CallumConnects Podcast – Gurpreet Padda
by admin | November 28, 2021 | Real Estate
CallumConnects Podcast- Gurpreet Padda - Entrepreneur on Apple Podcasts

Gurpreet Padda – My biggest hurdle as an entrepreneur.

Welcome to “CallumConnects.” Five-minute entrepreneurial inspiration for your day. Joining us today on “CallumConnects” micro-podcast is Gurpreet Padda. Dr. Padda is a serial entrepreneur who started rehabbing houses and repairing diesel engines while in high school, before entering medical school at the age of 17. His secret power is his ADD and curiosity about how things work.

– A hurdle I’ve faced as an entrepreneur is also my greatest strength. I have horrendous ADD and I have shiny object syndrome, and I’ve had that ever since I can remember. I started a company when I was probably 14 years old while I was in high school. And I loved science but I loved taking things apart and I loved construction as well. So I ended up doing a construction company and then starting a company that fixed diesel engines, and I did this all while I was in high school. But I was so curious about anatomy and physiology that I went to medical school. I got into medical school when I was 17 and then I ended up graduating when I was, it was a six-year program, so I graduated when I was 22 or 23 years old. I’ve got an incredible curiosity about how things work and that often leads to a lot of nonsensical learning or appearingly nonsensical learning. So I end up getting curious about something and doing a deep dive and learning everything that there is to know about it and then I get distracted by my ADD, which says, hey, this is something interesting over here. And what that does is it allows me to learn and deep dive on things that appear non-related and then my ADD interrupts me and I end up jumping to another topic eventually. And often I’m able to reconnect a variety of different topics. So what I ended up learning from this is essentially use that superhero strength of ADD to learn and to move from topic to topic, but then use the overarching entrepreneurial mindset to give it application, to come up with a cohesive theory and a business model of how to get things done. One of the coolest books that I’ve ever read is “Who Not How.” And so I’ve been able to use some of those concepts more and more, which is not necessarily doing a deep dive into every single aspect of every single thing, but finding experts that already know that and engaging them, learning from them. And that way I’m not spending forever learning about a topic that I had no interest in. I ended up starting an entire restaurant company because I was curious about the food production system. I ended up with five restaurants before I knew it. And I was interested in fermentation and ended up starting a brewery. So this can really get out of control. And I’ve found that in order to channel that correctly and do it the right way, I have to be able to bring other people on board who will keep me in check. I have an amazing business partner that helps keep me in check. And I think that the ability to rely on others to kind of self-monitor our own behavior, that you trust these others, is really valuable. The ADD permits rapid reiteration of concepts. And it also allows you to abandon concepts that are less than ideal, but only within the context of getting assistance from other people. I don’t think that if I had other great people around me, I would be as successful.

– If you have enjoyed today’s show or got any value from today or previous episodes of “CallumConnects,” do please subscribe and leave a review. It means the world to our guests to be able to see what they’re sharing has led to your learning.

The Journey of a Physician and Real Estate Investor with Gurpreet Padda, MD
by admin | November 23, 2021 | Real Estate

This week’s episode is the first in a two-part series that features Gurpreet Padda, MD. He is a private practice physician out of St. Louis, Missouri, who runs Reversing Diabetes MD and Padda Institute Center for Interventional Pain Management. Dr. Padda also runs Red Pill Kapital, which is a real estate investment development and management company. He is an advocate for educating private practice physicians on passive wealth strategies through owning real estate.

In this episode, we talk about…

[5:05] Getting into real estate as a teenager

[6:08] The desire to have a life outside of the hospital

[9:05] Characteristics that are more relevant than your education when it comes to owning a business

[10:30] The applicability of medical training to real estate

[11:09] How Dr. Padda decided on his medical specialty

[12:39] How capital flow impacts our health as well as the real estate market

[15:17] The importance of investing in real estate for your practice(s)

[16:31] How to decide where to purchase real estate for practice locations based on patient perspectives

[17:33] The effect of the pandemic on retail real estate

[21:28] Selling restaurants before the pandemic began

[24:14] Educating clinicians on creative passive cash flow and equity growth

[25:22] Why physicians tend to make financial decisions based on narcissism

Links to resources:

Reversing Diabetes MD: https://reversingdiabetes.com

Padda Institute Center for Interventional Pain Management: https://painmd.tv

Red Pill Kapital: https://redpillkapital.com

Dr. Gurpreet Padda: Creating Wealth with Real Estate for Healthcare Professionals
by admin | November 12, 2021 | Real Estate

OVERVIEW:

Jason A. Duprat, Entrepreneur, Healthcare Practitioner and Host of the Healthcare Entrepreneur Academy podcast speaks with Dr. Gurpreet Padda, MD, MBA and entrepreneur. Dr. Padda is an avid real estate investor. He shares the lessons he has learned as an early entrepreneur and also provides tips for healthcare professionals interested in creating wealth through real estate investment.

EPISODE HIGHLIGHTS:

Dr. Padda grew up in India during war and uncertainty. He moved to the US when he was 8 and started his first business at the age of 10 selling cards door-to-door. At 16, he had a team of 30-year-old men working for him. He states – I was an entrepreneur before I went into medicine. Dr. Padda made it through medical school by hustling, which he did through real estate auctions. During his first year of residency, Dr. Padda rehabbed an eight-unit building in Chicago. After his residency, he went into pediatric anesthesiology for heart, liver and lung transplants. His medical path also included addiction and interventional pain management. Dr. Padda’s practice has 7 locations and he provides $1.5 million in free care. “Option” is when you purchase a sale contract with an option to buy. You have three months to decide if you want to buy and the price is held at the same level. If you decide not to buy, you’re usually only out $100. Dr. Padda uses option contracts, where he’s looking at zoning and municipal plans. He researches what’s being planned for development in the area. Option contracts are low risk and offer a high reward. There are two types of wholesaling. “Ugly” includes houses below $80k requiring a lot of work. “Pretty” is when someone wants to sell and is having a hard time finding a buyer. This option provides great margins and it’s the one Dr. Padda recommends physicians to use. Dr. Padda also recommends going big with real estate vs buying single units. Cap rate is the net operating income divided by the price. Become a passive investor with somebody first, watch and learn from their mistakes, and then become an active investor. To get started in real estate investing, talk with people you know. Work referrals through friends and contacts. Don’t blindly trust people on the internet.

3 KEY POINTS:

The most valuable resource on earth is not money but time. You have to look at both active and passive methods of gaining wealth. Passive income is what people pay you while you’re sleeping. The biggest impediments to becoming wealthy are ourselves and our taxes. The number one impediment is our personal wealth operating system and how we think about money.

TWEETABLE QUOTES:

“Time is like a water hose and you’re watering a particular concept or project. The more water and fertilizer you apply to it, the better it grows.” – Dr. Gurpreet Padda

“I think entrepreneurship is the ability to ask questions of yourself, realizing you don’t know, and then trying to figure out the answer.” – Dr. Gurpreet Padda

“Leverage what you know.” – Dr. Gurpreet Padda

RESOURCES:

Red Pill Kapital: https://redpillkapital.com/

Dr. Gurpreet Padda’s LinkedIn: https://www.linkedin.com/in/gurpreet-padda

Michael Blank podcast: https://themichaelblank.com/podcasts/

Adam Adams podcast: https://podcasts.apple.com/us/podcast/creative-real-estate-podcast/id1285094279

Section 8 Multifamily Ownership to Build Wealth
by admin | November 9, 2021 | Real Estate

The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program.

According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

What is the Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlord whose property is in the listing.

The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills.

A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

Section 8 Multifamily Home Ownership

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up to4 units, and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units.  Five units and above are multifamily, but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on property to build wealth over time.

Vouchers under the Section 8 Housing Program

Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher.

The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program.

The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Advantages of Section 8 Multifamily Home Ownership

 

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certaintyof Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.

 

Building Wealth through section 8 Multifamily Home Ownership

Investing in several multifamily homes is a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

a) Choose and manage tenants wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

b) Ready Investors

The multifamily concept is more investor friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

c) House ‘hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

d) Add more rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:

Source: U.S. Department of Housing and Urban Development, Multifamily Properties: Opting In, Opting Out and Remaining Affordable.

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while a four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments.

It gets better over time as you can hire property managers to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.

 

About Physician Retirement
by admin | October 28, 2021 | Real Estate

A retirement savings plan is supposed to help you retire, but the problem is you’re still working and your money is retired.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

About retirement

Close to two-thirds of seniors cite finances as the primary reason why they remain at work, according to Provision Living, which is a provider of senior living communities. That means that the vast majority of people when they approach retirement age are unable to retire.

How long will your money last you in retirement, especially when you consider that one year of nursing home care in a semi-private room is projected to be $128,000
a year in 2021?

A 65-year-old couple retiring in 2019 can expect to spend $285,000 on health care costs in retirement alone. A working senior only has an average of $133,000 in retirement. How long will your money
last? Even if you’re a super-wealthy physician, have you anticipated an additional $285,000 in medical expenses? Have you anticipated $128,000 a year for the next 10, 15, or 20 years if you have to go into a nursing home facility?

You may think that the standard recommendations of putting 15 percent of your paycheck towards a retirement plan were impossible to achieve.

Even if you want to live on just half of your final salary, you need to put in about 40 percent of your income. This is dramatically different than what most people anticipate, and this assumes a historical return rate of eight to 10 percent, and I’m going to tell you that the future return rates on most traditional portfolios are going to be well below eight to 10 percent. They’ll probably be between six or seven percent, and when you take out inflation, and taxes, and everything else, your net rates of return are going to be two to three percent, so that’s going to have a dramatic impact on your retirement growth plan.

Future stock market returns will not match the historical returns.

The reality is the historical returns are eight to 10 percent. We expect the future to be six percent. When you take out the one to two percent in portfolio management or asset management fees, and you take out the two and a half percent, also, for inflation, you end up with essentially about a two to three percent rate of return. That’s not enough to sustain yourself long-term on a passive income
alone. It would just be setting aside a lump sum of money, and just eating through that at a very low rate.

If you bring in somebody who knows what they’re doing, it dramatically increases the likelihood of your success. You would call in a specialist if you had a pulmonary disease; you would call in a cardiologist if you had somebody with an unusual cardiac dysfunction that you couldn’t quite figure out. You would call in a neurosurgeon if you had somebody with a glioblastoma – so call in a specialist, call in somebody to help you navigate this. But, be careful who your specialist is, because usually the specialist that you call in is selling their plan, and it’s selling what they do really, really well, and what they make most of their money on.

If you do call in a specialist, you will get a more formalized retirement investment plan in place.

Almost half of the people that do that get a formal plan out of it. It’s really important to understand what your expenses are going to be, what your income is going to be and to analyze it before you get there. This is not a set and forget it. This isn’t an, “Oh, I’m going to have this, and I’ll be okay.” This is not something that you can make a change then. Your “then” has to be “now,” and you have to be able to predict where you’re going to be 30 years from now.

What does this have to do with physicians?

I mean, physicians have money. Why is it that it’s so relevant? The problem is that most physicians are active-wage employees, and most of them would invest most of their assets in the stock market, or they invest their assets in employer-sponsored retirement plans, which invest in
the stock market. These paper assets are precisely the things that are most damaged and most volatile, and the things that are consumed by assets under management fees. Most physicians rely on professional advice, but their investment options are limited to the financial instrument offered by their plan or their advisor.

What happens is they get this false sense of security, and that false sense of security makes them think that they’re going to be okay until they get to retirement, and by then it’s too late to make a change. There was an AMA study done in 2018, and they asked retired physicians: Do you feel
comfortable? Over half of them were worried about volatile market conditions depleting their savings. 40 percent of them felt like they hadn’t saved
enough, 28 percent said that they started saving too late, and about a third of them realized that their medical expenses were going to be out of control. Nearly three-quarters of all physicians were under duress by the time that they retired, which is almost exactly the same number that’s in the general population of non-physicians.

Physician salaries and income may be high, but their expenses are also high. Physicians’ hyperspecialization in medicine has kept them from understanding the financial world, and that lack of understanding is going to have a huge impact on physician retirement and financial stability.

We went to medical school to care for and improve humanity

We assume that by doing good for others, we would do well for ourselves. Unfortunately, that’s not true. Those financial rules have changed. We have to adapt to this new world – or we’ll die extremely highly educated but broke.

About me

I’m Gurpreet Padda. I’m a physician. I also have an MBA. I’m board-certified in anesthesia. I’m board-certified in interventional pain, and I’m board-certified in addiction, so I have a lot of experience in the medical field. I graduated from the University of Missouri-Kansas City in 1988. I’ve been in both an academic and private practice. I’ve been at a hospital-based practice, and I’ve been in independent medical practice as well. I’ve used insurance-based plans, and I also have a cash-pay practice when we deal with issues associated with cosmetic surgery. I’ve run 11 outpatient clinics. I’ve developed surgery centers for myself, and I’ve developed surgery centers for other people. I have both a medical and a non-medical turnaround specialty.

I started in the medical field after I started in the business world. That doesn’t mean I started a lot later. I started in the business world when I was 16, and
I didn’t go to medical school—a six-year program—until I was almost 18. I’m driven by compliance. I want to figure out what the rules are and I want to make sure I don’t violate those rules, so that’s my personality. That’s how I come to this.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash-flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at info@redpillkapital.com and that’s Kapital with a K.

What’s Red Pill Kapital?

Red Pill Kapital is a physician-owned commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property, or we find the investment group. We create and validate their plan. We look at how to improve the cash flow, we negotiate the deal, and we manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the 9 to 9 because physicians don’t work 9 to 5. We probably work 6 to 9.

We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals. I
specialize in turnaround situations. I originally got my MBA in finance, because I was interested in pharmacoeconomics studies, but then, I was applying
those principles – the cost-benefit analytic tools and cost-utility studies – and helping determine rates of return for healthcare. I started applying them to physician care. I had already started my first company when I was at the age of 14, and it was a construction company. I went to medical school and started right before my 17th birthday – I turned 18 in November, and I had started right before. My first year was really when I was 18, and it was a six-year program, so it was combined.

The reality is that early exposure to construction, and dealing with people when I was 14, 15, 16, and then, understanding how the dynamics of human beings are, has made a huge difference, and it’s allowed me to look at things in a little bit different way. I’ve eventually gone on to develop about 2 million square feet of commercial real estate. I’ve owned and operated five restaurants. I’ve got over 30 companies that I’ve worked in as in terms of ownership, and currently, have managed assets of more than $200 million, but I still practice clinically every single day. I practice because I want to practice.
I practice because I love the patients that I take care of. I practice in the urban core, and most of my patients are indigent. Most of my patients are on Medicaid, and I do my medical practice because it’s my calling, but my money is made outside of medicine.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com

Nine reasons to invest passively in somebody else’s commercial real estate deal
by admin | October 25, 2021 | Real Estate

We’ve done over 2 million square feet of commercial real estate development in our company directly, so why on earth would we ever invest passively in somebody else’s deals?

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

About me

I’m Gurpreet Padda. I’m a physician. I also have an MBA. I’m board-certified in anesthesia. I’m board-certified in interventional pain, and I’m board-certified in addiction, so I have a lot of experience in the medical field. I graduated from the University of Missouri-Kansas City in 1988. I’ve been in both an academic and private practice. I’ve been at a hospital-based practice, and I’ve been in independent medical practice as well. I’ve used insurance-based plans, and I also have a cash-pay practice when we deal with issues associated with cosmetic surgery. I’ve run 11 outpatient clinics. I’ve developed surgery centers for myself, and I’ve developed surgery centers for other people. I have both a medical and a non-medical turnaround specialty.

