My Realty Gains
Rick Martin has been investing in real estate since 1997 and currently resides in Southern California with his wife and two young boys. He is the founder of Fortress Federation Investments, providing value-add, multifamily investment opportunities in the Southeast and Texas, to help investors build wealth and multiple income streams.
Prashant Kumar, CCIM – What do you think about high-tech people, and how they should be looking at investment opportunities in the limited time?
Rick Martin – I would think that tech professionals are highly analytical people and they’d like to analyze any sort of Investment that they’re going to get themselves into. I think there are just so many things involved, so much panic and emotion in the stock market. It cannot be controlled. Whereas with Real Estate it’s not rocket science. The deal is pretty much laid out there in front of you with the Investment summary in the webinar. There are things that people can kind of wrap their heads around. What’s going on with that market? Is there enough population to support a Multifamily Industry? Is there enough Inventory? Is there a competing Inventory? Is there rent growth? Is their job growth? Is it a diverse market and are they are making an attractive business environment for businesses to come there? There’s like a broad scope you can kind of analyze. There are websites I recommend people get a list of websites you can bookmark, like Justice Maps or City Data. You can kind of have this little system in place to kind of do your due diligence on a project. You’re not completely reliant upon that Investment summary but I think you give yourself a better chance to see, that this Investment is going to work, whereas it’s a crap shoot with the stock market. I’m in a similar situation. I have one Investor, who continually throws money into the stock market, and about a year ago he said, I want to invest with you. I see the numbers, it makes sense. I see the tax advantages. But now I’m down. The stock market crashed. This is like a year ago and I’m just going to wait for it to come back. And I never heard from him. Two or three weeks ago everything crashed again.
I’ll never hear from him. At some point, you want to get into something more stable. The good thing about Real Estate is it pays you cash flow. You can see your returns coming in if you get enough of them, you can start to sort on the life of those income streams and you might be surprised how often deals or how quickly a deal will go full cycle. You see the five-year-old and you think, my money is going to be gone for five years. But you might be surprised in 16 months, maybe it’s time to sell that property and you’re going to get a big chunk of equity sooner than you thought.
Then the third variable is tax advantages. Sometimes people don’t get that tax advantages. They don’t understand what that means. It does that’s a Real Advantage. I just did my taxes right and I got a bunch of paper losses handed to me. I’m not going to share the amount, but it was large and it’s plenty to offset any other Passive Investments I have. If I had gains in the stock market, it could also offset that. I’m pretty much a Real Estate guy, so it offsets all my Real Estate gains. But until you go through that process, passively invest, and then get that K1, I don’t think you’re going to understand it. So try it. You’ll be happy at tax time how that is an additional benefit.
Prashant Kumar, CCIM – I think you said that right Rick, it is basically whatever information you get from the stocks, how much you can analyze that is not enough information. Everybody has different ways of reporting and stuff like that, but you get enough information for any sort of syndication. There are webinars, their PPM, and conference calls going on to discuss the opportunity. I don’t want to use the word dumb, but it would be dumb for me if I spend an hour and do not understand what these guys are talking about. I think that one hour webinar itself is enough for me to understand how the market is.
Prashant Kumar, CCIM – Let’s say I know you invest in southeast markets probably, let’s say Jacksonville for argument’s sake, the population has gone up and they mentioned it in Webinar. Job growth has happened, they mentioned it in the webinar. They tell you the address and it is very easy for you to look at what it is. They tell you what it is. You go to Justice Map or citydata.com and you have seen the price going up over some time yourself. It is like these three, four variables and you know that this property is going to make money and it’s not just going to disappear.
Rick Martin – It’s not that hard. I don’t want to say it’s a guarantee, but it’s not that hard to succeed in multi-family. If you’re with a team that doesn’t succeed, then you better get away from that team because oftentimes, or at least in my circles, the network that I’m involved in, everybody’s having success. I think that you need to do a lot of things incorrectly not to have success. Having said that, you want to be aligned with operators that have gone full cycle because there are a lot of things that you need to go through. How is it going through a sale, how is it going through a refinance?
Dealing with these different types of situations. You want someone who’s got that experience, so it’s going to give you the best outcome. But yeah, you said it there, it’s all laid out there in front of you.
I think a lot of us, even however analytical we are, make decisions based on some things that sort of stimulate some emotions. What excites me about this deal is, Real Estate is pretty easy to understand. It’s easy to kind of get excited about because you can kind of understand how, all right, we’re going to improve the operations of this building, we’re going to upgrade the facilities, the amenities. You can kind of wrap your head around the business plan and understand how I see it. I can see how that’s going to raise values and there’s going to be some turnover involved. That’s usually all laid out there in front of you. I don’t want to belittle the process. It’s a challenge turning over a property, but it can and it should be done. Getting back to stocks, I think people get a little fearful when they read the PPM of an Investment or Real Estate syndication.
