Leverage Debt For Maximum Gain in an Inflationary Market with Billy Brown

Speaker 1: 0:02

Commercial creates income. So you’re talking small apartment buildings, you’re talking your restaurant space, retail space, offices. That is secured by commercial debt. Those are actually on a shorter conversation. Welcome to the passive income Brothers podcast.

Speaker 3: 0:19

Here we take the fear out of real estate investing, using real life stories of everyday successful investors. Let’s go Welcome to another episode of the passive income Brothers podcast. My name is Tim Lyons and today I’m joined by two absolute rock stars, one of which being my brother, Greg. How you doing today, buddy?

Speaker 2: 0:35

I tell you, Tim, it never gets old. Call me a rock star, okay, with zero musical ability and talents whatsoever. To be called a rock star means the world.

Speaker 3: 0:46

Well, Greg, i’m happy to see your handsome face, as I am with our current guest, billy Brown, who is a returning guest and a crowd favorite, and I’m a big fan because Billy, Greg and I were in a mastermind together and Billy and I have been in two different masterminds together And it’s been awesome to kind of see someone grow, be successful, hit challenges, pivot, overcome and still come out on the other side with a big smile on his face. So, Billy, welcome to the Passive Income Brothers podcast.

Speaker 1: 1:16

Thanks, Tim, Great for having me again. I mean, it’s a blast. It’s like talking to family and love, sharing the microphone with you guys and talking all things, investing and life and all that.

Speaker 3: 1:27

Well, that’s what’s so special about Billy and when we were doing our mastermind together, is that so much of investing can be tactical, right, asset classes, allocations, time frames, what are we doing? How does it work? And on the other side of that, a lot of us have our desires and our wishes and we want to have time freedom in addition to financial freedom. And what does that mean to a lot of people? And that’s really what I like about Billy, because he’s very focused and direct when it comes to some of those goals. So, billy, can you kind of just take us through a little bit of? well, let me back up a second. Billy is a lender in the commercial real estate space And if you haven’t been hiding under a rock for the last 12, 18 months, you would know that the Federal Reserve has now increased the federal funds rate from zero to an area between five and five and a quarter And, just as of yesterday, they decided to do a quote, unquote, hawkish pause, right? So here we are, we’re recording in mid June. So, billy, can you kind of give us a little bit of high level about the commercial lending space? What’s top of mind for you today?

Speaker 1: 2:35

Well, not to bore everyone on this podcast, because we can go deep into charts. We go deep into why they’re doing this, and also those that don’t have 10 full hats at home. We could put those on as well here and go down that rabbit hole. What’s going on? But service level? So the way to stimulate growth in their minds and do de-steem like growth in their minds is through the cost of debt. Obviously, we’re a debt society. The cheaper the debt, the more incentives to borrow, more money, go invest, et cetera. The more expensive the debt, then that’s de-incitivizing. You don’t want to go pay more because all of a sudden, things cost more to go to borrow money. The cost of capital goes up. So now you have to go to justify your numbers, have to guess what. Bid down the price of the asset. You have to justify anything there as far as the future growth of anything, and if they’re trying to slow the growth of the economy, that’s going to affect your pro forma on the thing that you’re going to go buy, you’re going hmm, we’ve got a higher cost of capital and not as much growth as we thought. So therefore, yeah, i’m going to pause stuff. So hence that’s the goal. They want to pause everything because inflation is at control, because I don’t know how much they printed in 2020, several trillion dollars, it’s true, out of the air. So all that money is still actually out there. I did not look at the M1 and M2 right now, maybe if you guys looked at it, but I did a post on this probably in May on my newsletter. Everyone’s like all here like, oh yeah, we’re going to pause the federal funds increase because they’re kind of leveling off and you look at how much my supply is out there And I just took a little snippet of like the last probably six months, as they should coming down, and then I backed out and go, well, here’s what happened in 2020 and just went vertical. I mean it’s ridiculous how much money is out there. So, as an investor trying to go raise capital, like you guys, there is so much liquidity out there, like replay, it is just burning holes in people’s pockets because, well, inflation is high and you have to go create arbitrage between inflation and, obviously, growth. You want to have your dollar sitting there and it’s losing 10%. You have to go make 10% to break even and then, hopefully, a few percent more to go pay for taxes and then, oh yeah, grow so passively. So that’s the whole macro type of thing right there. But for interest rates, all that, i mean the lenders are looking at that because they’re creating their own arbitrage. Guess what? They don’t have their own money. They borrow money from you guys, from us as depository lenders. They go create arbitrage off the how much they pay for federal funds and how much in deposits, so there’s all sorts of like implications there. As a certain reason, rates. So that’s the fun thing now that we’re talking about. I was like how do you go create again the word arbitrage? If you’re an investor or anything, it’s all about arbitrage.