I started in the medical field after I started in the business world. That doesn’t mean I started a lot later. I started in the business world when I was 16, and I didn’t go to medical school—a six-year program—until I was almost 18. I’m driven by compliance. I want to figure out what the rules are and I want to make sure I don’t violate those rules, so that’s my personality. That’s how I come to this.

I specialize in turnaround situations

I originally got my MBA in finance because I was interested in pharmacoeconomic studies, but then I was applying those principles — the cost-benefit analysis, analytic tools and costs, utility studies, and helping determine rates of return — for healthcare. I started applying them to physician care. I had already started my first company at the age of 14, a construction company, and I went to medical school right before my 17th birthday. I turned 18 in November and I had started right before, so my first year was really when I was 18, and it was a six-year program, so it was combined. The reality is that early exposure to construction and dealing with people when I was 14, 15, 16, and then understanding how the dynamics of human beings are, has made a huge difference, and it’s allowed me to look at things in a little bit different way.

I’ve eventually gone on to develop about 2 million square feet of commercial real estate. I’ve owned and operated five restaurants. I’ve got over 30 companies that I’ve worked in, as in terms of ownership, and currently have managed assets greater than $200 million, but I still practice clinically every single day. I practice because I want to practice. I practice because I love the patients that I take care of. I practice in the urban core and most of my patients are indigent. Most of my patients are on Medicaid, and I do my medical practice because it’s my calling, but my money is made outside of medicine.

I have personally owned and operated apartment buildings and several hundred units of owned and operated mobile home parks. I’ve owned and operated restaurants, mixed-use developments, medical office buildings, surgical centers, industrial warehouse spaces, office buildings, and retail strip centers. I have a lot of experience in real estate, which gives me the opportunity to have made a lot of mistakes. The reality is you only learn when you make mistakes. If I’m dealing with somebody and I’m going to invest passively with them, I want to know what mistakes they’ve made, because if they’ve never made a mistake, there’s going to be a problem. I don’t know how they’re going to react.

On directly owning and operating real estate

There are some issues and advantages to investing passively

Advantages
• Quick, immediate decisions
• Control
• Leverage bank money 5:1 ratio
• Tax-advantaged accelerated depreciation
• Pride of ownership
• High yield and appreciation

Disadvantages

• Too quick, and too immediate
• Control = Responsibility
• (Tenants, Toilets, Termites)
• Recourse loans, eventually you run out of down payments
• Inability to qualify as a qualified real estate professional
• Predators know what you own
• Forced to use 1031 with an ever-increasing deal size


These are nine reasons to invest passively in somebody else’s deal instead of actively doing it on your own

When you’re investing passively, you don’t have to be an expert at that asset type. You don’t have to be the expert at that asset class. You don’t have to be the expert at that specific demographic because you have to realize that real estate is hyper-local. It’s blocked to block. It’s road to road. It’s not stated to state. It’s not even the United States. You don’t invest in the U.S. You invest in the U.S., in a state, in a city, in a neighborhood, on a particular side of the street.

1. Don’t need to be the expert

It’s very hyper-local. You don’t have to develop all of the expert lender environment relationships because these lenders are very finicky and you have to be in constant contact with them. You don’t have to develop expert relationships with brokers, which takes a lot of friction. You don’t have to take them out to lunch. You don’t have to hang out with them and have a drink. You don’t have to constantly contact them so that you’re getting a good deal because the reality is most commercial real estate is driven by broker relationships and you have to maintain those broker relationships.


2. Non- recourse, not on loan

When you invest passively, it’s a nonrecourse loan to you. You’re not on the loan.

You don’t have any risk beyond your capital invested.

You’re passive. Who is at risk is your general partnership, and they’re heavily invested in doing the right thing because they’re the ones at the highest risk. You’re along for the ride. You can step off this bus any time you want.

3. No responsibility except to vet the deal, the operator, and monitor

You don’t really have any responsibility inside the deal except to vet the deal. You need to vet the deal. You need to vet the operator and you need to monitor the deal. We’ll have other presentations on how to vet the deal, but you want to look closely at the underwriting. You want to look at the debt service coverage ratio. You want to look at the rates of return. You want to look at how long it’s going to take to get that return. You want the underwriter to have stress-tested that deal.

• What happens if this drops to a historic vacancy level?

• What happens if interest rates go up?

• What happens if demographics change for this community?

When you do vet the operator, you want to check their backgrounds. Every single general partner, you want to have checked their backgrounds. You want to look at their prior deal experience; you want to run UCCs on them. You may even want to do criminal and legal background checks on them.

That’s what we do. We’re Red Pill Kapital. We look at those deal sponsors. We figure out if we’re going to invest passively, and I want to know everything about the operator.

The operator is the most important part of a particular deal. It’s even more important than the deal itself.

4. No time commitment

When you’re passive, you don’t have a time commitment because what you’re doing is you’re using other people’s time and paying for it with your dollars. It’s the concept of leverage. Now, most people talk about other people’s money, but as a physician you have money. What you don’t have is time, and the reality is time is always way more valuable than money. If you can leverage other people’s time with your money, you’ve created far greater leverage than the five to one ratio of money leverage that you would create in a recourse loan.

5. Not limited by geography or travel distance or time zone

When you’re investing passively, you’re not limited by geography. You’re not limited by travel distance. You’re not limited by time zone. You can do geographic arbitrage. You can live in one place and pay rent and then invest in another place and earn a high income.

There are some people that want to live in California, but they invest in Oklahoma. They don’t want to live in Oklahoma. There are some people that live in Florida and they don’t think that Florida is a great place for them to invest long-term because of the hurricanes – even though I have to tell you the hurricanes are not as big of a deal right now. Now they might become
a big deal in 10 years, but they want to invest somewhere else. Geographic arbitrage is what passive investment allows you to do. You don’t have to go drive by your property every single day. You don’t have to go look at it. You don’t have to manage that asset directly. You’re passive. You live where you want to live and rent if you want to rent, but you invest where it makes money.

6. Bigger projects, more eyes on the project, professional management

The other reality is in a passive deal, it’s going to be a lot bigger than you doing a small deal. The bigger the project, the more eyes on the project. There’s more professional management and the reality is it’s going to have to get a loan and the bankers are as interested or more interested than you are because you’re leveraging a five to one ratio. The general partners are on the hook, and the bank wants to make sure that this is an awesome deal because they want their money back. They’re going to stress-test this deal.


You know, if it’s a gigantic deal, you’re going to have a full-time leasing agent. You’re going to have full-time maintenance. You’re going to have supplies in stock. You’re not going to have trip charges because you own one house on this side of the street and one house five blocks away and then one house three miles away. In a passive deal like this, you’re going to own 200 units
or 150 units and it’s all going to be in a one-acre plot of land or a two-acre plot of land, and it’s right here and all the systems are exactly the same. All the HVACs use the same filters. All of the plumbing is the same. You need to replace a toilet; you have six of them in stock. Your maintenance guy knows how to do this. You have full-time management, you have full-time
maintenance and you have full-time leasing capacity, so your turnovers don’t cost as much. Trip charges are gone when everything is in one commonplace.

7. Deploy capital at a higher rate of return in an asset type that you can affect and impact

You want to deploy capital at a higher rate of return and asset type that you can affect an impact.

The reality is when you deploy capital in the stock market, I don’t care how many iPhones you buy, you’re not going to affect the price of Apple.

When you deploy capital in a property and you have an interest in it and you get on those property management calls and you can give some feedback, if you’re interested, it’ll have a huge impact. It’ll have a huge impact on the operations of the project and you can have a very significant outcome difference.

8. Can use IRA money, since I don’t control

You can’t use your IRA money if you own the deal because you’re self-enriching. But if you’re a passive investor alongside somebody else who’s the general partner, we can show you how to use your IRA money.

• You’re not a prohibited party in a passive deal.
• You don’t have any issues with 1031s because if you’ve structured this correctly and you’ve structured your taxes, you’re not going to have any issues.

There are a lot of issues associated with capital gains. There are a lot of issues associated with taxes if you use your IRA, and navigating that can be a very significant factor. So let’s take an example: let’s
say that you’re investing through your IRA and you get $100,000 gain. It’s all good until you realize that you might be at risk for 37 percent UDFI tax if that project had a loan on it.

But if you structure this correctly, you can prevent that by using a qualified retirement plan. So you shift your IRA to a QRP, and the QRP is immune from those taxes. Let’s say that instead you had purchased this with non-IRA money and you sell it and you got $100,000 gain. Well, you’re going to be subject to a tax on that money because it’s capital gain. Using the right plan at the right moment, with the right stuff, will prevent you from having to pay taxes, and taxes are your biggest impediment to wealth generation.

9. Pride of ownership, without the predators

You get the pride of ownership without the predators. The government can’t go after you. The tax authorities leave you alone. The attorneys, the patients, the employees, and all of the predatorial problems that you have disappear when you’re passive, and you can hide your passivity even further by buying it through a trust. There are all kinds of tools that you can do to protect yourself as a passive that are not available to you as an active investor. Your name is not on the loan. Your name is not in the public record.

So what’s Red Pill Kapital?

Red Pill Kapital is a physician-owned commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to five because physicians don’t work nine to five; we probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money.

If you have any questions, please email me at info@redpillkapital.com and that’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
Find us at www.redpillkapital.com

What is a Cap Rate?
by admin | October 22, 2021 | Real Estate

Today, I’m going to talk a little bit about cap rates. I think that cap rates are very important for professionals to understand and frequently they’re misinterpreted. I want to spend a few minutes going over what cap rates are, what they actually mean, and how do you best utilize them.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

Risk and reward: the greater the risk, the greater the opportunity for reward.

In real estate, one of the most important things that you can figure out is how do you define what something is worth. I think that this is one of the most important formulas in real estate, so I’m going to spend a few minutes on it. It is essentially net operating income divided by the value equals the cap rate. The cap rate is inherent and specific to different asset types, different locations, different quality of asset, whether it’s an A, B or C type location, whether it’s a major metropolitan area, or whether it’s rural.

What is the asset?

Is it an industrial building? Is it a farmhouse? Is it farm rental land? Is it a multi-family apartment unit? There’s an inherent cap rate that we measure one asset against another and this is a different way to look at risk than just reward and having a generalized principle, and we do that through cap rate. If something has a 10 cap or a 10 percent cap rate, that’s going to have a different value than something that has a five cap. Let’s go over that net.

Net operating income is equal to income minus expenses. You take all of the income, you take all the expenses away, and that’s what you’re left with. For example, if an investment property has $50,000 of net income before you look at any debt service, you have $50,000 of net income and its value in the market is a million dollars. That means that its inherent cap rate is 5 percent.

Now let’s take a look at it a different way; let’s play with the formula. Let’s say that I want to figure out what the value would be if I changed my net operating income. What would the value be? What would be the value in a different market if my net operating income was higher, but I was able to buy it for the same amount of money? Let’s take that example. Let’s say that I went to a different market and the thing was generating $80,000 as opposed to $50,000, but I was only having to pay a million dollars. In both situations, the value’s the same.

One cap rate, the first one where I was generating $50,000, is a cap rate of 5 percent. Where I’m generating $80,000 in net operating income, my cap rate is now 8 percent. That’s a 3 percent difference in cap rate and that can be very substantial. It can tell you a lot about the demographics. The higher the cap rate, the higher the perceived risk for that asset group by people that are far smarter than you and I.

It’s a summary total. It’s people that have already invested in this kind of asset class, in this kind of city, and they’ve kind of sat down and said, «Hey, this is what I am willing to pay.» “Well, this is what I’m willing to pay.” You and I have probably done a few real estate transactions, but this is the summarization of 10,000, 20,000, or 50,000 real estate transactions of that asset group, of that asset type in that community with that demographic.

The cap rate is an easy way to compare different rates of return. It also can have the formula manipulated so that if you know the cap rate, you change the net operating income. You haven’t changed the property—it’s the same property—so the cap rate stays the same, but you change your net operating income. What happens to the value?

Cap Rate: comparison of net income for the same dollar investment between different investments

Cap rates allow you to compare what you do with net income for the same dollar investment between two different investments, whether they’re the same class of investment like, for example, multi-family compared to another multi-family or the same class of investment such as a retail shopping center compared to another retail shopping center or comparing between classes of investment, comparing a multi-family to a commercial office building.

Cap rate says this is my net operating income for this dollar invested. Cap rate is a comparison of net income for the same dollar invested between two different investments. An example is, if I have $1,000 invested and I get $100 of net operating income per year, that gives me a cap rate of 10 percent.
Another example would be that I get an $80,000 return for an $800,000 investment, and that’s a cap rate of 10 percent. Let’s say that I get a $90,000 return for an investment of $800,000; that’s an 11.25 percent cap. If you go further and you get a $60,000 return, which is less, for the same $800,000 investment, your cap rate is 7.5 percent.

or, a comparison of value-driven by NOI

If you look at it a different way, if you take the cap rate formula and you take the net operating income and divide it by the cap rate, you end up with a presumed value, and this is very relevant because this is how frequently brokers discuss what a particular value is. They’ll say, «Oh, this is an eight cap and its net operating income is X, Y, Z, and therefore its value must be Y.» This is a value derivative and this becomes very, very important when you’re starting to talk to people and ask them, «What’s your cap rate? What’s your net operating income?» That’ll give you what the presumed value is but this can also be very, very confusing and we’ll go through that in a few minutes.

Given a Cap Rate of 5%

Let’s give you an example. Let’s say that you know what the cap rate is for the area, for this kind of property. It’s about 5 percent and you know what the net operating income is, it’s $100,000, so what’s the value of that property? Well, if you’re paying more than two million dollars, you’re an idiot because based upon cap rate it should be two million dollars. Now, that’s what it should be and there’s some manipulations that you can do to that but that’s, in essence, assuming all things equal, a five cap with
$100,000 of net operating income should give you a translated value of $2 million.


∆ NOI and ∆ Value

Let’s say that you change your net operating income slightly — $10 per unit per month for 100 units. You go up 10 bucks, which doesn’t seem like a lot, but you do it for 100 units and there are 12 months in a year, so you get a $12,000 increase in your net operating income. On that five cap, you changed your value by $240,000, which is a very significant portion of your purchase price, so a small subtle change creates a huge leverage effect on value.

Changes in cap rate, with the same NOI

A change in cap rate with the same net operating income dramatically changes the value. The higher the cap rate, the lower the value; the lower the cap rate, the higher the perceived value.

∆ NOI and ∆ Value

You can also use the cap rate formula to decide if you make a change in the operations of a particular facility or particular commercial office building or particular multi-family. If you change the net operating income, given that the cap rate stays the same, what’s going to happen to that value? Let’s take an example.

Let’s say you have a 100-unit apartment building and you change the rent just merely $10 per unit per month. That works out to about $12,000 per year. Let’s say that the going cap rate for that kind of
building is 5 percent. That changed the value for a $10 rent change for 100 units by $240,000. That’s a very significant leverage effect that occurs because of this division by cap rate.

Slight change in NOI can have a disproportionate effect

Any slight change in net operating income has a disproportionate effect and it’s in the same direction as the value. In a low cap rate environment – i.e., if the cap rate’s about 2 percent – a $1,000 change results in a $50,000 value change. In a high cap rate environment, so let’s say 10 percent, a $1,000 change in net operating income only results in a $10,000 value change. Why is this relevant? This
is relevant because there’s certain markets, such as in California and other places that are relatively mature, like New York, that are very low cap rate environments for the same asset class as would be compared in the Midwest.

