:37:16.889 --> 00:37:19.530 for the working and middle classes, public sentiment 00:37:19.530 --> 00:37:22.789 shifts. We see research that suggests high housing 00:37:22.789 --> 00:37:25.690 costs directly increase public support for policies 00:37:25.690 --> 00:37:28.210 like wealth redistribution. People start to feel 00:37:28.210 --> 00:37:31.230 like the social contract is broken. If I work 00:37:31.230 --> 00:37:33.409 a full -time job but still can't afford a decent 00:37:33.409 --> 00:37:36.170 roof over my head, the system must be rigged 00:37:36.170 --> 00:37:39.090 against me. Exactly. And that is a real risk 00:37:39.090 --> 00:37:41.510 for the investor, too. If you push the profit 00:37:41.510 --> 00:37:44.769 lever too hard for too long, eventually the regulatory 00:37:44.769 --> 00:37:46.909 hammer comes down. Things like rent control, 00:37:47.190 --> 00:37:50.429 vacancy taxes, even outright bans on corporate 00:37:50.429 --> 00:37:53.429 ownership of single family homes. We are starting 00:37:53.429 --> 00:37:55.570 to see these policies being floated and even 00:37:55.570 --> 00:37:57.909 enacted in cities like Berlin and Amsterdam. 00:37:58.050 --> 00:38:00.949 So real estate is this incredible double edged 00:38:00.949 --> 00:38:03.570 sword. It's arguably the greatest wealth builder 00:38:03.570 --> 00:38:06.289 in history. It allows a regular person to leverage 00:38:06.289 --> 00:38:09.670 $20 ,000 into a million -dollar asset portfolio 00:38:09.670 --> 00:38:13.730 using a strategy like the BRR method. But at 00:38:13.730 --> 00:38:15.409 the macro level, if everyone starts treating 00:38:15.409 --> 00:38:18.409 homes purely as capital stacks, we risk breaking 00:38:18.409 --> 00:38:20.449 the housing market for the next generation. That 00:38:20.449 --> 00:38:22.449 is the defining tension of our time in this entire 00:38:22.449 --> 00:38:24.809 asset class. How do we balance those two things? 00:38:25.010 --> 00:38:26.829 This has been a massive deep dive. We've covered 00:38:26.829 --> 00:38:28.590 a lot of ground here. Let's just quickly recap 00:38:28.590 --> 00:38:30.579 the journey before we close out. We started with 00:38:30.579 --> 00:38:32.840 the sheer scale of it all. Real estate is the 00:38:32.840 --> 00:38:35.579 quiet giant of the global economy. We looked 00:38:35.579 --> 00:38:37.500 at the history from the old boys club of the 00:38:37.500 --> 00:38:40.980 1950s to Eisenhower's wheat revolution that really 00:38:40.980 --> 00:38:43.440 let the rest of us in on the game. We broke down 00:38:43.440 --> 00:38:46.010 the deal lifecycle, the hustle of sourcing. the 00:38:46.010 --> 00:38:48.630 paranoia of due diligence, and the long, active 00:38:48.630 --> 00:38:51.010 grind of asset management. We did the math on 00:38:51.010 --> 00:38:53.949 valuation and hopefully demystified the cap rate, 00:38:54.110 --> 00:38:56.530 showing that value is really just NOI divided 00:38:56.530 --> 00:38:59.210 by the market's collective mood. We visualized 00:38:59.210 --> 00:39:01.869 the capital stack, that layer cake of risk and 00:39:01.869 --> 00:39:04.809 reward, where the bank takes the safe, boring 00:39:04.809 --> 00:39:07.909 bottom layer and the investor takes the risky 00:39:07.909 --> 00:39:11.239 but potentially hugely profitable top. And we 00:39:11.239 --> 00:39:14.159 looked at the strategies, BRRR, foreclosures, 00:39:14.179 --> 00:39:16.860 crowdfunding. And finally, we had to confront 00:39:16.860 --> 00:39:19.719 the heavy societal cost of turning our homes 00:39:19.719 --> 00:39:22.179 into financial derivatives. It's a lot to process, 00:39:22.400 --> 00:39:25.159 but I hope, if nothing else, it changes the way 00:39:25.159 --> 00:39:27.420 you look at your own city. It usually does. You 00:39:27.420 --> 00:39:29.380 stop seeing buildings and you start seeing deal 00:39:29.380 --> 00:39:31.400 structures and spreadsheets. And that leads me 00:39:31.400 --> 00:39:33.500 directly to my final thought for you, the listener. 00:39:33.840 --> 00:39:36.679 We talked a lot today about information asymmetry. 00:39:37.050 --> 00:39:40.070 That core idea that in every real estate transaction, 00:39:40.469 --> 00:39:43.150 one person almost always knows something the 00:39:43.150 --> 00:39:46.010 other doesn't. The pro versus the amateur. Next 00:39:46.010 --> 00:39:48.670 time you walk into an apartment viewing or you 00:39:48.670 --> 00:39:52.730 look at a house for sale, ask yourself, who is 00:39:52.730 --> 00:39:55.349 on the other side of this deal? Are they seeing 00:39:55.349 --> 00:39:57.550 a home with a nice kitchen and a big backyard? 00:39:58.150 --> 00:40:01.449 Or are they seeing a capital stack with a 5 % 00:40:01.449 --> 00:40:04.210 cap rate, a clear path to force appreciation, 00:40:04.269 --> 00:40:07.230 and a three -year exit strategy? Because if you 00:40:07.230 --> 00:40:08.769 don't know the game they're playing, you are 00:40:08.769 --> 00:40:11.949 almost certainly losing it. Exactly. When you 00:40:11.949 --> 00:40:13.469 look at that building, are you seeing shelter 00:40:13.469 --> 00:40:16.989 or are you seeing a spreadsheet? Thanks for diving 00:40:16.989 --> 00:40:18.289 deep with us. We'll see you on the next one.