Speaker 2: 5:17

Yeah, it absolutely is, and I think one of the main reasons that Tim and I like to have Billy on. Of course everyone remembers episode 53, like the back of our hands. But Billy has done a little bit of everything in life and in investing. He used to be a professional golfer but he’s invested in office, multi-family, he’s a business owner, golf sanctuary in Nashville, tennessee. He’s a mastermind leader, he’s a thought leader and also a lender. So there’s so many varied experiences in Billy’s backpack that he could just kind of take it out and say, hey, i’m going to wear this hat today or I’m going to kind of dispense advice or here’s what happened to me, kind of in this avenue of my investing career. But, billy, with all the different things that you’ve been involved in office, multi-family, business owner, all those different things we come across a lot of people that say I’m just going to sit this one out, i’m going to go nice and easy right now. All the bad news, mainstream media. When someone comes to you and say, why would I invest now? What would be your answer to them? And is this a great time or is this the worst time ever to be invested?

Speaker 1: 6:24

Well, it depends on what you’re investing in. True, that’s the question. So everyone’s like the whole thought of investing. well, what is it? Because we’re seeing about inflation and the recessions and all that? A lot of the people I’ve listened to Sean Rawls is one out there at EBS I get newsletters from. I subscribed to a lot of newsletters to go read these things throughout the week. But what they’re talking about is that recession is not just broad based, it’s going through each asset class differently at different times, which is kind of interesting. That’s working. So you talk about investing. well, what are you investing in? Stock market? Investing in bonds? You’re investing in small businesses? You’re investing in apartments? You’re investing in what? Where are these things? The concept of investing is to go grow your money passively. have your money, be the muscle and go take it and work. because why Inflation? We’re a fiat currency. The more money you print, the less it’s worth Bottom line. dump it down to public school one-on-one. That’s why we go invest. And for those that want to go get wealthy, you do a different type of investing. To go create abundant wealth, you have to do some different things, like you guys are doing for syndication, business ownership, growth all that The average person out there is working their W-2, wanting to go see their money. go work because in 20 or 30 years or 15 years or whatever, when they’re ready to go retire, they want that nesting there set aside that has grown with interest and value that they can go provide their needs and write off the sunset, what they want to go do, hopefully without too many taxes. So the idea of investing is that concept let your money be the muscle. So if you’re going to go invest in an apartment complex, i mean now is a great time to go do it, because it always is. There’s such a deficit in how much housing we need right now There’s not enough houses being built. In Nashville alone we’re five years behind and we’re not the fastest growing place. That’s for five years to being breaking even on housing starts. So those people moving into Nashville and migration patterns they’re going to have to buy something or bid up something to go get a house or go rent So people can be renting. know that. Well, that means that we’ve got five years of runway where those houses can go up. Talking about stock market, well, i’m a crap about stock, so, quite honestly. so the price earnings ratio I’m trying to get that on the stuff, but it seems like it’s going down, but there’s still I mean it’s still going. it’s still safe place to go put stuff if you know what stocks to go pick and why. And then you go into a debt, well, debt’s up there. If you’re going to go from stocks to bonds debt, well now you get a higher yield there. Sometimes stuff where you get seeing is high single digits, low double digits on your debt. So back to again why invest now? There’s always this America like. there’s always opportunity to go grow And then don’t even start. but the baby boom is retiring to have $10 trillion of businesses out there that have no errors. There’s people out there recruiting their own funds to go buy businesses and roll them up and go sell them off. There’s I don’t know how many $40 trillion of money flowing around the economy. There’s so much money that needs to home looking for great assets. So if you can find a place to go put that, that beats inflation plus taxes plus more larger and you’re going to attract that money in droves. So who’s waiting for your question? I mean, I didn’t say depends, did I?

Speaker 3: 9:41

That’s always the fallback kind of saying, right, well, it depends. But, billy, i mean like I love what you just laid out there, right, because to me there’s so much. And it hits home when you’re talking about it, because what you’re essentially saying is that as investors we’re looking for an asymmetrical return. Right, and that’s not being greedy, that’s not trying to hit a grand slam, that’s not trying to like win lottery type money, but we’re looking for an asymmetrical return. We want to have more upside with less risk. And for the everyday investor, they have kids, they have a job or two, or they have a mom or a dad, that’s hospital, or they don’t have the time really, or the knowledge or the know-how, the financial education, to really dive in and say, well, you know what, maybe my 401 K just isn’t cutting it for me or maybe I want to do something more with my capital. But who do I trust? What do I turn? with all the fake news out there and AI? you’ve written articles like how do I know what I’m reading is legit? And I think that’s really where city side capital was born. Because I had the same limiting beliefs to me, being a New Yorker. You’re guilty to a proven innocent and it would be no, but that’s kind of saved me and kind of kept me alive. I guess you know. So when you talk about debt, when you talk about asymmetrical returns, a lot of people, if they’re not in the game already, they can be turned off. So when you have somebody that’s looking to kind of join us in kind of what we’re doing alternative assets, learning about money, learning about debt what are some of the resources that you kind of tell people about? Or how did you get started, like, how can we get more people financially educated and on board now to work with someone like you in a few years?