You would think because the cap rate is higher, you’re getting better bang for your buck, but that’s not necessarily true. In a low cap rate environment, a smaller change in net operating income drives a
greater value change. This is very important because you can make money whether the cap rate is high or low. It’s really a derivative of net operating income. Keep in mind that cap rates are an explanation of risk, so if the cap rate is super high for a particular asset group and in a particular city, that just might be because that’s a very high-risk area or a very high-risk asset.

Is it really that simple?

No. Cap rates are an artifice. They’re a calculation; they’re a derivative; they’re not real. Cap rates are looking at your back or rearview mirror trying to figure out where you’re going to get to. Cap rates are a translation of existing market behavior into a number that allows a comparison between asset groups or between demographics. Cap rate is an explanation of market sentiment, and it doesn’t mean much more than that. It’s like a numerical pain scale. One person’s pain might be an eight, another person’s pain might be a two, another person’s pain might be a three. It’s a scale and it’s highly subjective.

We objectify it by putting the formula in of essentially net operating income divided by value equals cap rate, but it doesn’t mean much – it’s looking at it backwards. Cap rate is a measure of forward-looking financial safety and
wealth preservation. It’s really a marker for potential market risk in a particular environment. You should never be lulled into a sense of safety by looking at a cap rate.

The cap rate is often used by brokers to obscure the real facts, and it confuses the individual investor. You have to remember that real estate is a hyper-local environment and cap rates are typically regional. They’re usually citywide.
Nobody really defines a cap rate for a neighborhood or a three-block area. I know that in the city that I live in, if I literally drive 250 feet from one residence to another residence or one street to another street, I can go from a war zone into some of the most expensive areas in the city, so the hyper-locality of real estate is not explained by cap rates and it’s very easy to confuse.

You can make money whether your cap rate is highor low.

It’s really the property that matters. It’s the management and what the management does with the net operating income. The hyper-local environment determines the value of that particular property, and the time horizon in which you’re going to hold property. The cap rate is really a look at supply and demand and risk. If the demographics are declining for that area—i.e. people are leaving the city – you can expect that the cap rates would go up because the risk goes up. It’s proportional to the risk. Keep in mind the cap rates do reflect the net operating income, so if you have a low cap rate and a high-interest rate, you’re going to find a very tough time financing a particular property because your net operating income may not be sufficient to pay for the debt service.

We search for value-added real estate for our passive commercial real estate partners and we actively manage that investment long term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com

Questions for the syndicator
by admin | October 21, 2021 | Real Estate

I thought I would share the exact questions I get asked as a general partner, which are the same questions I ask of people that I invest with who are general partners. I invest in other people’s deals, and I have my own deals, and I want to share the commonality of questions that are super important to ask. I’m on both sides, and I want to share this information.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

How long have they been actively engaged in real estate investing?

I want to vet the general partner. I want to figure out how long they’ve been engaged in real estate investing.

• Did they just start a year or two years ago, or have they been in this for 20 years?

• What’s their track record?

• What’s their experience?

I want to look at their comparative analysis of this offering versus other offerings, look at an analysis of the things that they’ve actually completed, and look at their actual results delivered.

I want to know what they offered before and what the result was from that offering. In other words, what was their pre-offering package, and what was their final result? I want to get a copy of their previous deal. I want to get a copy of their investor communication that they’ve provided, because more than likely, how they communicated with other investors is how they’re going to communicate with me.

I want to know how long they’ve been doing syndication. I want to know what their investment strategy is. Is their strategy to just kind of shoot everywhere, or are they a highly refined sniper? Both things are good. You could have a wholesaler that was buying houses, and that might be one way to approach it – not the way that I would approach it. You could have a targeted sniper that looks at hundreds and hundreds of potential real estate deals or targets, but then picks the one out that’s super important and super necessary.

I want to know about their strategy.

• Does it correlate with the current and future market conditions?

• Can they describe their strategy?

• Can they describe how the macro trends affect their hyperlocal neighborhood, where this specific piece of real estate is?

• Do they understand what’s going on with this local neighborhood and how the job trends are going to make a difference?

I want to ask them before I do their background check:

Is there anything negative that they want to discuss with me? Is there anything negative they want to disclose? I pay very close attention to the vocabulary that people use and their style of communication. That vocabulary is going
to determine how clear and standardized they are and how their verbiage is going to come out, because if they’re not clear with me, and they’re not using standard vocabulary in the real estate vernacular, then there’s going to be a problem, because they’re not going to be able to deal with the banks. This might be their way to learn, and I don’t want to pay for people’s education.

That doesn’t mean that people don’t make mistakes. It doesn’t mean that things won’t happen.

What it means is I don’t want to pay for somebody else’s education.

I want to know if what they’re telling me is a fact or it’s an opinion, or if they’re mixing opinion as if it’s fact. Everything has a rational basis underneath it, but do they understand what that rational basis is, or are they just opening? I want to make sure that they’re using industry-standard metrics, not something that they made up, not something that they think they can derive.

I need to know what locations do they invest in?

• Do they invest in the location that this project is in, and why are they investing there?

• Are they investing there because there’s a demographic reason?

• Are they investing there because they heard this was a good place from their buddy Joe, and they’ve listened to some real estate shows and everybody says, «Austin is hot, so I’m going to Austin»?

I want to know how well they know this hyperlocal environment that they’re currently investing in. Do they have a team that’s ready to undertake the investment? That doesn’t mean that
they have to have a team that has a general partner with an attorney, an inspector, a loan broker, insurance broker, and property management. All of those things can be hired out, but is it assembled? Is it ready to go? Do they have an attorney? Have they specified out who the inspector’s going to be?

• Have they picked out the loan broker?

• Do they have a relationship?

• Have they talked to an insurance broker?

• Have they even talked to somebody who’s going to help on the taxes? Because who knows?

In certain areas like Arizona, once you buy a property, your tax rate may go up a few percentage points, whereas if you buy a property in Texas, it may go up a few hundred percentage points.

Really, the functionality is to make sure that they’re prepared for this, and that they’ve anticipated this. Not all the team members are part of the general partnership. Some are just simply independent contractors.

• If there’s going to be major construction, have they identified the team that’s going to do the construction?

• Have they identified the rehab budget?

• Who’s going to manage that construction?

• Has that construction management cost been built into this?

• Has a pro forma that matches the construction, that’s specifically going to determine the cash flow, been done on a monthly basis, rather than some sort of nebulous percentage basis of the whole year?

Because the reality is you can’t take a percentage basis to the bank. What you can do is take the monthly income to the bank, so you need to know exactly what your pro forma is going to be per month – not as a global number, like an IRR, you need to know what the cash flow’s going to be. Cash flow you can deposit. IRR you can only look at.

I want to know what asset classes do they regularly invest in and what grade of asset. If they invest in multifamily, which makes sense, but they only invest in grade A, and this is a grade C, I don’t think they’re going to do as well, because what they’re going to try to do is take a grade C and upgrade it to a grade A, and that’s never going to happen. You might be able to get to a
grade B-minus, but you’re never going to get to a grade A, and you’re just going to spend a ton of money for nothing.

If they’re used to grade C, and they’re buying a grade A, they probably may not have the skillset to deal with the grade A tenants, because grade A tenants have a much higher need basis, and you’re basically creating an experience
for them in which you take care of things. Grade C, not so much. You want to know how many years of experience do they have with a particular asset class and how many years of experience in this grade of asset.

I want to look at their credibility

Are they going to put their own money in the deal beyond the acquisition fee? A lot of times all they’re putting in is the acquisition fee, which is the money that you’re putting in, and the acquisition fee might be 3 to 5 percent of the deal. It might be 7 percent of the deal. Just depends on the deal. But if that’s all of the money that they’re putting in, they’re not putting in anything. They don’t really have anything to lose.

Yeah, they spent a lot of time. They may have looked at a lot of projects, but I want them to feel the pain of failure if there is failure. I want to know: have
they ever had a deal gone bad? I don’t invest with people that have never had a deal gone bad, because a deal gone bad creates a whole different feeling and creates a whole different set of skills for the syndicator.

I want to know if they’re sponsoring other investments. How many other investments? Where are they at? Because I don’t want their attention overly diverted. That doesn’t mean that they can’t do other investments, but I need to know how much of their bandwidth of time is going to be spent on this investment, because this is the one that’s important to me. Can they give me names and contact information of past or current clients? Can they provide contact information for other investors so I can talk to them for a reference?

Credibility questions

• Do they put their own money into the deal, beyond the acquisition fees?

• Did they ever have a deal go bad? If so, how did they handle it?

• Are they sponsoring any other investments? If so, how many?

• Can they give you the name and contact information of their past/ current clients?

• Can they provide contact information for other investors, that you can speak to them from a reference?

Deal structure

I need to know what the deal structure is.

• Is there a preferred rate of return?

• Is there a waterfall?

• What’s the split?

• How do we structure this deal?

• Do they change the split between the general limited partner after a certain threshold?

It might be 70/30 going in, but then it might become 50/50, and you need to understand that.

• Are they only allowing accredited investors in, or is it also sophisticated?

• How are they making that decision that they allowed certain sophisticated investors in? Because that could impact the entire investment.

• How many key principles do they have?

• If there are no other partners, what’s going to happen if the investment goes south? Because if there’s only one general partner, and something happens to that one key person, everything is going to go south.

• What are their sponsor fees?

• How long are they usually holding an asset for?

• What’s their investment strategy?

• Is this a value-add?

• Is this a buy and hold?

• Is this a value-add with an intended refinance?

• What are we doing here?

• Where are we going to?

I want a map that tells me exactly what they’re actually thinking. If they can’t describe this to me in probably two or three sentences, they haven’t thought hard enough about this. This investment strategy is an elevator pitch – it should be that refined.

Reputation search

I will always do a reputation search

That might include just a simple online search looking for complaints. I want to look for positive comments. I want to look for negative comments. I want to do a UCC background check. I want to do a criminal background check. I want to check if they’re a prohibited party from the Securities and Exchange Commission.

I want to look for references on social media about this specific syndicator.

• Are they on a podcast?

• Do they have other websites?

• Do they have YouTube channels?

The more web presence they have, the less likely that they are going to be anonymous, and more collateral information is available that keeps them from behaving poorly later. I want to know if I can discuss this offering with one of my trusted advisors. More likely than not, I’m going to have to sign an NDA to make sure that everything is okay.

I want to contact the syndicators’ past or present colleagues or employees, and I want to know what their opinion is. I want to ask details about the past deal that the syndicators handled.

Legal documents

When I look at the documents, I want to make sure that they’re professional – that they’re legal, they’re accurate, they’re complete. For me, they have to come over by DocuSign or one of the other electronic means. If they’re sending me paper, I kind of wonder about that, because in this day and age, that’s highly unusual. I want to make sure that all the documents are there, and that they look professionally prepared – that there’s not any typos in there.

I want to make sure that it’s an actual syndication attorney that signed off on this and not just some online tool that they’ve used to create a private
placement memorandum. I want to analyze the property, the market, the major employers in the area, the location, and the proximity to shopping centers and employment hubs. That should be described all in the offering memorandum.
I want to cross-validate it later, but I want to make sure that’s in there.

I want to review their pro forma and their underwriting and their hold period, and I want to determine for myself if this is conservatively written. Has this been stress tested? If need be, I’ll use a third-party underwriter to validate. Using a third-party underwriter to validate a plan, to validate somebody’s pro forma, is a very cheap insurance policy and can save me a ton of heartache later. Typically, this runs about $2,000 by the time that I’m done.

When I’m getting my offering memorandum, I want to make sure it was professionally prepared, that it’s not full of typos and mistakes. I want to make sure that it’s concordant with the property. I want to make sure it hasn’t been copied.

When I deal with people, I want to know:

Is this a pressure situation? Because if this is a pressure situation, it is possible that they’re making a mistake. I want to make sure that there’s been plenty of time for me to analyze it and that I’m getting the appropriate amount of attention that I need in this deal. Are they answering my questions, or are they brushing me off?

I want to make sure that they understand my particular situation, my goals, and my needs. What does that mean?

Well, if I’m investing with an IRA, it means something totally different than if I’m investing with my own cash. If I’m investing for a five-year horizon, and this is a ten-year opportunity zone project, I’m not in the right deal. You can’t manipulate an opportunity zone project for ten years and expect to make a five-year return.

I want to know:

is this a pressured sale, or was this a pressured piece of information that they’re putting out? How many other deals did they look at before they selected this one to present? Did they look at three deals and this is the one? Because usually I find that, at minimum, I’m looking at 20 to 40 deals, and sometimes
a lot more, to find one that is worth analyzing. I want to make sure that they’ve verified, that they’ve evaluated, other similar assets of similar grade in a similar demographic. I want to know why they rejected those deals.

Pressured sales?

• Is the deal sponsor giving you enough time and attention?

• Are they answering all your questions?

• Do they understand your situation, goals, needs?

• How many deals did they look at before they selected this one to present?

The actual deal

When you actually get to the deal, and you look at the market comps that are provided by the syndicator, you want to make sure that it’s in the right neighborhood. If you look at the market comp, and it’s plotted out, and it’s from two miles away, it’s probably not the same neighborhood. So, that’s not reliable. There are all kinds of online tools that you can use to validate a particular neighborhood.

You want to look at their projections of those market comps, and are they in line with neighborhood comps, not from something two miles away? I
guarantee you that if you invest in St. Louis, and you’re investing in University City, which I’ve invested in, if you go two blocks, you’re in a hellhole. If you go two blocks in the other direction, you’re in the business district, and the cost differential in housing is that one side sells for 40,000 and the other side sells for 400,000. One side rents for $350 a month, and the other side rents for
$1,800 a month – and they’re within blocks of each other.

You want to make sure that the overall offering makes sense in terms of the returns and the duration of the syndication. You want to make sure it makes sense for this particular syndicator and their background and the proposed plans. You certainly wouldn’t put up a high rise in the middle of farmland, so you want to make sure that this specific plan makes sense.

• Have they stress-tested this deal?

• Have they looked at what would happen on this deal if you went to historic vacancy rates – 30 percent vacant?

• Would they still be able to pay debt service?

• What would happen if taxes jumped 150 percent?

You want to look at the reversion cap rates. That’s what would happen to the value at a particular net operating income if the cap rate goes up.

Let’s say that you’re buying at a cap rate of six and you’re going to sell in five years. I usually increase the cap rate by 0.2 percent per year. So I’m looking at a reversion cap rate of seven, and then I want to know what it is for value. You also want to know if and who the lender is that’s underwriting. If it’s Freddie Mac and Fannie Mae, then it’s probable that you have additional eyes on this loan, because Freddie Mac and Fannie Mae have amazing underwriters. Those are the people that I use to underwrite my deals, and I think it’s very important to have that level of underwriting because it means the deal will stand on its own. Freddie Mac and Fannie Mae do not lend you money unless this deal is going to stand on its own.

You want to look at your cash-on-cash return. You want to look at your equity multiple. You want to look at your average annualized return, and the bank wants to look at your debt service coverage ratio. If your debt service coverage ratio is below 1.2, this is a no-go deal. If my average annualized return is below 7 percent, for me, that’s a no-go deal. If my equity multiple is not at least 1.9, this is a no-go deal.

I want a cash-on-cash return that’s significant. I don’t want to do deals that I’m not going to make a decent return on because I know what I can get in the market, and so I want to be very careful. When I look at the actual deal, I also want to impute what the depreciation value is to me, specifically.

The actual deal

• Evaluate the market comps that the syndicator has provided. Are the target rents competitive for this neighborhood in this grade property?

• Are the projections in line with the comps?

• Does the overall offering make sense in terms of returns, duration, syndicator integrity and background, and proposed plans?

• Have they stress-tested this deal? Vacancy rates? Taxes?