They’ll go through the PPM, they’ll see all the risks and be, oh my gosh, it’s pretty scary. It seems pretty risky because that’s what the attorney’s job is. Lay out every possible risk there is, and it’s there for liability, and it’s there to sort of scare you. But here’s the thing. It’s full transparency.
There’s no hiding. Whereas with stock, there’s a lot of fine print that people just don’t read. They just see that hit that buys button and they hit buy. It’s too easy. It’s also too easy to sell. People sell at the wrong time, and people will look at putting their money into Real Estate as it’s an illiquid investment. My money’s going to be stuck there. Oh, gosh, I can’t touch it. Well, that might be a good thing. Now you can’t hit that cell button at the wrong time. You have a lot of minds aligned on how what’s the best time to sell this thing, what’s the best time to seek a refinance? You got a whole team working for you, whereas maybe you’ve hired a stockbroker, but they have so many clients and they’re juggling emotions just like you are. The volatility of the stock market is a disadvantage, and the stability of Real Estate gave that advantage to Real Estate.
Prashant Kumar, CCIM – It is well, I like your comment, in which you said that your money is in liquid in Real Estate, but it’s good that it is in liquid.
Prashant Kumar, CCIM – In multifamily syndication there are a lot of good people out there, maybe one or two bad folks who have less integrity. You figure it out, you search for them, and reviews all over the place for them. You cannot think that the whole pond and all the fishes in the pond are bad. Maybe one or two here and there. Those who are there, don’t last for long. They only last only one or two seasons and that’s it.
Rick Martin – One bad deal goes south, that’s going to be hard to overcome reputation-wise. People know that for the most part, people don’t have malicious intent. I think you can find some people who are inexperienced and get in over their heads. That’s a different thing—those things you have to check for. You want to make sure that there is like I say, enough experience so they can think on their feet and pivot when they need to pivot but I’m biased and I think it’s an awesome way to invest.
Prashant Kumar, CCIM -Yeah. I mean, you are saying you are biased, but I don’t think you are biased. This is our business. We want to promote it. But you are seeing what everybody should hear. I mean, you are screaming from your lungs, come on, what can you do better than this?
You and I are sitting and all we do is as an investor, cut the check and watch it grow.
Rick Martin – The person I mentioned earlier who said that he lost his money in the stock or his nest egg had declined massively and that he needed for it to come back and then he wanted to invest with me. Well, that’s a friend, I know him and I know he needs this. I almost got angry. I was frustrated because I knew it was a good thing for him. I got my sister a couple of deals. I believe in it. If I didn’t, I wouldn’t be able to sleep at night. To me, it’s frustrating when people continue down the same path that hasn’t gotten them anywhere, and continue that stock market path.
I believe once you get the ball rolling with syndication, you don’t have to worry about your nest egg running out because you just rinse and repeat, and you just kind of continue to build those income streams on top of each other, especially when you have a deal or two that refinance. Now you get your capital back, you redeploy that, you stay in that deal, your cash flow improves in that deal, but now you got money to put it in another deal.
Now you’re exponentially increasing your Investments. It’s kind of like the burst strategy. You’re pulling money out, you’re reinvesting it. If you want to skim some cash flow out of that you can, but you’re getting your monthly cash flow if you want to live off that. That’s sort of what I did. I built up enough income streams to get me through those slow times. I still depend on those Passive Income streams. This year, quite honestly, has been slower because it’s been difficult to roll out good deals for people.
If we don’t have good deals, then we can’t be rolling out deals. This year has been slower for me than last year. Last year, we had a lot of deals. This year is starting to pick up, but it’s been a slow start.
So thankfully, I have my income streams to kind of get me through. Those Income streams aren’t going anywhere because I continue to find other Investments to add another income stream. That gives me peace of mind because I got kids and I got my wife. We got to make ends meet, And if I can’t make ends meet, at least my Investments can.
Prashant Kumar, CCIM – I come from a good school back in India, and 50% of my class lives in Bay Area. They know what I do and they are like my good friends. Like real good friends they know, what I do. But they never end up investing with me. That’s the frustration I have. They lose money day out in the stock market, and they just don’t understand. What is your opinion?