Speaker 1: 11:16

Yeah, so one I mean you guys do a fantastic on educating your clientele and giving them alternatives to a stock. The stocks and mutual funds are great for the uneducated. You’re trusting your money into, not say the money managers, but the brokers are trusting these money managers. And you’re going through the brokers, so two-step process there between the broker to sell you the mutual fund. So again, you don’t have the luxury of taking that time to go read their financial statements or bios, all that. Who’s managing your money, the billions of dollars in these funds. But just know one they had the belief system that there is alternatives out there. Two, that you doesn’t take that much time. It just has to be consistent to be able to learn alternatives. And three, have many, many, many conversations because each dollar that you earn has not only an origin story but a tax spouse to it, so that all that money is taxed and where it’s earned, how it’s earned, how it is derived. There’s always that following spouse of the taxes. But then also looking forward, the space to go create what you want to go create and why with those dollars. You’re employing your dollars that you earned to go do something for you in the future. What is that and why, and getting back to like the story of the golf sanctuary, but to go create true freedom and alignment. So that’s what we did And that’s. They just created money for money’s sake. The money is an energy source to go do something. So that’s the first question I asked the listeners out there is what is it that they want to go do with that money and have it employed for them? What do they want to provide for them and when?

Speaker 3: 12:53

Hey Billy, i want to stack on top just one thing before I throw it to Greg. I know Greg’s going to kill me for taking his turn. But when you’re talking about money and I love how you just kind of outlined some of that But really when we talk to brand new investors, it’s amazing to me. Smart folks, really successful folks They just don’t know how money is treated right And with taxes and taxes has become something of obsession of mine. I love to read about them. I love Tom Wheelwright. If anybody hasn’t read Tom Wheelwright’s book, Tax. Free Wealth. It is incredible. He has another book out there, the Seven Ways to Wealth or something like it Seven Ideas about how to invest in, like alternative type stuff. It’s amazing. But basically he’s a guy that can deconstruct taxes and give it to you in bite-sized pieces that you can actually understand, you can know it, you can feel good about it, you can ask questions to your CPA about it, because it makes sense and demystifies it And it’s not scary anymore because I feel like the societal conversation has been well, i don’t want to get audited. The IRS is scary So long as I don’t get a garnishment. I think I’m coloring inside the lines. Tom turns around and he talks about the tax code is a roadmap, it’s a set of guidelines for incentivizing investors And he always says if you ever hear him speak on stage or if you hear a podcast of his for real estate especially, he’ll say to everybody in the crowd I’ll say, raise your hand if you want to live in government housing, and literally nobody raises their hand. It conjures up projects and low-income housing. I guess. And listen, if you’re there, you’re there in life, but listen. As investors, the government incentivizes people like Greg and Billy and I to go out there and create value, clean, safe, affordable housing, and in the process we get tax benefits and depreciation benefits and whatnot. But it’s learning how that tax is treat your income. And I’m going to end on this. There’s three buckets of income that Greg and I talk to investors about. There’s your W2 or 1099 income and that’s called your active income bucket And that’s taxed at ordinary income taxes And that’s the majority of folks, right? Not a lot of tax write-offs. Active income trading time for money. The second bucket people might go into, say, a brokerage account, and that’s their portfolio bucket. So your stocks, your bonds, your CDs, your simple interest maybe I’m leaving some stuff out, i don’t know mutual funds, and that’s taxed at either long-term capital gains or at ordinary income rates, right. And then the third bucket, which is what everybody needs to circle. So pull your car over, get the pen out and circle. The third bucket of passive income is all real estate activities are classified under the passive activity rules in the IRS guidelines And passive income can be offset by something called passive losses. Billy, from your point of view, what is the power of having your dollars treated as passive income under the passive activity rules?