• What are the reversion cap rates?

• Is this a loan being underwritten by Freddie or Fannie?

• What’s the COC, Equity Multiple, Average Annualized Return, DSCR?

Thoroughly understand the capital stack and distributions

Equity Distribution

• Equity split at refinance or sale
• Asset management fees before or after pref
• Catch-up clause
• Refinance contingency
• Waterfalls

You have to understand what the capital stack is, so I’m going to just go over what a full capital stack is because I think it’s relevant. When you buy a piece of property, a portion of it is going to be equity and a portion of it is going to be debt. The debt is what you’re going to get from the bank. There are two levels of debt: senior debt and mezzanine debt.

Senior debt is the debt on the property if you’re not doing a rehab, so let’s just take an example. Let’s say that you’re going to buy a property.

Of that 70 percent debt, if there’s a rehab in it, it’s likely that about 50 percent of that is senior debt, and the other 20 percent is mezzanine debt. It’s a lender that is not going to give the full amount of money. It’s going to be at a slightly higher interest rate, and they’re second in line should anything bad happen. But if there’s no significant construction, then the whole thing is going to be senior debt.

So you’ve got 30 percent left that you have to raise equity for. The preferred equity gets the preferred return. The common equity gets the non-preferred return. The preferred equity is you; you’re the limited partner. So you’re going to get a split, and it could be a 70/30 split, or it could be a 50/50 split, or some combination thereof.

Inside that preferred equity, there’s usually a percentage. The first 6 percent goes to the preferred equity, and then it’s equally split, so you want to take a look at those numbers very closely. I usually map out my full capital stack. I usually just take this diagram and I put it down on paper so I can visually interpret this.

• What’s the mezzanine debt?

• What’s the senior debt?

• What’s preferred equity?

• What’s the common equity?

This is the easiest way for me to figure out exactly who’s going to get what, and what my expectations are going into this.

Then, when you look at the equity distribution – and you need to look at the equity split – what’s going to happen if it refinances versus sells? A lot of places, a lot of folks, will do an equity split at refinance or sale of 70/30, but if they’ve refinanced it, and you’re still in the deal, then the subsequent part is usually 50/50. It’s difficult to tell, but you’ve got all your money back, so for you it’s an infinite return anyway. Really, the ongoing risk is to the syndicator.

So, you want to take a look at that equity split at refinance or sale. You want to look at those asset management fees. Do they come out before or after pref? I’ve seen it done both ways. I think it’s very reasonable to do it before, and I’ve seen it very reasonable to do after. Most of them are done before the preferential payment.

There’s also something called a catch-up clause. The catch-up clause is we had enough money to pay the asset management fee. We had enough money to pay the 8 percent pref or the 7 percent pref, but we didn’t have enough money to do an equity split at all. So next year we do the same thing, and the next year we do the same thing. Eventually, the general partner catches up at the time of sale.

It’s very important to know whether there’s a catch-up clause or not. You want to know about any refinance contingencies. You want to know about waterfalls. Waterfalls are shifts in percentage based upon particular targets. There might be waterfalls because of construction. There might be waterfalls because you hit certain numbers. These are additional kickers. It’s very important to understand them.

So what’s my process?

My average time to preliminarily analyze a deal is about four to six hours. I have people, though, that help me. I’ve got two full-time paralegals. We’ve got a full-time attorney. We have an in-house financial analyst, and we outsource our Freddie Mac underwriting for an extra look at deals that have gone forward.

I look at the people first. I look at the syndicator first. Then I look at the general demographics of the area, specifically looking for jobs. Then I look at the hyperlocal environment of the particular deal, and then I look at the deal. I don’t get to the deal until I’ve vetted the people and I’ve vetted the demographics. I’ve looked at the hyperlocal environment, then I look at the deal, and the least important thing that I look at is the entry cap rate.

People always talk about, “Oh, so-and-so has this cap rate. So-and-so has that cap rate.” Almost all of my deals are value-add. So what I’m looking for is not the entry cap rate. I’m looking for the exit cap rate, and I’m looking at the net operating income. Based upon the net operating income, that’s going to drive my value. I look at that delta between current net operating income and anticipated net operating income. That’s my value-add because that’s going to drive that value up.

I rebuilt the entire pro forma. I don’t want to use unintended math errors that might be hidden in a formula in their pro forma. So I basically copy the rent roll. I look at the T12, which is the last trailing 12 months, and I also look at the T3. I copy out all of the data, and I apply the rule of thumbs to costs. I want to make sure that I’ve done my own independent pro forma.

If my preliminary analysis is good, then I usually go visit the site. If I have to visit the site, that’s me adding about another 24 to 36 hours into my analysis. I don’t need to visit every single unit in the site, but I need to get a feel of it. I don’t invest remotely.

Last 6 months of 2019

Passive investment     

  • per 17 Offers (total received 51 offers, 43 different syndication groups)
    • 6 Preliminary analysis
    • 2 Site visits
    • 1 Investment
  • did 3 passive investments last 6 months
  • added 17 syndication groups to my no-fly list

    Active direct investment

  • >150 properties analyzed (actual site visits on 19)
  • 4 offers made (full due diligence)
  • 1 purchased and closed

In the last six months of 2019, in my passive investments, per 17 offers, I received basically 51 offers in 43 different syndication groups. From these 17 offers, I had six preliminary analysis, I had two site visits, and I had one investment. So it went from 17 to 1. I’ve basically done three passive investments for the last six months, and I added 17 syndication groups to my no-fly list.

These are 17 syndication groups that sent me offers, and I did the preliminary analysis on the people in the syndication group, and they had significant red flags. I know that I don’t have to reanalyze their deals. I might wait a year or two and let them back into my group to fly, but for the next year or so they’re locked out. I’m not even going to bother looking at their offers, because there’s something in there that I’ve identified in that particular group or those particular people that’s super dangerous.

It could be an SEC violation. It could be a pending bankruptcy. It could be a bunch of UCC liens. It could be some other criminal behavior. So, they go on my no-fly list so I don’t have to analyze them again. When I look at my
active direct investments, I looked at over 150 projects. I did actual site visits on 19 of them. I made four offers, and then did full due diligence with those four offers. I purchased and closed one. Greater than 150 down to 1, versus passive investment 17 down to 1.

Final thoughts

Syndications are long-term prospects. You really need to understand the people that are in the syndication, because most syndications are going to outlast the average marriage in the U.S., which is about 8.2 years. The average syndication deal is between five and nine years right now. If you’re investing in an opportunity zone, that’s a minimum 10-year hold, which definitely outlasts the average marriage in the United States.

You’re creating a contract and offering memorandum. You’re looking at disclosures. You’re looking at PPM. These are all just the prenup to the marriage. The longer the syndication, the higher the risk, the greater the mischief that can go wrong, and the less likely that that prenup will even apply.

You want to make sure that there’s always a contingency plan to remove a bad actor. You don’t want to be stuck with a bad syndicator, and you don’t want to get bamboozled by beautiful graphics and beautiful pictures that somebody’s put together. I want the data. I want the math. The pictures are nice, but they don’t mean much. I can’t eat a picture. I can’t put a picture in the bank. I want to know what the cash flow is that’s associated with these beautiful graphics and pictures and how I’m going to get that into my bank.

Again, it’s a combination of the syndication team, the demographics, the hyperlocal environment, the actual deal, making sure it’s stress tested, looking at the exit, and how does it interact with my specific situation?

If you need help underwriting a deal, let me know. Just send me an email: info@redpillkapital. com. If you need us to help you underwrite a deal, it’s pretty cheap. It’s about $1,900, but that’s not specific, because some deals are very, very complicated. But $1,900 is really cheap compared to getting into a really, really bad marriage.

Now this doesn’t mean that we’re going to go do a site visit for you, because that takes a lot more time, but at least we can help you with your underwriting and the reputation analysis research.
That’s one way to do it. But if you just have a couple of questions, that’s always free. Just email me info@redpillkapital, and just put in the subject line, call me. Give me your number, and we’ll chat, because we want to help other investors. We don’t want people to go into bad deals.

So what’s Red Pill Kapital?

Red Pill Kapital is a physician-owned commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to five because physicians don’t work nine to five; we probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital right for you?

Your passive investment provides you with an opportunity to earn an income without the nine to nine, because physicians don’t work nine to five. We probably work six to nine. We create a unique business strategy that fits your financial investment goals, because we understand the specific needs of physician professionals.

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at info@redpillkapital.com and that’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.

Find us at Redpillkapital.com

14 secrets of successful passive real estate investing
by admin | October 19, 2021 | Real Estate

Hi. I’m going to be going over 14 secrets of investing in passive real estate. These are the things I wish someone had told me or things I had to learn the really hard way. You might even call it, “How not to lose millions of dollars when you start out.”

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

1. Operator integrity (each GP)

You want to know about the operator integrity of each of the general partners. You want to know exactly what their experiences are. You are passive in this deal, but the general partner is active. They’re responsible for maintaining and operating this specific investment for you. You’re the customer.

But unfortunately, it’s not that simple. The reality is being the customer, you have to be extremely well informed about the investment to the same level as the general partner, and not only that, you have to make sure that that general partner is going to be well behaved during the timeframe of your investment. You have to do a background check on each and every general partner. You want to make sure that you’ve done a UCC check. You want to
make sure that there aren’t any security law violations. You want to check their creditworthiness. You want to see how close they are to financial solvency or if they’re using your money to solve a problem hidden somewhere else. Are they undergoing bankruptcy somewhere else and this is a way for them to raise a bunch of money and then take advantage of a situation where you’re passive, they’re active, they’re in control, and they have your money?

You want to understand the specific roles of each team member

• Who’s going to manage this asset?

• Who’s going to manage ongoing after the purchase?

• Who found the deal?

• What’s the relationship of the deal finder to the property?

• What’s the relationship of the deal finder to the real estate agent?

You want to figure out who did the underwriting.

Is the underwriter somebody that’s independent or is the underwriter somebody that’s so dependent upon this deal going forward that they might create difficulty for you by changing the numbers or changing the perception or not adequately stress testing the deal?

You want to figure out how they’re raising the capital, and that has a huge impact on your expected rates of return.

If the capital raise is being done in a global way and there’s a lot of people coming in – potentially customers that could be passive – you’re going to find out that your rates of return will drop. But if it’s a limited raise, if it’s just friends and family, it’s a small group and it’s not actively being marketed to the general public, you’re going to find that your rates of return are higher.

You want to figure out who the key principal is.

Who’s backing the loan? Who’s got the assets that the bank is going to be looking to come back? Because it’s not going to be you. You’re passive. If this is for you, a passive investment, the money that you invested in the only money that you have at risk, but the key principal, whoever that is, they’ve got everything at risk. They’re on the hook potentially for the entire loan.

Understand the roles of each team member

2. Incentives integrity

The key thing is, do you know, do you like, do you trust the general partner? That’s the most important thing. It’s not so much the deal. It’s the general partner.

You want to make sure that the general partner’s incentives are aligned. You want to make sure that they’ve put money in the game, too, because if they didn’t put any money in, they’re not really aligned. Whether you win or lose, they’ve got nothing to lose. Now, there are going to be acquisition fees, no matter how you do it. There are always acquisition fees in any project, and the acquisition fees are not something you should run away from because if there’s no acquisition fee, that means that you’re basically taking a very significant gamble that they didn’t look at a bunch of other deals. The acquisition fee pays for the general partners, whoever was doing the asset analysis, whoever was doing the underwriting to have looked at possibly hundreds of other deals and exclude those from an offering to say, «Look, I looked at 50 other deals. I traveled to 25 other localities and those weren’t good deals. I’m not even going to present those to you.» But that stuff costs money, so the acquisition fee is used to defer or defray the cost for the deals that you didn’t look at. It’s to get rid of the bad deals.

Now, if you’re going to do major construction—and I’m not talking about painting, I’m not talking about changing out a bathroom—but if you’re going to do major construction roundup or you’re going to massively rehab a project, there are going to be construction management fees.

You want to make sure that they’re between five to 10 percent. Obviously, the bigger the project, the greater the construction management fees. You’re going to have to pay somebody to manage the construction because you’re passive. You’re not going to go out to the site. You’re not going to be doing this yourself. If there’s no incentive for the general partners to manage that construction well and efficiently, you don’t get as good of a deal.

The asset management fees are ongoing fees charged to this partnership, and what it is is typically between one and two percent, and they’re used to manage the managers. You have to have somebody who manages the managers – somebody that directly interacts with a management company and makes and holds the management company accountable, to make sure that you’re maximizing your depreciation, to maximizing your marketing, to make sure that all of your assets are protected. If there’s no asset management fee, people are going to lose interest, and you want to make sure that’s between one to two percent. That asset management fee says, «Hey, look. We’re going
to be looking very closely at this project and we want to make sure that nobody screws this up for us.»

You want to make sure that the general partnership returns are only after your preferential return is paid first, and so there’s usually a split. It’s typically between 30 to 50 percent of that annualized or quarterly or monthly return that gets paid to the general partner. This keeps them engaged because if that’s not engaged if there’s not a heavy incentive for them to maximize your return on investment on a cash-flow basis, things can fall through the cracks because the end result is at the end when you sell the thing. That’s an equity position, but the cash flow basis is what do you make every month? What do you make every quarter? Some partnerships payout annually, but most of them payout quarterly. You want to make sure that they maximize your cash flow and that they’re sharing in that, but after they’ve paid your preferential return.

In terms of capital paid for a successful deal, that’s the difference in price between what you purchased the asset at and what you’re selling it at. Typically there’s a split at that, and so that’s typically a 70/30 all the way down to a 50/50 where you’re getting 70 percent and the general partnership’s getting 30 percent, or it could be 50/50 where you’re getting 50 percent and the general partnership is getting 50 percent. I’ve seen some variations of this, and depending upon the class of stock, there may be some variations that have to occur, but that’s your equity raise, so a big chunk of your money comes as cash flow on a monthly or quarterly or even yearly basis. The bigger chunk — the real income — comes when you sell the property or refinance the property.

3. Deal integrity

You’re looking for the integrity of the deal itself now. You’ve trusted the partnership; you’ve trusted the people in the partnership. Their incentives are aligned, but now is this a good deal? This is very important. This determines how this deal operates, and in deal integrity, the number one thing you have to look at is the demographics. Is the area that you’re investing in growing? Is it stable or is it dying?

You have to realize that real estate is hyper-local, and hyper-locality means neighborhood, street by street. It’s not that I’m investing in Texas, it’s not that I’m investing in San Antonio, a city in Texas, it’s that I’m investing in this three-block or seven-block or 10-block or 14-block neighborhood. It’s that hyper-local. You can’t tell me that if I invest in Texas, I’m going to increase my
real estate value by 7 percent because there are places in Texas that are going to increase their real estate value by 30 percent and there are some areas in Texas that are going to increase the real estate value negative 30 percent.
So it’s hyper-local. It’s not the state, it’s not the city, it’s not a ZIP code. It’s a neighborhood, and that hyper-locality is very important.

There are certain tools that we utilize to determine the hyper-locality of a neighborhood. You want to look at job growth in the region. People live in the region, but they live in a neighborhood, and very specifically jobs come to the region. They might be in industrial parks, but people don’t live in industrial parks. They live in neighborhoods. You want to look at population growth for that city because it’s almost impossible to get direct population growth for a neighborhood, but you can get population growth for the city.

You want to look at household income and its affordability.

Is the price that you’re paying close to what it would cost for somebody to just go ahead and buy? Then there’s a lot of competition for your product. If, on the other hand, the price that you’re paying per unit is relatively low and the cost of them purchasing a similar amount of square footage is high, it’s highly likely that they’re going to rent instead. That concept is called affordability. It’s a comparison for price to rent versus price to buy for a similar sort of asset.