Rick – I sort of gave up on my friends and family because I have friends and family that have come in. But a lot of other people, I think they think maybe he’s just doing that because there’s something in it for him but it’s not that. It’s not that. I have this buddy, I’ve known him since third grade, and he had this Duplex with his brother down in San Diego. The thing was worth a lot, but he was not getting a dollar of cash flow and he was over.
It was a lot of work, a lot of stress. His brother drives him nuts, that’s a whole different story but he had an excellent sizeable chunk of equity that he wanted to invest and make sure that he got an income stream because he teaches overseas and he needs that income coming in. And so he approached me. He heard that I was doing this, and we had been out of touch for a while. We had a long conversation. We kind of ran through the process, and behold, he did 1031 with, again, a sizable chunk of equity. And I said, don’t worry, Dan, we’re going to take care of that, And I got a text from him about six weeks ago where he got his first income stream. It was a healthy income stream, a healthy dose of cash flow. He was like, This is awesome.
I just got more cash flow in one month than I did for the last three years off my Investment. That’s another thing. You can have money buried in equity, trapped. If you don’t know how to tap into it, at some point you want some cash flow. And that’s what he wanted. That made me feel great, man. As I said, I’ve known him since the third grade and I don’t know, maybe my week, I was like, Good. See, that’s how it’s supposed to be. What I would tell other people, is it’s tough because, again, I think people think you have an ulterior motive or an agenda. That’s not it. It’s a win-win.
If I win? You win. That’s really what it is. We have to make money in this business for our Investors. If we don’t, we’re not in business. I said, the cash flow, the surprise appreciation, I say, you get those little surprises where you think you’re in it for five years all of a sudden. Two years, boom, you got this big sale. Then those tax benefits. It all adds up to a great thing. That’s what I would say.
Prashant Kumar, CCIM – Awesome.
Prashant Kumar, CCIM – There was a time when I lost almost all my savings because of this emotional reason. I would buy it at the wrong time because the market has gone up, and people will think that it’s going to continue to go up at the wrong time. When it starts to go down you think that it’s going to continue to go down, but you sell it and it starts going up. That happens all the time because our capabilities are our capabilities and we are not capable in every direction. I would be the first one to admit that not everybody can do good in every area.
Rick – I would just add that the ability to control an Investment is possible in Real Estate. Whereas in the stock market there’s so much panic that we discussed that you have no control and neither does your stock broker. Whereas with Commercial Real Estate, I’m not talking about single families. Single-family is a different ball game but in Commercial Real Estate, you have the net operating Income. As long as you can raise that net operating income, you can raise the value of a property during any market. You’re not at the whims of the emotions of a market. Now with a single family, you don’t have that capability.
You’re basing on your comps and your comps, your neighbours, and whatever happens there, that’s what’s going to happen to your property too. As long as you can raise that net operating income, you divide that net operating income by the cap rate and out spits of value. If you’re raising that net operating income, which is what is happening now with rents.
Everybody’s like, oh my gosh, interest rates are rising, and cash flow is getting squeezed. Rents are still rising, that’s raising the net operating income and that’s raising the value of the property.
Another interesting point, getting a little off-topic, but there’s a graph that shows what happens with interest rates over the last forever, since like early 1900. And on that graph, I wish I could show it, but it shows every recession. Leading up to that recession is a rise in interest rates. It’s quantitative tightening, which is purposeful. The Feds doing it. They’re operating the puppet stream. They’re rising those interest rates and they’re trying to slow down the economy. And then we head into a recession. Some are longer than others, but they don’t last too long.
Sometimes it’s just a couple of quarters, sometimes maybe it can be a year but what happens during those recessions and it’s marked in grey on this chart, you can look it up, look at Fred’s interest rates and you’ll see it.
What happens is the interest rates immediately start to decline and they fall pretty fast. And that’s the Fed doing quantitative easing again. They’re lowering interest rates. My thought is that deals are tighter. It’s been a challenging year to roll out deals to our Investors. The cash flow is a bit tighter instead of 8%, now 5% but here’s my rosy outlook anyway, and we’re recording, I’m on the hook, but I can see getting into deals now that cash flow still has a very positive total return projection but in a few years, when interest rates come down, I’m telling you they’re going to come down. A lot of people are fearful that they’re going to go to the moon. They’re not. The Fed is going to do this for a little while.
What do they say?
Seven rate hikes, and then they’re going to start to ease again. Interest rates will come down. I don’t know if it’s going to happen in the next year, but next year, two, maximum three, I don’t think it’s going to be that long. Interest rates will come down and that might be a nice, attractive time to refinance and improve cash flow in that deal that you just got in. I think there’s a silver lining to this. The Fed, they know what they’re doing. That’s a different outlook on interest rates.
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