Speaker 1: 15:56

Oh, you’re going to ask me a tax question. Yes, i love this stuff. So the beautiful thing about investors, especially that passive income stuff, is, there is this beautiful thing called depreciation. Things break down and become less valuable because the sticks and bricks break down. I mean, we all see that If the bill is where our body is, you could kind of see what that happens over 10 years. Your body breaks down. That’s depreciation. Your body depreciates, so does the building. So the government says, hey, if it is an office building, residential, it’s going to appreciate and be crap in 27 and a half years or it’s going to be 39 and a half, depending on your office. That is depreciated every year. The income derived from that is offset by depreciation because you’re going to go replace that asset and you go build something new in the government size. So those dollars are actually offset by that depreciation. You don’t pay taxes on it. In other words, if you suddenly sell the asset there’s a depreciation recapture. You have to go do, but that’s less. That’s down the road, but the most part the income that you earn right now as a deputy employee is taxed at the highest For depreciation. Most real estate investors actually don’t pay taxes on it And sometimes it’s a loss And that loss can offset either active or passive investing. And if you have creative and I’ll say, like I don’t know where you guys, how you guys go, do this I did this for the golf sanctuary and for other things we can actually classify our investors and whether they’re active investors and that offsets their ordinary income and you can flip them back and forth totally legal So that actually offsets their W2 income, not just their income derived from the passivity. So there’s buckets of those monies right there. So if you guys can think about as you’re driving or whittleston podcast back the concept of every dollar created again through debt, by the way, every dollar that you’ve created in your life has its own tax spouse associated with that And what you’re trying to do is divorce that spouse. It’s best you can because it will suck life out of you. And so now you’re going to figure out how do I get that spouse off my active income lesson And same thing because the more money you can go save in taxes, the more you get to keep and then reallocate and other investments to grow passively, which has its own tax benefits. So there’s a way in cash flow. Quarter is a great book by Robert Kiyosaki really dumps down cash flow and how taxes are treated and how the wealthy use those tax laws to create wealth continually. And it’s just amazing, one of the simplest books to go read and kind of blew my mind like, oh my gosh, this is how the wealthy go do it. It’s just makes more sense And I can. If you read it, i think I read like three times now everything that you view in life right now. You can see that cash flow And it’s beautiful because if I go do this, there’s the tax implications. You can go see the invisible taxes And when I talk about the most egregious tax out there, which is inflation, that’s a whole other book you can go read on inflation, about the invisible tax. But the fun thing about the tax laws is it gives you that roadmap to not paying taxes because incentivizes you to go do some cool things. So the past investors out there just know that there are ways to go create tax-advantaged passive income, what you guys are doing here. So it’s very, very, very beautiful.

Speaker 2: 19:19

Billy, i feel like you really sides that divorce analogy pretty good. I mean, that could have went in any number of ways, though great Right, that could have been a five-minute sidebar, but really kind of glossed over it. So that was pretty good. But I mean, in concept that’s totally right. And something you said a little while ago, billy, it was like you get into investing and learning about taxes, but what are you doing with the money? And I think so many people are caught up in the accumulation model of working, stuffing as much as you can into a 401k, a 403b and just more, more, more, more, more, but not having a really good idea of what they want to do with that money. Do you want to create cash flow when you get older and retire? I think in your mastermind you were really good about how do you create freedom with your money. Freedom is financial freedom, time freedom. But it’s so personal in what you want to do with that wealth that you’re building and you’re not just accumulating and hoping that you have enough. So I just wanted to point that was really good before. But, billy, in the headlines a lot of the times, negative news sells, right, it’s clicks, it’s sales newspapers. I know that’s a little bit dated, but The bleeds and leads right, yeah. And some people say, with all this negative news going on, why would I go out and educate myself? You know, people learn about taxes, right, it’s never going to change for me. And I think one of the biggest headlines out there right now is they keep talking about there’s $1.5 trillion wall of commercial real estate debt coming due. And people hear that like, oh boy, no, I’m out, i’m out. But I think one of the biggest misconception is what is commercial real estate? It is this all-encompassing term. It could be office, multifamily, retail, a million different things but it scares people from even taking that step to educate themselves. Being in the lending world, can you kind of talk about that headline a $1.5 trillion wall of commercial real estate debt coming due in the next 18 months or so?