When they underwrite this deal, if they’re using non-recourse lenders, that’s a really good thing because the non-recourse lenders are an additional set of eyes on this deal. They’re going to hire an outside independent consultant or they’re going to use an inside independent consultant who’s going to stress test the deal. They’re going to figure out: is the information being provided accurate or inaccurate? They’re going to look at that cap rate. They’re going to look and see what your start cap rate is. If it’s a value-add deal, it doesn’t matter so much, but if it’s a stabilized deal, the cap rate is what you’re going to be making, so you want to look at how this deal is being underwritten. Is this deal being written, underwritten, as a cap rate with a value add? Then you want to look. That incoming cap rate doesn’t mean anything, but if this is a stabilized deal and your cap rate is 4 percent and your interest rate is 4 percent, it doesn’t leave a lot of room to make cash flow. Now, it may appreciate over time, but the cap rate is going to determine your cash flow.

Demographics before underwriting

  • Hyper-locality
  • Population growth
  • Job growth
  • Household income and affordability

Underwriting this deal

  • Non-recourse lenders add additional layers of due diligence
  • Cap rate and value add

You want to make sure that the deal is stress tested

• That means what would happen if occupancy dropped to its historic low?

• What would happen if prices would drop to their historic low?

• What would happen if cap rates went up?

Because the higher the cap rate, the lower the price, and so you want to be able to predict your monthly or quarterly income, and you want to predict your exit as well.

4. Property evaluation

You obviously need somebody that’s going to look at that property in real-time before you’ve invested. Typically, it’s done with a property management company that’s going to come in and long-term manage that deal. You want to make sure that each and every unit has been walked, that each unit has been memorialized by photography, so they’ve looked under the sinks and photographed the stuff, that they’ve looked at each appliance and categorized it.

• How many dishwashers will need to be replaced?

• How many refrigerators will need to be replaced?

• What’s the likelihood going forward that we have to change this electric system?

• Are there GSCFIs in the wet spaces?

You want to look at each mechanical system.

What’s the lifespan of the motors that are expected for this HVAC unit? One of the things — a horrible mistake that I’ve made — is I forgot to have a sewer scoped once. That was a $15,000 disaster.

You want to look at the usable lifespan of the roof.

I did a project once that I was able to identify that the roof was at the end of its usable lifespan, and right before closing when I got my roofing report back, I was able to get a $400,000 credit on a usable lifespan of a roof on a commercial strip center. It’s very important that you know eyes wide open going into a project what’s going to be happening. Foundation work may sometimes require a specialist. You can’t just look at a foundation and say, «Oh, this is awesome. This foundation looks fine.» There are things that people hide in foundation work with stucco or dry wall that you can’t identify right now, and they may move subtly over the next six months, a year, or five years, and then when you’re trying to sell, somebody does a foundation report and it decreases your value by 30 percent, and all of a sudden the big profit that you were going to have doesn’t even exist.

A lot of lenders require flood letters.

That determines, is this property in a flood zone? Now, you have to realize that flood letters change over time and historic areas that used to never flood are now starting to flood, so you want to get a professional evaluation. Is this area prone to flooding? When you do your memorialization of each unit, you’ll be able to identify if there’s mold underneath the sinks. You’ll be able to identify if your tiles have asbestos in them. Is there lead in the paint? Are there other hazards that are lurking under the ground such as petroleum from a leaking gas station nearby? These are all environmental issues that become very significant because it’s not just that you’re buying this property – you’re eventually going to be selling this property, and you may be selling to somebody who is very, very detail-oriented, and this may destroy your value if you don’t yourself become very, very detail-oriented.

5. Comparative Market Analysis (CMA)

You want to make sure that they’ve done a comparative market analysis, not just of what’s the value of this property because the value of the property and commercial is typically a derivative of cap rates.

What you want to figure out is that your comparative market analysis for rental rates going forward for this particular asset, this class of asset, this space, this kind of amenities, is accurate. Remember I said that real estate is hyper-local, so you can’t use a rental rate comparison for a property that is on the other side of town. You can’t use a rental rate comparison for something that might only be four or five blocks away if it’s a different neighborhood.

So, I typically do all my comparative market analysis on a basis of the neighborhood, and usually when I have a property team go out and look at the specific property that we’re doing and we’re taking photographs of each and every single unit and we’re memorializing each and every single unit, the next day we do go out and do a comparative market analysis. We visit all of the local neighborhood apartments, all of the local neighborhood areas, and try to get an idea of what are these people charging and how relevant is our rental rate to their rental rate.

You want to be able to determine what’s going to happen to your rental rate by your asset class, with your level of amenity, and based upon the demographics that you’re both serving. If the apartment three blocks away have twice the household income that your apartments do, you’re really living in two different neighborhoods, so there could be a significant difference.

I always do a reputational search on each and every unit because that tells me in terms of multifamily, what’s the reputation of the management company that’s currently there? That’s one of the easiest things to fix. Now, if it turns out it’s a horrible result, then I may have to change signage and change the name because that’s the only way I can get away from the original reputation, so I have to build that into my cost, that I’m going to have to re-market the entire system and change all of the signage. Typically, I also change the color scheme so that the drive-by looks totally different.

6. The value add plan

You want to look at their value-add plan if that’s the way that they’re going to be going. One of the things that I always look at is what’s my occupancy or vacancy? If there’s almost no vacancy, that could be a problem. If I’m running close to 100 percent occupancy, what that tells me is either the management company is really lazy because they don’t want to raise rents and nobody wants to move, or I’ve completely distorted this market. Now, the other thing is if there’s a high vacancy – i.e. a low occupancy – that could be a problem, too. Have I already reached the maximum amount of rentals that I can get to, or is it so mismanaged that I can’t get customers in the door?

In my value-add plan, I also look for sources of net operating income. What are the other things that I can add that will generate my net operating income? Because the net operating income will determine the value because NOI divided by cap rate equals the value change that I’m going to get. So if I can get a slight increase in the laundry or start charging some parking fees, if I can get some cable or internet fees, if I can start charging for pets, if I can force the tenants into paying a proportional share of the utilities, if I can increase the water efficiency, I’ve dramatically increased the net operating income. Based on the cap rate for that area, I could have dramatically increased the value.

The areas that I look for in a value-add plan is I do marketing first. I increase the inflow of customers. Then I look at areas of increasing that operating income. Then I start doing things like curb appeal and kitchen and appliances and baths, and I only keep my rehab budget, which is a large capital expenditure, after I fix the first problems. It’s a tiered approach. You don’t want to do a major rehab budget and use your cash flow to pay for it if you haven’t even fixed your marketing first. You want
to get maximization of the lowest-hanging fruit first before you spend a ton of money on capital expenditure.

7. About this deal structure?

Now, look at your deal structure. There are two kinds of essential deals that people look at 506b and 506c. Do you want to know what the structure of that deal is? A 506b, you can sell for credit and say that you’re an accredited investor or you’re a sophisticated investor and
they’re letting you into the deal, but this deal isn’t advertised to a lot of people. Usually, I find that my rates of return are higher in a 506b.

A 506c says, «Hey, I’m a verified accredited investor. Third parties verified me, but this deal might be advertised to a lot of people and it might be heavily advertised on Facebook and it might be advertised on other areas and portals.» Frequently, I find that my rates of return are a little bit lower here. You want to know what your investment minimums are and what your investment maximums are because if your investment maximum is low and you’re trying to deploy cash, your cash multiple may not be that good. I have a minimum amount that I want to invest and I want to know that I can deploy that capital and it’s going to be safe and I’m going to get a multiple of that capital coming back.

You want to know what’s the time element for your soft commitment and when do you go hard on your commitment and when do you have to actually transfer that capital? I’ll talk about transferring the capital in a second.

You want to review the detailed subscription agreement. Was this professionally prepared? Did an attorney put this together? Does it make sense? Did you read the thing? I find that the private
placement memorandums, most people don’t even read. Take that nondisclosure that’s in there very seriously. If you’re taking the information and sharing it with friends, that’s not cool because if they disclose that information, especially if there’s information about tenants in there, you could jeopardize your position in this project and you could actually be sued. Take the nondisclosure very seriously in sharing that information outside you.

You want to know: should you visit the site? Can you delegate this? Most passive investors don’t visit the site, but occasionally if you’re in the neighborhood, if you live nearby, it might be worth your while to visit that site.

One of the biggest mistakes I’ve ever made was unfunding or transferring capital because I screwed up my routing numbers, so I always validate the routing by two different modalities – typically by a phone call, email, or text. I use two different methods to verify and validate that routing number so that my money doesn’t end up in Uzbekistan.

8. Financial integrity

You want to look at the financial integrity of the deal. Have they set up strategic reserve accounts to hold capital expenditure budgets? Because you don’t want to use cash flow for capital expenditure. Capital expenditure should be set aside at the beginning so you can predict it.

One of your biggest expenses in real estate is going to be your taxes, and you want to make sure that they’re setting aside money through the year to pay for the taxes. You don’t want a cash call on this thing at the end of the year. You want a separate operating account. That operating account is what the management company works out of, and then they sweep the operating account to the rest of the accounts.

You want to make sure that the reserve accounts are there so that there’s an adequate amount of money for unexpected things and there’s an adequate amount of money for expected things. You know that a particular lifespan of a roof is going to be 30 years. You know that refrigeration equipment lifespan is five years. You know that everything such as carpet has a certain lifespan. You know that flooring has a certain lifespan. You know that painting has a certain lifespan, so you want to be able to predict that and have reserve accounts that account for that in a continuous method. The longer the deal – the longer the length of the deal – the risk of the deal goes up because a lot more things can happen. Economic risks can happen, property risks can happen, and demographic shifts can happen, so the longer the length of the deal, your risk goes up. If it’s a 20, 30-year deal, it’s much riskier than a three- to a five-year deal.

Most people think that the larger the deal, the higher the risk. That’s simply not true. The larger deal decreases the risk, and the reason is that in a larger deal, you’re forced to have professional third-party maintenance and management companies. You’re forced to have additional oversight and you get economies of scale. In construction, you get economies of scale and maintenance. You get economies of scale in marketing, and individual occupancies have much lower individual impacts on your cash flow. The more the number of units, the greater the incremental income enhances the value. If you’re trying to increase rent by $10 a unit in 10 units compared to $10 a unit in 100 units, the net operating income is much greater at the same cap rate, and so the value is tremendously greater.

9. Communication integrity

You want to make sure that they communicate with integrity. You don’t want to get communications on a monthly or quarterly basis that have a bunch of fluff. You don’t care about family pictures. You don’t care about Fluffy the pet. You don’t care about travel pictures. What you care about is the property.

I recommend that you have pictures and videos, and you also have net cash flows that go hand in hand with marketing reports, and all of this is archived so that you can go back and compare month over month over month and look at each of the reports and validate their integrity.

I set up a separate Excel spreadsheet for each individual investment that I go into and I archive all of the information in a single folder, and then I have a spreadsheet that tells me: This is my expected date of next payment, this is my expected rate of return, and when the deal opens and when the deal closes, I revalidate. I go back and look at what they promised and looked at what they delivered, and I want to make sure that they underpromised and end up overdelivering. I want to make sure that there’s integrity in that communication so that I don’t get surprised by unusual things.

The management company should be generating a marketing funnel report for you.

• How many people called about the property?

• How many people came out and visited the property?

• How many people submitted an application for the property?

• How many people did we reject from that application?

• How many people did we accept from that application?

• How many people moved in?

• What’s our expected occupancy a year from now, six months from now, a year and a half from now on a month-to-month basis so you can predict looking forward when people are vacating units?

• Do I need to gear up marketing the two months or the one month before a high vacancy is expected?

You want to make sure that there’s a comparative market analysis being done in real-time. You want to make sure that people are looking at the rental rate changes and you get that done at least on a monthly or quarterly basis so you can see where your property’s positioned compared to the market. You want to be very wary of vacancies. Is my vacancy high or is my vacancy too low? If your vacancy is too low, that means you’re not charging enough. What kills most deals is turnover. If you have tenants moving in and tenants moving out, you have to reset that unit nearly continuously. If you have to reset the unit, that costs significant amounts of money and may destroy your cash flow.

10. Compensation model

On the compensation model, look at the preferential return.

11. Deal exit

You want to look at the deal exit. Are they applying the right cap rate for the expected deal exit?

I typically increase my cap rate by 0.2 per year, so 20 basis points goes up per year of the hold. So in a five-year deal, I’m increasing my exit cap rate or my reversion cap rate, by 1 percent. This is really important because this is part of the stress test. Now, it may not go up by 1 percent, but what a 1 percent increase in cap rate does is it forces the value down of the project for the same NOI, and this gives me a better prediction of what I could exit this deal at. Now, I’m hoping that my cap rate stays the same or drops because then my value goes up dramatically, but I want to expect that it may go up, and it really depends on a lot of factors in the economy at the time of the exit.

Does that bring us to the concept of is the exit a hard exit or is there a lot of variability in it? I prefer a lot of variabilities because if there’s an opportunity to hold a property for another year or to exit early by two years to get a better price, I want that executed.

You also want to look at the deal exit. Is this a refinance or are they reselling? You want to look at the contingency plans in case the general partnership becomes incapacitated. Let’s say that it’s a small partnership that’s running the GP. What happens if that general partnership becomes incapacitated? Who’s going to run this deal and how are they going to get you all the way to exit and make that money?

Some people are doing a lot of investment in opportunity zones because there’s a deferral on your taxes in opportunity zones. This is not relevant to you if you’re investing through an IRA. The opportunity zones really don’t mean much to you. Now, if you’re investing directly, opportunity zones do mean something to you, but the thing is a 10-year exit dramatically increases your economic risk. You’re marrying this general partner for 10 years. You really have to vet that general partner, and usually, most of my opportunity zone projects are significant value-add and rehabilitation, so that can have a very big impact.

12. Is this deal worth it?

At the end of the day, is this deal worth it? How much am I investing, how long is the deal, what’s my return, how often do I get paid out, and what’s the deal split?

That IRR really is impacted, and that IRR is the internal rate of return. What that tells you is what is my net present cash flow or what’s my net present cash for a future cash flow, and depending upon the timing of the distribution, it can dramatically change the IRR. That may or may not be relevant to you because if you’re using your cash flow for living expenses, that IRR is really important, but if you’re just simply accumulating the cash, that IRR may not be as relevant and your total return may be more relevant.

13. Deal metrics
(beyond the pref and split)

You want to look at the deal metrics beyond simply the pref and the split. What’s the cap rate against the interest rate? Is this a value-add? Is this not a value-add? What’s your reversion cap rate? These are all relevant.

You want to look to make sure that they’re using the leverage because if they’re not using the leverage, and they’re using only your money, it
dramatically reduces your return because typically using leverage gives an extra set of eyes to the project with the bank. It’s a one-to-five ratio and usually, the interest rate is far below the cap rate, so you’re making money off of the bank’s money without taking a significant additional risk.

Cap Rate

  • Interest rate
  • Value add
  • Reversion cap rate

You want to look at your cash-on-cash return. You want to look at your annualized return, which is all of your money back divided by the number of years. You want to look at your equity MURP multiple, which is how much money did I make against how much did I invest. IRR we’ve kind of gone over, which is what’s my value of cash today based upon a future revenue of cash flow, and that can be quite detailed. That’s something that I typically will plot out on an Excel spreadsheet and look at, but it’s not really relevant as much to me as my annualized return rates.