Speaker 1: 21:22

Oh, yeah, the tsunami of debt, this other. So first let’s break this down. Commercial real estate is anything that’s not residential. It is, by definition, and it’s over five units, but it’s also, again, very broad. Commercial creates income, right, that’s what it’s supposed to do. So you’re talking small apartment buildings, you’re talking your restaurant space, your retail space, offices, hotels, you name it, anything like that. That is all commercial. That is secured by commercial debt. Is the banks or non-banks, such as life insurance companies, commercial back mortgage security. Cnbss, fannie Freddie has apartment lending and there’s all sorts of things you can go into. Those are actually usually on a shorter conversation and on call. So your mortgage that you have is usually on a 30 year loan and it’s advertised for 30 years and you got 30 years to pay off. You’re not going to call a due. Well, commercial loans can be in or from 24 months, depending on the asset structure, to five, seven, 10 years. So all the timeframe when those people got cheap rates back in 2017, 2018, 2019, and around five year loans 2023, 2024, those are coming due. We guess what Rates have doubled. And if they didn’t proforma that, rates are going to double. Most people raise your hand if you did. No, no one did. They’re going to be kind of screwed because they didn’t do that. Now, good thing is, with inflation and rates have increased and the cash flow has increased, but the cost to go service that debt has gone up. So your returns for your investors just went down and your ability to go service that debt is going to be a zero or even negative. If that happens, then the sponsors and investors, no matter who it is, now has to come up with more money to go pay down that note to a point at which it will debt service. So it’s more capital being sucked out from the investor pool to go put down this thing to make sure debt services are next three to five years, or if the lender wants to go do it, they can extend it out another year. That being said, let’s just pretend it doesn’t happen. And the headline of one point whatever trillion, they want you to believe that it’s not going to get readjusted. And there’s this wall of debt that’s going to be foreclosed on and this worthless paper worthless, it’s not going to happen. The concerning part about those asset classes I listed, the only one that’s really not performing right now that’s in question is office, because guess what We figured out in the COVID like you don’t need to be in an office. However, they’re starting to figure out that the productivity went down and people love people. If you don’t like them, you love them and you have to be together. This is okay, but they actually want this. This is why I actually office in a place, even though I’m sub-employed. I office in a place because I love the community and seeing people. That is going to be key going forward. But some people think that’s not going to happen. So the need of office is going to go away or change or whatever. And there’s this big question mark. So bottom line there, it’s not going to pull like what you’re going to think. There’s going to be maybe 10% of that 15% that actually does go into foreclosure or go back into special assets to go get reworked. But not all of it, i mean a lot of it will get refinanced, repurposed, something like that. It’ll all work out. So there’s no reason to go buy into something. Oh crap. If you’re an investor, i would stay away from office running even my own office building. It’s still a bit scary for us, like you don’t know, because those leases are on three or five, six years. And if you do it the right way or the wrong way, you can’t upside down sometimes. But those people out there, they think there’s going to be a giant implosion of bad debt coming due and it’s going to take down banks. It’s not going to happen. There’s just no way. You don’t just understand. There’s just no way. You can’t. It’s not going to happen. I wrote about this probably two months ago. It’s going to be fine If you separate out the bank debt from the CNBS Life Co debt, life Shares debt. The banks have a majority of that. The banks have the ability to go get creative, so they’ll rework it, unless it’s like really a bad sponsor. That’s a whole other conversation.

Speaker 3: 25:22

So this is an important topic because whether you’re an active investor or you’re a passive investor, you really need to know that there’s risks. This is not just like a it’s by no means a casino but there’s risks to buying and operating and owning and profiting from real estate, like there is on probably any investment, i’d argue And part of that risk is interest rate risk. And there’s other risks like duration, which means how long of a loan term or how long is the hold period, and if you run out of time or you run out of money on a project, well, guess what? You’re going to take a loss, you’re going to book a loss. There’s geopolitical risk, there’s market risk, there’s political risk. You’re in a market that has political risk And then maybe you can’t evict tenants in a timely fashion, right? There’s inflation risk. There’s all sorts of risks out there, and the idea is to get educated. Get around people that are doing the thing that you would like to do, learn from them, learn from their mistakes, learn from their history, what’s their experience, and try not to bite off more than you can chew or proverbial, getting out too far over your skis, but learning the process and learning how everything interacts And for real estate. It’s the debt, right, the debt means everything. Today. It’s dominating all of our conversations. It’s dominating all of the acquisitions and some of the dispositions that maybe we could have gone full cycle on a couple of deals that Greg and I already have, but we haven’t right. So we’re just going to stand there. We’re going to cash flow And what Billy was talking about, the debt service coverage ratio. This is what I want people to understand. If they want to get into commercial real estate. You have to kind of understand the plumbing, and the plumbing is all focused on what’s called the net operating income, right, so you have your income coming in on the top line, you have your expenses right below that And your income minus your expenses is your net operating income And that’s your income before debt service. And why do they do that in commercial real estate? Question I get asked a lot, billy and Greg. Well, because everyone’s debt product, whatever kind of loan you get, isn’t the same as Bob down the street or Greg down the street or Billy down in Tennessee. So you can’t really value properties by their debt products because they’re so different and varied across the whole country. So you have to take the net operating income and then properties trade on a multiple of that income. With that being said, billy, there was a large portfolio that was foreclosed on And it was in the front page of the Wall Street Journal a couple of weeks ago. And this was an operator. I don’t want to pile on top of him, but he was inexperienced. He was behind the desk as an engineer one day and then, all of a sudden, he had 4,000 units the next. He went very quickly. It sounds like he didn’t get proper debt. He was part of a guru, but he didn’t get proper debt. He bought, picked over properties in tough parts of the city in which he invested in, but he didn’t do the right thing by investors. Billy, can you talk about what is the due diligence required these days to get a good, solid loan product And people that may be thinking to themselves? you know what? I’m in a syndication right now in multifamily self-storage, whatever it might be, mobile home parks, whatever. Man. I hope my operator is doing something for this loan. What are some of the ways that you’re seeing some of these loans being worked out? refinanced opportunities What’s kind of the topic of conversation in your office?

Speaker 1: 28:48

That right, there could be its own podcast. I mean quite honestly, because you mean you could go to so many rabbit holes there. So picking apart that guy, that’s a bad operator. Let’s just go to go down the road there. Decisions he made is just first started the asset class and then the location, and then he put those under contract, based on probably some type of pro forma that he thought he could give you, and then he got to raise money to be his backing for his down payment. All that to go use that to go apply debt. Now get back to your equation there the NOI. So let me just be clear on this one lending standpoint that I learned and I’ll hammer home many, many times Debt is not the profit, debt amplifies the profit. Get that in your head. For anyone else, especially the new syndication out there, debt amplifies the profit, not is the profit. So then you have to pick it apart, the right type of debt. There are many lenders that will lend on an asset class regardless. So back to hit this guy, which I didn’t actually read down in this thing but more than likely is probably a three year type of bridge type of product He’s going to go refinance later on after he stabilizes it. Fine, we’ve all done that pro forma type of thing. He probably couldn’t do it because he’s an experience And all of a sudden he tied all these things together and a bunch of these things because he cross collateralized these assets. Two, three, four, we go down, the rest of them go down. So back to the question of how do you go to vet your sponsors and vet the deals. Well, you vet the sponsor first. What’s their experience level? Show what the cycles are, how many successful cycles you got in and out of, how much skin they have in the game, who else is on the team? This is the same thing that lenders look at as well. And then you go into okay, cool, you get the chops. Then you ask okay, well, how many fights have you been in that you lost? Use, some New Yorker speak there.

Speaker 3: 30:37

Love that. I see what you did, Billy.

Speaker 1: 30:38

How many fights have you been in that you lost Or almost lost? Because if you haven’t, you know how the great hair and broken nose, broken fingers if you see my fingers there then yeah, probably. If your hands a little too clean, probably not the person you want to go in with. Then you go to the asset class. Is this an asset class that you would personally buy yourself, to break it down easily? for somebody that’s brand new to go invest with a sponsor side by side? That’s it. If you don’t know crap about self storage, don’t invest in self storage, or especially self storage in a Class C area where you can see it on the TV, get broken into meth labs, whatever. So another question there, or right now, four, five, six years ago, probably five years ago, the whole idea of you go buy a Class B property or a Class C property, make it Class B. That can be done, but it is very, very rare. Yes, you can go do it, but it’s very, very rare. Poor people are typically poor people for a long time When the choice is gonna be made between buying beer and paying the rent. Poor people buy beer or other things. They’re not gonna pay rent. So that’s the asset class, that BCD. We got some friends that do like the CDEF asset classes and they’re like. Actually one of them he tried to contact me to go do some lending on and I’m like no lender in the world wants this because a $25,000 house is gonna be $20,000 in five years. It’s not gonna value, it’s not gonna go up. They don’t want that in their portfolio. They don’t want to deal with the tenants If you don’t pay and they take the same back. It is worse When the lender’s mantra is there it can get this for anything, for bridge lending and the else. If the worst thing that happens is they pay you back, it is a good deal because if they don’t pay you back and it’s a good asset class, you make more money off the asset, repositioning that and selling it, et cetera. So the lender is the friend in all this. But you gotta have the wisdom to go ask those questions and this is a viewpoint of very, very simply, is this something I want? if I had the opportunity to go put my own money in the thing, all of it would be something I’d be proud to go own and show off my family.

Speaker 3: 32:44

No, i love that, billy. I mean, listen, real estate is a team. Sport is what Greg and I found very early on. And the operators that we’ve been fortunate enough to work with and surround ourselves with they have teams in place, they have processes, they have full-time employees, they have benefits, they have vacation time, they have contracts, they have warehouses. Those are the folks that you wanna surround yourself with if you’re gonna be that passive investor right, or Billy’s lending on somebody and they have a 30 to 50 person full-time team in a given market, versus somebody that went to a weekend conference, comes out and calls themselves a syndicator and they don’t have any systems in place, no full-time employees, they don’t own and operate their own property management company. That’s gonna raise some red flags. That’s gonna make Billy say look, we need to do a deep dive on you to make sure that you’re actually able to have there’s something called execution risk, since I have all the risks today, right To execute the business plan. And those are the things, as a passive investor, you really wanna dive into. So I invite you guys if you’re listening to the show and you’re getting a little nervous or you thought you might wanna be a passive investor and now you’re saying, oh my God, i don’t know if I want to. That’s why you hop on a call with somebody like Billy Brown, that’s why I hop on a call with somebody like Greg and I and you have to rely on your resources, right? Due diligence what does that mean? Let’s crack that egg right, because that’s a term, due diligence, that we hear all the time in our business but no one ever really says well, what does that mean? And for Greg and I, it means understanding who we’re working with criminal background checks, doing deep dive third party. We have a third party company that we contract with to do deep dives to make sure that the LLC that this person said that they are owned and operated or property with was in good standing, that they own the property, that the purchase price and the sale price all match right. This is some of the due diligence stuff that you have to do on a regular basis underwriting Raise your hand if you know how to take someone else’s spreadsheet and operate it. Probably not right. So unless you have your own spreadsheet at home that you created, you’re probably not gonna recreate the underwriting. You need somebody else to help you out with that.