14. Your personal situation impacts

How are you going to be investing? Is this through an LLC? Are you investing directly? Is this through a trust account? You want to look at does this project allows 1031 exchanges? If it does, they have to set up tenants in common for you. Does this project accept IRA or Roth, and if it does, what’s the impact on UBIT? If they use leverage, you’re going to be paying taxes on some of this gain at the highest tax rate there is, and you can’t escape that. You may end up paying trust taxes that are very significant.

What kind of investors are they taking? Is it 506b? Is it 506c? Are they taking accredited or are they taking sophisticated? Accredited is that you have an annual income of $200,000 yourself or $300,000 joint income for the last two years or an individual or joint net worth value exceeding $1 million. A sophisticated investor is somebody who knows something about this and is a friend, and the deal sponsor knows them well, and that’s Aunt Sally who doesn’t have a lot of money but wants to invest in the deal. That would be typically a 506b and it cannot be advertised.

You want to look at the time horizon.

Will I need this cash in the near future and does the time horizon match my requirements?
If I need the cash in two years but the time horizon on this deal is five, this is not a good deal for me.

You want to look at what if

• What if I have an emergency situation? A medical situation?

• If I have to do a liquidation?

• What happens if my preferential returns are delayed?

• What happens if my entire investment is lost?

• How will this impact me?

It’s not just the deal, it’s you, and you need to make sure that you fit in well with this particular deal. Ultimately, how much am I putting in? How much do I get out and when? What’s the likelihood of losing it all?

You’ve got to look at the whole package and look at the tax implications of depreciation, and most importantly, you have to know, like, and trust the deal sponsors.

Red Pill Kapital is a way for us to invest with you. If you’re looking to enhance your financial wealth and truly live the life that you deserve, then this is for you. If you’re an accredited investor and you’re interested in learning more about passive investing, this is probably for you. If you’re interested in investing alongside us, this is probably for you. The thing is, we don’t need your money. We have money. We’ve done huge projects. What we want to do is do bigger projects, create more leverage. The bigger the project, the lower the risk, the higher the return. We only make money if you make money because we’re aligned with you.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com.

Business Secrets About Money That Most Physicians Were Never Taught
by admin | October 14, 2021 | Real Estate

 

As doctors, we were never taught anything about money in medical school. We have been purposely kept in the dark, while all of the people around us are working less and becoming more wealthy.

Most doctors make a decent living, but that doesn’t mean they are wealthy. Physician salaries and income may be high, but their expenses are also high. If you stopped working today, how many months would you have, before you ran out of money?

Just because we are doctors, doesn’t mean we can’t get seriously injured or sick.

If you suddenly couldn’t work due to an accident:

  •  How many months would you have, before you had to move to a cheaper house?
  • How many months would you have, before you started to deplete your savings?
  • Did you know that disability insurance doesn’t cover your full income, and unreimbursed medical expenses bankrupt the families of most physicians?
  • Have you anticipated an additional $285, 000 in medical expenses?
  • Have you anticipated spending $128, 000 a year for the next 10 to 20 years if you have to go into a nursing home facility?

If any of those questions scare you…

Consider this your wake-up call, your chance to take control of your own future.

Physicians today face huge challenges in a rapidly changing healthcare environment:

  • Declining
  • Regulation and compliance
  • Evermore patient demands and never enough time to help

It’s no wonder the burnout rate is so high.

How are we supposed to help our patients when we are struggling with our own financial well-being?

Do something about it!

As a physician, the last thing I thought I would have to worry about was money.

I don’t know why, but I really thought having a 401K and investing in the stock market would let me retire wealthy. I was seriously mistaken. Blindly trusting my money to stockbrokers, promising an 8-10% return, does not actually lead to financial freedom.

As physicians, we assumed that if we simply took care of our patients, we would make more than enough money and that we would never have to worry about money. That eventually when we retired, we would retire with freedom and the resources to enjoy it.

  • We assumed that by doing good for others, we ourselves would be rewarded.
  • We assumed that because we have a high salary, we would never run out of money.
  • Most of us grew up thinking that even talking about money was a bad thing.
  • Most of us grew up thinking that even talking about money was a bad thing.
  • Unfortunately, we have ignored our financial education, to our peril.

We trusted in our financial advisers, to guide us in saving for our eventual retirement goals, but in reality, we are putting money into their pockets and they really have nothing to lose. They charge us a fee, whether they make money or not, and if we lose everything, they lose nothing.

Our hospital administrators, our governmental officials, our financial advisers, even our gas station and dry cleaner owners have more wealth and time freedom than we do.

The system is rigged against us. We get taxed at the highest levels and have nothing left to show for it.

At the end of the day, most physicians end up dying broke and broken.

Did you know about 10,000 people retire each day in the U.S.?

That’s about 300,000 people per month.

Almost 40 million households have no retirement savings at all, according to the National Institute on Retirement Security.

Close to two-thirds of seniors cite finances as the primary reason why they remain at work, according to a recent poll by Provision Living, a provider of senior living communities.

The problem is that:

  • One year of nursing home care, in a semiprivate room is projected to be $128,100 in
  • A 65-year-old couple retiring in 2019 can expect to spend $285,000 on healthcare costs in retirement
  • But working seniors only had an average of $133,108 saved for

But what does this really have to do with physicians???

I just happened to be making post-anesthesia rounds in the psych ward of an urban university hospital, on a trauma patient that one of my residents had managed to break a tooth on… Not the usual place I would want to find myself at 9 pm after a busy day, but the show must go on.

A patient in a wheelchair motioned me over. He seemed to know who I was, but I had no idea why this disheveled “patient” wanted to talk to me.

It turns out, he had been the head of General Surgery at that very hospital, three years previously, about a year before I had started.

 

In the OR’s the nurses had regaled me with battle stories about him, stories about life-saving heroics, but I hadn’t met him until that day.

For that day and the next few days when I could steal away a little time, we talked. He needed to pass on what he had learned, what had happened. What had gone right, what had gone wrong, what he wished he had done differently.

He had worked nearly a hundred hours a week for his entire adult life. He was a doctor’s doctor.

He was extremely skilled. He had sacrificed his personal goals to help his patients.

He had made all kinds of money, but he wasn’t in it for the money.

He let his stockbroker manage it. The market would have its ups and downs, but he knew that it would always recover. Because of the stock market crash of 2008, the broker had lost nearly everything. His broker had been actively trading the account as the physician was getting closer to retirement and the overall return wasn’t going to be quite high enough to retire.

Unfortunately, the stock market crash came unexpectedly about 3 months before he got diagnosed with metastatic prostate cancer.

By the time he got through treatment and got his head above water, the market was decimated.

He ran out of disability money, he ran out of savings, and eventually, he ran out of hope.

He didn’t die from cancer, he died from desperation and fatigue.

I had met him in the last few days of his life. I had met him too late.

Nearly every week, I hear of yet another physician who’s burned out.

  • A physician who has to close their practice or sell to the hospital and then gets pushed out of their
  • A physician who seemingly is on top of the world, but in reality is cutting corners to make ends
  • A physician who can’t get off the treadmill of work, or he will lose

 

The vast majority of physicians realized they were running out of money… but after they had retired.

If you want to live off even half of your final salary in retirement, you need to save at least 40% of your income over the next 30 years.

This assumes a historical return of 8-10%. Unfortunately, the projected stock market return is 6% and the Fed inflation target is 2.5%, so the real rate of return is closer to 3%.

Olivia S. Mitchell, professor of insurance/risk management and business economics & public policy, and executive director of Wharton’s Pension Research Council at the University of Pennsylvania.

The reality is that although physicians make a lot of money, they also have huge bills. At the end of the day, they will run out of money just like everybody else, but faster…

Let me share a few business secrets about money, that most physicians were never taught.

Are you looking to enhance your financial well-being, and truly live the life that you deserve?

Are you looking for a way to pay less in taxes and keep more of your money?

If you’d like to find out more, Join our physician investors club,

where you can schedule a phone call with me, and I will send you a free book “Financial Freedom for Physicians.”

What breaks my heart.

A fifty-three-year-old female physician colleague reached out to me because she needed a loan.

She had been getting bank loans because she couldn’t make ends meet, despite the fact she made a good living. She had some taxes she had to catch up on, she had college

for her kids she was paying on, she had car payments, and she had gotten behind on a mortgage.

She hadn’t been able to save anything, let alone save enough to retire. As soon as she wasn’t feeding her financial advisers with investment cash, they had stopped returning her calls.

When the bank stopped lending to her, she went to private money loans through loan brokers, who charged her a hefty fee, that she thought she could just pay off with her next few paychecks.

She had been struggling financially, and only turned to me because she had heard that I had helped another physician avoid financial catastrophe when he became disabled from a bad car accident, and I had helped him.

She assumed that I had given that physician a loan until he got back on his feet. I hadn’t given him a loan; I had given him something far more valuable.

I had given him the information and guidance to get off the paycheck treadmill, to no longer be a wage slave.

I had given him the tools to invest money passively, so whether he worked or not, he would still make money.

I gave him the tools to reduce how much tax he was paying, over 40% of his paycheck.

I had shared with him why the stock market was a veneer of truth, covering all manner of unspeakable financial rot.

I had shared with him what true wealth was, the freedom of being a physician, helping patients, and not worrying about if there was going to be enough money to pay for his daughter’s wedding.

Physicians need true financial education and specific tools to understand these complexities, so we stop getting taken advantage of.

So what are we supposed to do?

So my fifty-three-year-old physician colleague got her financial house in order. She changed her relationship with money and managed it like you would manage a ventilator in the ICU. She had been on life support, but now that she knew how to make a change, she could wean herself off of life support.

She paid off her highest interest loans, she stopped spending as a distraction, she set up a reserve bank account for investment, and eventually rolled over her non-performing

retirement accounts into performing assets that not only generated monthly cash flow but also gained in value. Assets that didn’t fluctuate minute to minute, hour to hour, day to day. Tangible assets that would help her retire, and that her kids could eventually inherit.

Financial education is not something physicians are taught in medical school.

We sacrifice the majority of our adult lives to help patients, to help save their lives. We’ve spent so much of our brainpower caring for our patients, we ignore our own financial future.

The financial information we get is filtered through the lens of our financial advisers who tell us to invest for the long-term, in a diversified portfolio of stocks, bonds, and mutual funds.

This couldn’t be farther from the real truth. We are being bamboozled by paper asset managers; we have been blinded to the truth.

At Red Pill Kapital, we are physicians just like you. We recognize your time is valuable, and are here to help simplify and streamline the process for you.

Our mission is to empower you, as a physician investor, by providing you with a clear and concise map to navigate real investments:

  • That help you reduce your taxes
  • That keep pace with inflation
  • Those are passive so you can focus on your true passion to help patients

Red Pill Kapital is a physician-owned commercial real estate investment and education company. We specialize in tax-advantaged commercial real estate assets that produce real results.

How to learn more.

I look for opportunities where I can generate an asymmetric return, a return where the benefit is far greater than the risk. When you invest in the stock market and you have special knowledge that no one else does, you are breaking the law. But when I invest in real estate assets and I have special knowledge, it’s just considered being smart.

I was once working on an interesting spinal cord implant technology that I knew would make a fortune, but because I had special secret knowledge, I couldn’t tell anybody else and I couldn’t invest in it.

In my real estate investing world, I found out about a pending zoning change that would create a huge windfall for a specific area. Before the newspapers made it public knowledge, I tied up the properties with purchase options. That special knowledge still gives me an extra $5,000 of cash flow every month.

As physicians, we never learned much about money in medical school.

  • It’s no wonder that physicians are considered such easy prey for financial
  • It’s no wonder that physicians have such a high burnout
  • It’s no wonder that a lot of them die

Don’t let this be you. Make a decision to take your financial future in a new direction, where you can achieve true wealth, a future where you can make money even while you aren’t working.

True wealth is not having to work.

Are you looking to enhance your financial well-being, and truly live the life that you deserve?

If you’d like to find out more, join our physician investors club, where you can schedule a phone call with me, and I will send you a free book “Financial Freedom for Physicians.”

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What is Financial Freedom for Physicians?
by admin | October 12, 2021 | Real Estate

So, what is financial freedom for physicians? It never occurred to me, until one day an extremely wealthy businesswoman asked me, «So, what’s your number?» I thought, «What does she mean?» I’ll explain.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cashflow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

Making money as a physician?

So, when you make money as a physician, it’s an active endeavor. It’s a personal service business. What you’re doing is you’re trading your time for somebody else’s money. It’s a skill. It’s not something that’s fungible. You can’t go on Amazon and say, «Give me two units of a physician.» You can’t say, «Oh, I need a toaster, and I need it in black,» and they make 3,000 of these things a minute, and you need two of them. You’re not a widget. It’s a highly compensated, highly trained field, but unfortunately, because it’s such a specialized skill, because it’s so highly training, and it’s so lucrative, you have something called golden handcuffs.
• What happens if, for example, there’s a disruption?
• What happens if there’s death?
• What happens if there’s a disability?
• What happens if there’s a divorce? What happens even if you have to take a long vacation and you make your money actively?
• What happens to your income?
• How long do you have?
• How long does your family have before it runs out of money, if you have no active income?

How long can you survive on your savings alone, if you lose all of your active income?

Take your total savings divided by your average monthly expenses, and you’ll get a number, and it’s the numbers of months of survival.
Now, you might be able to prolong your months of survival, if you have a death insurance plan, a life insurance plan, or if you have a disability insurance plan. You might have an improvement in the number of months of survival, but you know what? This comes at the expense of the person who’s disabled. This comes at the expense or the life of the person who’s the insured. If you’re that person, it’s not a good thing, because the only way that your family members are going to get that value is if you expire. Even if you become disabled, it’s highly likely that your average monthly expenses will dramatically increase, not decrease, and they’ll never increase to the level that you made when you were an active participant in the labor force.
This might explain why there’s a very high suicide rate in professionals, such as medical professionals. There’s financial duress that occurs, and sometimes people face these horrendous potential disabilities and a future reduction in income, and they don’t really see a way out. This might partially explain why suicide rates are correlated closely with financial instability.

What’s your number?

It’s your average monthly expenses times 1.30. That’s your number. That’s how much money you need to survive. Based upon your personal number, how many months can you survive? So, take your total savings, divide it by this number, and that gives you months of integrity.

Disability is not a Black Swan event

I mentioned disability, and I want to graphically represent this. In the red line is your expenses. In the green line is your income, if you’re an active income worker. If you become disabled, which is the purple arrow, all of a sudden your expenses start to go up, and your income starts to go down, and what little you had left in savings disappears, and instead you start to accrue
debt. You’re far more likely to become disabled than die. On average, a 32-year-old male is six and a half times more likely to become disabled than die. Deaths due to cancer, heart disease, and stroke have gone down 32 percent, but the disability rate has increased 55 percent.
The things that used to kill people instead now disable them, and the problem is the disability costs way more than the death does.
Income vs Expense with disability

 

But I have disability insurance

You might tell me, «But I have disability insurance. I’ll be okay.» You know, the reality is even if you have insurance, it’s not going to recover your income to the level it was before, and it’s not going to cover the income to the same level as your expenses are going to go up. So, no matter what, you’re not going to be able to maintain the delta between your active income, your expenses, and you’re going to end up negative. You’re probably going to end up in debt.
Disability is more likely to occur long before retirement, but that’s only because the mortality statistics suggest that death is more likely as we age, and that disability is far more expensive to you individually than death. It’s really a catastrophic number that most people don’t plan on; they don’t anticipate. Some people have disability insurance, but they don’t realize how many loopholes are in there, how many hidden limitations, what the time limitations are, or what the occupancy specific limitations are.
Being a physician, and having a disability, and having it occupation-specific to a physician doesn’t mean much. It has to be occupation-specific to what you do specifically at this time. It’s interesting to me. People change what they do, even as physicians, three to four times in their career, and rarely does their disability insurance keep track of that. The other thing is people set and forget their disability insurance. They get it at one time, and 15 or 20 years later, it has no bearing on what they’re currently doing, and it’s usually not indexed
to inflation, and it’s usually not indexed to income changes. You’ve worked actively, and suddenly your entire future gets destroyed, and all of your years of sacrifice are evaporated, because you didn’t anticipate disability.

Population is living longer, but sicker, with greater financial needs

So, one year of nursing home care in a semi-private room in 2011 was estimated to cost about
$78,000. In 2021, the estimated cost is going to be $128,000. That’s a 64 percent projected growth rate. Did you earn a 64 percent projected return rate on your stock market investment from 2011 to 2021, 10 years? I don’t think so.

 

Most Americans live paycheck to paycheck

Most Americans live paycheck to paycheck, and the reality is that the median American household currently holds about $11,700 in bank accounts and retirement savings accounts. That includes all their money. Now, median balances are different than average balances. So, the average balance is $34,730. This is the difference between mean, median, and mode. But the reality is 29 percent of households have less than $1,000 in savings. Millennials obviously have the least amount. Baby boomers and older have about $24,280, but they’re getting close to retirement.
The Northwestern Mutual 2018 Planning and Progress Report found that Americans average about
$38,000 in personal debt, excluding their home mortgage. So, even though they might have $34,730 in savings account median, their average debt is $38,000, so they’re actually net negative. About 30 percent of Americans use up about $14,000 of savings a year, so they go negative $14,000 every single year.
The 2018 Federal Reserve Report indicates that about 40 percent of Americans struggle with just paying a $400 emergency bill. 27 percent of those surveyed would need to borrow money to cover a
$400 bill. 12 percent wouldn’t be able to cover it at all. About one in five adults had a major unexpected medical bill last year, and one in four adults skipped necessary medical care because they couldn’t afford it. So, people are living on the brittle edge of insolvency.
At any given time, about 17 to 20 percent of adults are unable to pay their current month’s bills. They’re going in debt every single month. The real median household income in 2018-2019 was about $61,372, which in real dollars is almost exactly the same as it was in 1999. So, the household income average is
$61,372. The average expenditure per consumer unit was $61,224, again indicating that really there’s no difference between people’s income and their expenses. They’re spending everything that they have.
So, what does that have to do with physicians? Physicians make more money, don’t they?
In other words, two thirds of physicians are net negative. After they get their income and they pay off all of their expenses, there’s nothing left over, and there are a lot of reasons for this.
I mean, obviously it’s the concept of “I finally made some money, and I’m going to do what I need to do,” or it’s the concept of keeping up with the Joneses, or it’s the concept of, “You know what, I’ve got hundreds of thousands of dollars of
medical school debt.” There’s an interesting study on neurosurgeons that the vast majority of neurosurgeons continue to pay off student debt well into their 50s. What’s happening is just like regular people, physicians’ expenses match their income, so they have nothing left in savings – just the numbers are a lot bigger.

 

Being an active wage employee leaves you exposed

If you’re an active-wage employee, you’re exposed.
The reason why is active-wage employment is taxed at the highest possible level. Active employment requires constant activity to maintain your financial integrity. It’s like bucketing out water from a lifeboat that’s sinking. The problem is all you can do is bucket faster, and once you start to get behind, it’s hard to get above water again. But the other problem is you don’t realize, as a physician, your lifeboat is only standing in about three feet of water, and you’re drowning in these three feet of water. If you get out of the lifeboat, you can stand up, and look at the horizon, and walk out of this mess.
These are the things that I want you to think about, immediately.
You need to set up some bank accounts and set up some hierarchical accounts. You want to set up an integrity account, which is essentially the number. You figured out what your number was, so multiply that by six, and set up an integrity account. This is where your emergency cash reserve is going to go. It doesn’t mean that you have to set it all up at once, but that’s your intention. Your first goal is to set up enough money being put aside that you have an integrity account, so that should you have an acute expense – should you have something horrendous happen – you’ve got six months of cash.
Your next account, the next flow over, should go into an investment account. You want to have a set dollar amount per pay period going into investment. Now, you notice that your living expenses don’t come until third. What you want to do then is identify what your actual dollars per pay period are that you’re going to use for living expenses, and put it into that living expenses account, and live from that living expenses account. Then you want to pay down
debt, and it’s a strategic pay down. I’m going to go through that in a few seconds. Only after you’ve done your debt pay down can you put some money aside for a splurge account – the dopamine account, the thing that makes you feel good. You have to have something that you’re looking forward to, and so that’s your splurge account. Then whatever you have left, it goes into your final bucket, which is your residual investment account. Sweep everything that you have left into a residual investment account.

Upgrade Wealth Operating System

What I’m really talking about is upgrading your wealth operating system. Your wealth operating system is how you perceive your relationship with money. Most people have an extremely defective wealth operating system. People think that if they spend money, it’s a bad thing. Some people think that money itself is a bad thing. Some people think that rich people are bad people. Ask herself a question, and just close your eyes and ask. If you’re asking, «Rich people are … Rich people do …» ask yourself if you’re getting any negative connotations. Are rich people greedy? Do rich people take advantage of other people? If these things resonate in your head, your wealth operating system is defective.
If you asked yourself, «Money is …» and you let yourself just write it down on a piece of paper, what is money? If money is dirty, if money is something that’s scary, if money is something that you lack, then your wealth operating system is defective. If you asked yourself, «Money makes people …» and if you end up with words greedy, if money makes people jealous, if money makes people behave badly, your wealth operating system is defective. Because money and wealth are merely tools as a process of success. Innately there’s nothing good and there’s nothing bad about money. Money is just simply something that you can use to accomplish a particular task. So, you need to upgrade your wealth
operating system. You need to definitely calculate your number. You need to accumulate your cash for six months of integrity.

 

 

Debt rules: Arbitrage interest rates

As you upgrade your wealth operating system, you want to remove rules. So, I want to talk about debt rules, specific things that you pick up along the way, things I wish somebody had mentioned to me. When you look at things that you have debt on, if they have a high interest rate and
their interest rate’s above 12 percent, you want to pay them off first, because you can generate probably in your investments, if they’re significant investments, you could probably generate 12 percent or greater. So, if you pay off debt and it’s above 12 percent, it’s better to do that, because it’s still an investment. You’re just paying it off. It’s just that you’re not getting the money directly, but you’re saving the money. If the cost of interest is between six and 12 percent, you need to evaluate it. You know, you might be better off paying off that debt. You might not be.
The key thing is take all of your debts and consolidate it down to the least number of units that you have to pay off. Usually when you consolidate debt and you aggregate it together, then the interest rate drops. If it’s a minimal debt interest rate, below 6 percent, you want to make a minimal payment on it, because you’re definitely going to make more money in other investments well above 6 percent. What you want to do is you want to take that cash that you would have used to pay down that debt and invest it into cash flow projects. If the interest rate on your debt is below 6 percent – 6 percent to
12 percent – you need to evaluate it closely. Above 12 percent, you definitely need to pay that stuff off immediately.
Really, the power of compounding is what this is. Let’s take an example. So, $10 invested for 30 years. Simple interest versus compounded rates of return. Let’s say that you had $10 at year one, and you took out $10 at year 30. At a 7 percent rate of return, you’d get $10 principal back. If you had invested without compounding, you would’ve made about 25 bucks, but with compounding, you end up walking away with $80 per $10 invested. That’s the value of compounding. Compounding is essentially a formula that allows you to reinvest that money on a monthly basis, and so you’re making money off of the money that you already invested, and it generates a rate of return. You add that to your principal, so that you make more money off of it. If you don’t have compounding interest, somebody else is eating your lunch.
Let’s just do a little, quick comparison, just because I think it’s important to understand what a huge difference compounding makes. Let’s say that you took an investment at 2 percent versus 10 percent versus 18 percent over 30 years, and you invested $100. You start with $100. What is it worth at 2 percent, 10 percent, and 18 percent over 30 years? At 2 percent, it’s worth $182. At 10 percent, your
$100 has grown to $1,984, but at 18 percent over 30 years, your investment is now $21,000. That’s a huge difference. This is going to become much more relevant shortly, when we start talking about what happens in the stock market and what your real rates of return are. I think you should pay attention to this, because your real rates of return are nowhere near what they’re telling you.

Quick analysis compounded returnRule of 72

Another way to look at it is the rule of 72. It’s a quick way to determine the number of years it takes to double your actual cash. Now, this is a quick and dirty way. This is not science. This is just a real simple way — back of the napkin. Take whatever interest rate it is. So, let’s say you’re going to make a 2.5 percent compounded return on something. Take 72, divide by 2.5, and it gives you the number of years it would have taken to double your money.

Debt rules: Arbitrage interest rates

Taxes – the failure to account for taxes is incredible to me. Most physicians are either employees or they’re self-employed. They have an average tax rate of 40 to 60 percent on their income.
Doesn’t that seem bizarre? Because these are the hardest working people we have in our community, and they’re the ones saving the lives, and they’re the ones that we’re taxing the most. Do you know who has the lowest tax rate? Investors and business owners – people that own dry cleaners, people that own convenience stores, people that invest their cash. In fact, if you make money on your money, you probably don’t even pay any taxes at all, but if you’re a hardworking physician, and you get blood on your shoes, and you have to deal with difficult patient situations that are life-threatening, you’re getting taxed 40 to 60 percent. It doesn’t make a lot of sense. This is the issue. The biggest single cost burden that you have to your wealth taxes, and you are in the wrong category, and so you have to understand that and see exactly why.

Retirement financial stability

Why is it that physicians don’t feel comfortable about their financial preparedness going into retirement? This is an AMA study that was done in 2018, and over half the physicians are worried about volatile market conditions and depleted savings. 43 percent of the physicians felt like they didn’t save enough. 28 percent thought that they started saving too late. If you look at all of these things, these physicians are heavily focused in on savings, and I’m going to conjecture that this is the wrong thing to do. Focusing in on pure savings is buying into the mentality of what portfolio managers want you to buy into, and I don’t think that you can save yourself enough to get to retirement, based on market volatility, and inflation, and fees. Most people will never be able to retire if you really look at it.

 

The 4% rule: (traditional investments in a balanced portfolio of stocks, bonds, and cash)

When I look at how much money can somebody take out of retirement at any given time, there’s something called the 4 percent rule, and that’s assuming that you’re using traditional investment tools, like balanced portfolios, bonds, stock, and cash. It says that you can take out about 4 percent of your total investment portfolio in any given year, and that portfolio will last you about 30 years. That assumes, though, that the inflation rate is the historical 2.5 to 3 percent, and it also assumes that the compounded rate of return in your traditional investment portfolio is about 6 percent. It also assumes that taxes don’t go up. It assumes that fees don’t go up. It also assumes that you’ve reinvested all of your dividends. So, what does this mean?
If you invested a million dollars in a balanced portfolio of stocks, bonds, and cash, you could withdraw about 4 percent per year with a steady decline in the principal over the next 30 years. The keyword here is steady decline in principle. At the end of 30 years, you don’t have anything. There’s nothing left. So, if you took $1 million when you were 30, over the next 30 years, by the time you turn to 60, you would have nothing left. Now, the problem is expenses. People are living a lot longer than 30 years, and they’re living a lot sicker. Only 12.2 percent of the U.S. population is now healthy. That means
78 percent plus of the population has significant comorbid diseases, and that’s going to be a very significant factor for most people.
It also assumes that the tax rates don’t go up, but the reality is tax rates are going up, and they’re going to tax your retirement. They’re saying that these are tax free, but when you look at use taxes, use taxes are I buy a piece of bubblegum, and it costs me 10 cents, and I pay 1 cent in tax, because I eat that bubblegum. That’s not a federal tax. That’s not state tax. That’s a sales tax. It’s a use tax. If I buy
a car, then I might have to pay a couple thousand dollars of use tax to the state. I might have to pay a municipal tax.
These use taxes have nothing to do with your deferred tax plans and your 401ks. So, once the money comes out of the 401k, you’re going to be using it. You’re going to use it to buy things, and the things that you buy are going to have definite use taxes. I also believe that real estate taxes will probably
go up. I also believe that the federal government will come up with all kinds of novel ways, because they’ve run out of money, and the only place that they can get their money is from you. So, they’re going to figure out innovative ways to get your money.
The other reality is we have a negative yield bond rate right now. So, that means that there isn’t a lot of money that you’re going to generate off of investments in bonds. In fact, it’s negative. When that happens over a prolonged period of time, stock market returns will start to drop, because people will
not be able to maintain high levels of stock prices as interest rates continue to drop. You have to have a certain amount of economic friction with inflation and you have to have a certain amount of economic friction in bonds in order to maintain elevating stock market prices. When those things disappear, stock market prices start to drop. In the short run, they go up, but in the long run, they drop.

 

What if your income is passive, and is growing >4% (non-traditional, tax-advantaged)?

So, if your income is passive, and it’s growing greater than 4 percent in non-traditional tax-advantaged states, it creates a whole different mechanism, because if your average monthly expenses times 1.3
is your number and based upon your number, assuming that you’re constant renewing passive cash flow exceeds your number, it really doesn’t matter what your total savings is, because as long as your monthly passive cash flow exceeds your number, your total savings could be zero and you would still have infinite months of permanent cashflow because that positive cashflow exceeding your number is all that really matters. Now, that doesn’t mean that I would recommend deplete your savings and live purely off of positive cashflow, because the reality is there are going to be fluctuations, but it gives you a different perspective. What you’re really looking for is to increase your monthly positive cash flow above your number, so that you can have an infinite capacity to survive passively, and then your total savings doesn’t really matter that much.

 

What if your income is passive, and is growing >12% (nontraditional, tax-advantaged)?

So, what if your income is passive and you’re growing greater than 12 percent in a non-traditional tax-advantaged plan? You know, again, the same thing. Total savings plus monthly passive cash flow divided by your number is infinite. What you’re doing is you’re leaving a huge legacy for the people behind you. Your savings is never depleted. You’re financially free, and you’re free to pursue your passions, whether that’s working in medicine, or whether that’s painting, or whether that’s travel. Most people that are physicians have spent so long becoming physicians and they’re so passionate about becoming physicians and are so passionate about delivering awesomeness and care, they’re going to continue to practice medicine, but they won’t feel the stress and the day to day grind of that, and the burnout of medicine disappears.
I recommend that you work the number. So, what that means is cashflow divided by an investment equals a rate of return. For example, if you get $100,000 of cashflow and your investment was $1 million, that’s a 10 percent rate of return. Cashflow is the rate of return times the investment. So, this is just another example. If you take your cash flow and you divide it by 12, you get what you need for your monthly cashflow. What you want is you want your monthly cash flow to be greater than your number.
So, if you take the number, multiply by 12, divided by your rate of return, you’ll get the exact amount of investment needed, so you can work it backwards to figure out how much you have to invest to achieve your number and what the interest rates are.
This is just a different way to look at the same issue, but everyone should go through this to figure out what investment level they need and what their rate of return is. Once you do this, and this rate of return is post-tax, post-inflation, post-fees, once you do this, you have a whole different approach to your investment.
• So, again, what’s your number?
• What’s your rate of return?
• What are your real risk adjusted rate of return after fees, inflation, and taxes?
• How much capital will you need to deploy to be successful?
The reality is is that you’ve already won the money. You’re losing time. You have a high income. You’re 90 percent of the way there. If you just do a few things right, you can be incredibly
financially successful. You can leave a legacy. You can leverage other people’s time with your money and be incredibly successful at a much lower risk and a much higher reward.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at info@redpillkapital.com and that’s Kapital with a K.
We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com
Why multifamily? Asymmetrical Yield
by admin | October 12, 2021 | Real Estate

I often get asked: Why did I pick multifamily as one of the major places where I invest? It’s the yield. There’s an asymmetrical yield that occurs in multifamily, and let me explain why. I’m an opportunistic commercial real estate investor, and I prefer mid-to large-size multifamily for a very specific reason.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

What we do?