Speaker 2: 34:49

Yeah, tim, i think when you talk about due diligence and Billy alluded to this a little bit people are trying to take a C property and make it a B property. It’s called a value add. The value add strategy is so hyper local. If you invest in a war zone, the war zone is not changing in the two to five year holds. Downtown Fallujah is gonna be downtown Fallujah in five years. So you’re not gonna get your money. And the value add strategy you could do the best construction, put the nicest tile, grant a countertops. If it’s not a nice neighborhood, it’s probably not gonna be a nice neighborhood in five years. I mean, that’s just what happens. So the value add strategy is so hyper local and really important that the sponsor knows exactly what they’re doing and where they’re investing.

Speaker 3: 35:37

Love that. Yeah, all right. So it might be time to pivot into the last three questions of the show And before we get there, i just wanna let people know we talked a lot about tax strategy today. We talked about tax kind of CPA stuff. I wanna let everybody know, for full disclosure, that neither Greg nor I nor Billy are CPAs. We are not giving tax advice. Consult with your CPA And I will say if you’re gonna be a real estate investor, you have to work with the real estate focused CPA. And I always tell people if you break your ankle, what would you wanna see? Orthopedic surgeon or a neurosurgeon, right, they both have MD next to their name, but you wanna go see that orthopedic surgeon? Anyway, billy, first question, it goes like this our dear friend and mentor, robert Kiyosaki. He says that savers are losers and debtors are winners. What does that mean to you in our inflation every period here?

Speaker 1: 36:30

Oh man, this is like college quiz right here. So all right, so let’s go down to our other, let’s get into our other holes here. So we have a fiat currency, right, you can’t see? fiat means it’s in good faith. There’s nothing backing that currency, it is just a piece of paper. My daughter, like Tuesday, i almost teared up. she says she had two pennies and she claimed them together. He goes dad, these are fake. And I went tastes the red pill. oh my God, lord. And so there’s nothing there. There’s nothing in that paper or those coins that has any value other than the faith of those using it. And because of that they know print more. When there’s more out there, it’s worth less. So if you cannot save your way into prosperity because there’s gonna print more, they’re gonna print faster than you can go save. We’re based on a debt society. Every money, every dollar’s in this right now, is because of a debt that we created Back to like the conspiracy theory, which is not conspiracy, it’s real. The Federal Reserve is neither Federal nor has reserves. They just print money. It’s created off debt. We promised to go pay this back in circulation. We sell it off to other companies or countries. So we are a debt society, meaning we have to. your dollars are created through debt. If you don’t know how to create arbitrage between that how fast they’re doing it and the value, the assets you can go buy to go make more than that debt costs, then you’re gonna be losers. And when you go put your money in a bank and like right now, the inflation rate, depending on which one you look at, is between five and seven and it’s gonna probably level off at four and you’re getting a 4% interest rate on your money into the bank, you’re negative 1%. You’re losing 1% per year Plus the taxes it costs you to put that money in there, actually more than that, like 25% before you got there. So yeah, savers Illusors. once I figured out that there’s a whole concept that he said she said before. this is several years ago. he said 95% of the world’s population fights over the 5% of the world’s wealth, while there’s 5% of the world’s population that swims in 95% of the money. And that’s because they realized that it’s based off of debt And embracing debt as your friend for proper leverage, not to go buy stupid crap like Lamborghinis and whatever else You’re dead.

Speaker 3: 38:47

he calls them do-deads.

Speaker 2: 38:49

Yeah, yeah, love it. Yeah, And you know we touched on that just a little bit before when we talked about the accumulation model. Yeah, that most people are still in. They’re fighting over 5% of the wealth. Just like you said, that’s a tough way to go about it. The second thought we have for you, billy, is from our mentor, jim Rohn, and he said formal education will make you a living, self education will make you a fortune. What does that mean to you?

Speaker 1: 39:15

Oh man, these are great questions. I love your questions, guys. All right, so formal education you need to know how to add, you know, as a trap Structure of sentence I’ve plunked that one. Don’t ask me how to spell. I can do math though. So but the foundation there to be able to do that and interpersonal skills is there. Like you need to have those through your schooling. Now we can go down that rabbit hole of what they’re teaching kids in school right now and common core math and whatever else that’s going on. It just hurts my head thinking about. But that is not going to teach you how to she’s thrive in today’s society. In order to be an entrepreneur and thrive, you have to have a different set of skills. Just like you go to medical school, go and study for a CPA, go into law, you have a different education there to go teach you how to go, do that and be that specialist. Same thing in being an entrepreneur and creating wealth. There are many programs and call it adult education out there to go into and teach yourself how to go be a real estate investor, be a syndicator, raise money, economics, talking to family offices, all that world You can actually go pay and go be part of this and learn And that’s where I’ve learned the fastest on all this. It’s tied to all together And then you can tie in that formal education back to self-education and you go oh my gosh, now I know how to add, i know how to work a spreadsheet, but I also know how to go create. Look at a P&L, see an NOI, create IRR for my clients and then you can raise money, love it And you can create arbitrage. Once you pull back that and you see opportunities that no one else can go see.