We leverage data. We take all the data that we can find, and we apply it to real-world experience. What we figure out is how to get a dependable passive income investing cash flow, and we look at tax-advantaged, commercial real estate. We look at doing value-adds to improve net operating income in our passive commercial real estate. When we do that, we’re able to significantly enhance the value proposition. We’re densely research and data-driven, and what we’re trying to achieve is asymmetrical returns, returns far greater than what one would expect for a particular risk ratio. I keep in mind that all real estate is local. It’s hyper-local. It’s driven by demographics and the local investment environment.

Each individual asset performance is based upon the skill of the management. It’s the management team that will determine the success of a project. The fundamentals of real estate, the dirt, the building, and things of that nature have little to do with the outcome. The asset is probably 10 percent of the job. Managing the asset and doing it correctly determines the performance of the investment, and what’s really interesting is, in real estate, you, as an investor, can have a massive impact on the outcome should you choose to.

Our core competencies

  • We find and validate projects.
  • We look for untapped potential.
  • We look for the local growth drivers
  • We look for upside potential.
  • We trust what people tell us, but we verify each and every single fact that’s verifiable.
  • We acquire real estate, we stabilize real estate, we value add it, we improve it
  • We have a goal to exit in four to seven years.

Now that may change in the near future because there are a lot of changes coming in inflation, and there are a lot of changes coming in interest rates, and so we keep our eye on the horizon. We’re trying to predict what’s going to happen five, seven, ten years from now, knowing that the farther out we look, the less predictable it is.

Our goal is to maximize cash flow, to drive the net operating income, and ultimately increase the realized sale value of a property.

We prefer mid- to larger-sized real estate because

You can leverage the systems inside a single campus. What that means is your maintenance, your overhead, your leasing costs, your branding, your unit mix, your ability to release, and your ability to communicate in social media is maximized, because it’s all one single campus. You’re not trying to rent 100 units over 20 square miles. You’re renting 100 units on one city block, and you can put your arms around it.

I prefer real estate that’s multifamily because it’s logic-based. It’s not subjective; it’s not emotional. It’s math.

Take the net operating income, divide by the cap rate, and that gives you the value. The cap rate for a particular asset, for a particular grade, is pretty well defined. So my goal is to affect net operating income. Net operating income is essentially income minus expenses. Can I increase the income? Can I reduce the expenses? If I can do that, I’ve increased the value. That’s called forced appreciation. It’s called a value add. Any increase in net operating income increases the value dramatically.

Let’s just say that you invest $1,000 in the property, and you get a $4,000 to $5,000 increased income net operating annualized. Assume that the cap rate is 5 percent. So a $4,000 change in net operating income from a $1,000 investment at a five cap results in an $80,000 increase in value. That’s amazing because you can’t get that in a house or a single-family residence, because single-family residences and houses are based on comparative value—the value of that similar house in the market in the same neighborhood—and they’re highly subjective.

Let’s take a worst-case scenario. Let’s say that your $1,000 investment only increased $1,000 net operating income. Even at a five cap, $1,000 increase in net operating income for a $1,000 cap times the expenditure still gave you a $20,000 equity gain. You can’t do that in a house. When you increase or put money into a housing situation, you usually will not get the money out. Very rarely will you get a dramatic increase in equity gain in a standard house.

There’s a lot less competition to buy in commercial real estate, and the reason is because it takes more money, it takes more knowledge, and there’s way more fear about it. Everybody knows how to buy a house, but I bet you in the population in general, 1 percent know how to buy commercial real estate. In that 1 percent, it’s probably half of a percent that’s very good at it.

Depreciation is your secret weapon.

Taxes are the single biggest drag on wealth accumulation. You have to realize that taxes are merely an incentive by the federal government to get you to do something that they themselves can’t do efficiently. They need people to develop housing, because there’s a tremendous difficulty for the federal government to develop housing. In fact, it costs the federal government. There was an
interesting study done in California where they built section eight housing. The per unit cost of section eight housing for the federal government combined with the state to build it was over $300,000 per unit. That’s ridiculous. Anybody else could have come in and built that for $120,000 per unit.

So, the government looks to the private sector by modifying the tax rates, creating incentives to have them do the work that the federal government can’t do, and realize that depreciation is a phantom loss. It’s not a real loss. What it is, is the federal government says this thing is going to devalue over this amount of time, and as it devalues, you’re going to have to replace it. It’s about three and a half percent per year for most structures. When you have this phantom loss, it goes against your income, and so it reduces your taxable income. Now with the recent tax law changes with accelerated and bonus depreciation, it has completely eliminated most of my K-1 distribution taxes that I’ve had to do on passives. It’s a secret weapon that most people don’t pay attention to, and it’s a huge equity kicker on rate of return that you can never get in the stock market.

Why not just buy a portfolio of single-family rentals?

Well, you can’t find property managers. It’s really hard to find them. Maintenance is incredibly difficult, because it typically takes my folks 30 minutes to an hour to get to a site, evaluate the site, look at the system, figure out what they need, then go to the hardware store, get what they need there, and put it in. A simple toilet repair, on average, takes about four hours on a single- family residence. That same toilet repair on our multifamilies takes under 30 minutes. Those parts are in stock in our multifamily; they’re all standardized. You don’t have to go and travel.
There’s not a trip fee. You don’t have to go look at the particular gasket or that particular item that you need, the flapper valve that’s unique to that particular toilet.

Single-family residences are incredibly market sensitive. If you looked at the 2008 recession, single-family residences had much higher vacancies than did the cheaper apartments and the value-add apartments, and so they had a much greater loss of capital. Single-family residences are highly dependent
upon the general economy, because they’re comparative market approach to valuation rather than cashflow valuation. Single-family residence is defined by comp rates, not by net operating income, so if you increase the rental rate by $500 per month at a 7 percent cap on a multifamily, it increases the value by $7,142 per unit. On the single-family residence, it wouldn’t matter. What we’d have to do is compare that single-family residence to something else that looked similar – similar architectural style, and whether somebody would want to buy it in that same neighborhood and based upon the schools, and a whole host of other factors that are highly subjective and completely out of your control. I don’t invest in single-family rentals. There’s too much hassle, there’s too much friction, and it’s too subjective for me.

  • There’s a stability of income even during a recession. You know, people think that a recession is coming, the recession is coming.
  • I don’t really care.
  • The sky may be falling, but it’s about cashflow.
  • Cashflow determines your success during any recessionary period.

 

If you looked at the numbers from the St. Louis Fed, and you looked at consumer price index for all urban consumers, and you looked at in the blue line the index for the average consumer of goods versus the consumer of residences. The red line shows what the cost is for rental, and the blue line shows just a general inflation rate or general cost. If you look at that and you look at the gray bars, which indicate recessionary periods, you’ll notice something interesting. The inflation rate ticks up but has a significant drop during the recession. The actual housing cost doesn’t shift, and this is specifically for multifamily. It really doesn’t make any difference. It may stabilize or it may flatten for a period of a few months, but then it continues to creep back up. The reason why, is that this is demographic driven. This is driven by the number of people, and unless we dramatically reduced the population in the United States, that average rental rate is going to continue to climb.

 

Foreclosure is exceedingly rare in multifamily, and the reason why is because of the stable income and the high demand.

It’s a cashflow-based asset that the banks will stress test before they give you a loan on it, and the banks love lending for it because they know that you’re not going to go into foreclosure. If you look at single-family residences, they’re foreclosed on three times more often than multifamily. Even in good times, they’re five times more likely to be foreclosed than a multifamily property. Lenders love
multifamily because the asset is stable. They can deploy a lot more capital, and there’s less potential for human factors to get in the way.

This is a chart of single-family foreclosures during the recessionary period: 2008, 2009, 2010. This is compared to the same period for Freddie Mac and Fannie Mae loans, which were commercial multifamily. If you notice, the historic average of rates of foreclosure is 0.46 to 0.47, and it jumps to
2.23 for single-family. The historic rate for multifamily is about 0.1 to 0.2, and it jumps up to a little bit below 0.8, then it drops immediately back down to 0.1, 0.2. Single-family foreclosures peak at 2.23 percent of the entire real estate market, and even at the peak of the financial crisis, multifamily was only 0.8 percent. That’s a huge, huge difference.

It’s about supply and demand.

So I’m going to throw something at you. Demographics is what happens to populations, and populations determine value. The more people that want a particular thing, the higher the price. The less people that want that particular thing, the lower the price. In real estate, supply of real estate and utilization of real estate is fixed as in terms of land. Certainly you can increase the supply of real estate by building, but what is easier to change is demographics – the number of people coming into a community. If you have a bunch of people coming into the community, you’re shifting your demand curve from D1 to D2. You have people coming in, and your supply is remaining linear, then what ends up happening is your price has to go up. But let’s say that instead, you’re in a community that is at D2 and you’re losing population. Your price is going to go down and your supply is essentially the same. Demographics are incredibly sensitive indicators as in terms of what happens to price.

I look at demographics as a headwind or a tailwind. If you’re flying a plane, and you’re going 500 miles per hour, and you have a 200 mile per hour headwind, you’re going to take longer to get there because your net rate is 300 or you’re going to burn more energy to get there. But if you’re flying that plane and you have a 200 mile per hour tailwind, you’re going to get there a lot faster, or you’re going to have a lot less energy burned to get to the same place. It’s almost the exact same thing. Demographics are headwinds and tailwinds, and the economics of the issue of price and demand.

Demographics drive the economy

It’s all based off of population statistics, so there are a couple of things that you should be aware of. America’s birthrate is really low, and we have not been producing enough babies for the generations to replace themselves. We have to have a steady influx of people coming into the country, because if we don’t, we’re not going to have enough people to maintain our demand levels. If our demand levels start to drop, our prices are going to start to drop. Certainly, I know that real estate is a fixed total supply, but the reality is if your demand drops in a fixed total supply, your price goes down, and so it’s just something that we have to be aware of. Now there are other factors, and part of those factors are as that population ages, they live longer.
So the demand may go up as an aging population goes up. But, we have to be very careful what economics they have, and what they’re willing to buy and not buy, so I use the demographics to help predict what happens to price and supply in a particular asset class.

It’s a combination of net migration, intra-country and inter-country. So let’s say that I’m going to buy something in an area that’s losing population quickly. I’ll give you an example: Detroit. Detroit continues to lose
population. No matter what you do, your population is leaving, so you have headwinds there. You’re not going to be able to increase price over time, because you don’t have the demand and your population is leaving. Whereas, let’s say you compare that to Orlando or Tampa where a lot of people are moving in no matter what. That same real estate, that same asset that’s at that location, is going to have a higher demand, and there’s not more of it, so the price goes up.

Jobs pull people to a locality. People don’t move to a locality because they want to move there. The vast majority of people move to a locality because they’re able to work. Jobs drive the economy, and a lack of jobs drives crime rate. This combination of stuff poses some interesting thoughts on what the future of real estate investing is – assisted living facilities, skilled nursing facilities. What happens to the millennials? What happens to retirement? There’s a whole host of things that I’ll be discussing in other modules that we’ll look more closely at, just that demographics. This is really meant to be an overview.

 

 

 

As you get more new households formed, then rental demand goes up, and the thing is that the vast majority of household formation, new people coming into households, they’re really looking for B and C quality property. But the only thing we’re building is A quality property, because it’s almost impossible to build B or C. It’s too expensive, and so B and C properties actually have reduced production and high demand, and A properties have high production and reduced demand. What do you think is going to happen to the price on these things?

This is just a simple display of household demand, household growth, and what’s happening over time. Household formation is far exceeding the completion rate of multifamilies, and if you look at it a little bit closer, you’re going to find out that the multifamily completion is in class A facilities, but the vast majority of household formation is B and C.

 

 

If you look prospectively—if you look at the future—the number of new apartments needed far exceeds the construction rate that we have available, and we’ll have a deficit of probably 2 million units by the year 2030.

 


As the population continues to increase, whether it’s by net migration in, or by intrinsic population increase, that combination will maintain a demographic growth rate. Now that demographic growth rate is hyper-local. It’s not going to be all over the country. It’s going to be in urban areas. It’s going to be in a core area that has a lot of benefits for the local community. What we’re noticing is that even the people that have retired are now moving to more urban areas so that they can have more access to amenities and health care, and the millennials are also moving to these more urban areas so they can have more access to entertainment venues. What’s interesting is, there are very few construction opportunities in these areas, so they’re having to rent.


We’ve converted to a renter nation

People have been disillusioned by the housing bubble crisis of 2007 to 2010, and a lot of homeowners had total equity destruction. They’ve given up on owning houses. Younger households look for mobility. They have a tremendous amount of student debt. They’re postponing home ownership, or choosing to have the flexibility of renting. It’s the Uberization of housing. We’re looking more at the use of an object rather than the ownership of the object, and the tighter underwriting standards have resulted in a significant reduction in supply of multifamily and single-family housing, especially on the coastal markets.

Home ownership rates are dropping dramatically despite the fact that our GDP is stable. Despite the fact that our mortgage rates are decreasing, the home ownership rates are decreasing.


Our expected homeownership rates are going down no matter what you say, no matter what you think. It’s going to look bad for ownership of single-family residences going into the future no matter which way you turn.

 

The rental stock needed is very significant, and the availability of that rental stock is diminished.

 

This is a graph indicating the net rental units needed by the year 2030 in comparison to what’s available. You only start to see a shift in about 2030, 2030-plus. The reason why you see the shift is that we may have a decrease in net immigration, and if that happens, then by 2030, we won’t need as much housing. But all the way to there, we’re going to need a significant amount of housing that we cannot build.


If you look at household formations and percentage of households, you’ll notice that more and more households are becoming single-family households, and fewer and less households are becoming multiperson households. What this tells you is that there’s an increase in the amount of wealth in each individual household, and household formation is increasing and people are living by themselves or living with just one other person and taking up apartment units, so this is going to put an additional burden on the utilization of the number of apartments rather than large houses.

The U.S. population growth will continue all the way to about 2030, assuming that we’ve decreased our immigration rates. If our immigration rates go back up, then these numbers will obviously change significantly.


There’s more households in the U.S. renting now than any other time in the last 50 years, and the majority of them are millennials.

The largest generation in U.S. history prefers renting over buying. They’d rather use something than own something. It’s Uberization and the sharing economy that is pushing this trend.

Our process

We’re a demographic-oriented, first and foremost, company. We identify general areas of interest, but then we quickly narrow our focus to the specific deal and the situation in that specific opportunity in that hyper locality. We acquire assets, but that’s just the beginning of the process. The real process is value addition. It’s changing the income, reducing the expenses, actively managing the resource, and anticipating the ideal exit time period.

Our market selection is based upon migration rates. It’s based upon job creation. Job creation determines the direction of the local economy’s future. If you don’t have job creation, you don’t get net migration in. If you don’t get net migration in, you don’t get housing build.

So what’s Red Pill Kapital?

Red Pill Kapital is a physician-owned, commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to nine because physicians don’t work nine to five. We probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital right for you?

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing in cash flow and commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage. The bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at info@redpillkapital.com. That’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com