Speaker 3: 40:54

Billy, i couldn’t have said it better myself. The last question is from Jim Rohn. He says that you are the average of the five people you spend the most amount of time with, and since you are part of our mastermind here in our world, i thought that would be a layup for you, billy. So take it away. What does that mean for you And that’s a quote by our good friend Jim Rohn You are the average of the five people you spend the most time with.

Speaker 2: 41:18

And Billy. You only need three other people on this question. So I mean, you’re already in great shape.

Speaker 1: 41:23

I mean it sounds like you’re inviting me out there for July or something. I mean because you want to spend more time with me. you want to be add more value because there’s two people right there, so you’ve got to find three more to come with us to pick Nick on before July. that are going to be big ass. So it’s basically law association. There’s a book out there. I love this book. You guys should read it. if you have, i’ll see if your book case up there. Willpower doesn’t work. You’ll love this as an athlete, right. It goes in the same thing what Jim Rohn said about the average of five people. It’s not that you can will yourself into success. I didn’t know I was doing this. And there’s a whole concept about being the dumbest person in the room. You just always keep on finding the room that you’re like being curious in showing up and learning. Well, i call that drafting. I show up in room full of like from wrestling to golf or whatever. I just show up and I’m like the worst one there and you keep on hanging out And I’ll say like you’re not the worst one anymore. So I’ll tell you this example, if I don’t have a basketball example because I don’t have a basketball, greg, sorry, but football University of Alabama is obviously huge down here. I mean I could care less about SEC. But I can tell you this if I put you and gave you a scholarship and allowed you, as an athlete, just to be in the room of University of Alabama for the next four years, do you think you’d be a better person? Because you’re surrounding yourself with great champions that have that vision and are working all together towards that vision. You’re gonna be part of that and you’re gonna be drafting through that. So we’re just for us intentional or not that other people that you’re around are drafting their own way from their other places And you gotta look at them and say, okay, where are they going? And if they’re not going where I wanna go, why would I spend my time with them?

Speaker 2: 43:02

Yeah, you’ll be around that winner’s mentality all the time And you have to draft off of that.

Speaker 1: 43:09

You have to draft off of that. I mean it’s part of the reason. I mean I grew up in athletics, grew up in wrestling, but I got to be at one of the premier schools in the nation for wrestling, at Oklahoma State, and be in the room watching. And if people only knew how much it took to be a champion, a world champion, Olympic champion. I watched that and I applied that to my life. And now that I applied that to my life, I know who the other champions are out there, who’s doing the work behind the scenes, because I can go see it. It’s the little things And that’s what I surround myself with, because I don’t have time for people to swim the average or mediocre or just above average. I only surround myself with champions And that’s not being like I’m picky or whatever I was like. I don’t have time to go. Be around that. The mentality, the words are spoken, all that. So watch people’s words. But in order to be better, you got to be around better. In order to be great, you got to be around greatness. And if you don’t know what greatness looks like, that’s where you need to go, start asking questions of what does greatness look like? And if you surround yourself with greatness, you’ll be great as well.

Speaker 3: 44:12

Well, Billy, that was great, And I want to be surrounded by more greatness too, So I’m going to invite everybody out there listening to this podcast to please take some time, leave a rating and review for our podcast. We can get more great guests like Billy on the show and then we can make a championship podcast here. I also want to invite everybody to head on over to citiesodcapcom and download our free download code. Learn the five things you need to know about making your money work for you. Billy, this has been a phenomenal show. We learned so much. If people want to learn more about you your company lending, multifamily commercial real estate, all of the things, how, can they?

Speaker 1: 44:48

Yeah, so first off, back to the strength of champions. You guys are champions yourselves and I encourage anyone out there to actually go talk to these guys, follow them, get their downloads, all that. So go to the website. They’re phenomenal human beings, phenomenal fathers and incredible stories that you can truly trust them with. So, in order to contact me, i just have this website called BillyBrownme and just log on there and you just see my contact information and I’ll let it chat with you Love it.

Speaker 3: 45:12

So head on over to BillyBrownme. We’ll put that down on the show notes so you guys can connect to Billy. And for now that’s gonna do it for the Passive Income Brothers podcast. We look forward to serving you again next week. Thank you for listening to another episode of the Passive Income Brothers podcast. We would be grateful for your support of our podcast by giving our show a five-star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head on over to citiesidecapcom to connect with us and find out more information about how to get started passively investing in real estate.