"Become Recession-Proof with Conservative Investing"
Real Estate Entrepreneur
Episode 16: "Bad Beats"
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New and seasoned investors alike spend a lot of time worrying about capital. But according to today’s guest, once you learn how to raise capital, you can raise capital for anything. Venture capitalist Joel Block was raising capital initially for real estate. But once he learned how to tell stories and put the package together, he fell into venture capital transaction, which he raised about $10 million for–a path that led him to selling financial service packages on Wall Street. After selling that business to a Fortune 500 in 1995, he started investing in other companies and has been involved in about 40 different transactions since. When the market crashed in 2010, Joel saw opportunity where other investors saw disaster. He went back into real estate and started buying, which was ultimately a profitable decision. Joel says he now takes everything in stride. He joins our host and real estate attorney Scott Smith on this week’s episode of The Real Estate Nerds Podcast to talk about venture capital, real estate syndication, and investment crowdfunding. He shares some of the best deals he has experienced in his career so that listeners can copy the habits that have led to his success.
Mitch Stephen’s Bad Beat: Lots and Lending
Scott welcomes Joel onto the show. The two investors discuss Mitch’s background and current career, then conduct a post-mortem on Mitch’s worst deal. Hear about how the deal in an unfamiliar asset class went sideways, largely due to unfortunate timing, and how Mitch handled the aftermath.
[1:00] Mitch owns about 1500 houses in the San Antonio, TX area. He began his real estate career in 1996 and averages 100 new real estate purchases per year. He excels at raising private money, with $12-13 million currently under his control. He also began loaning money to competitors for additional income.
[2:40] In fact, Mitch’s bad beat began with an ill-advised lending transaction. He wasn’t familiar with the person requesting the loan or type of loan, and it was outside of his typical wheelhouse. This would later become a fatal flaw, but he’s learned his lesson: “It seems like every time I get out of my lane, I get hit by a truck.”Scott agrees that this is important: “Stay in your lane. Do what you know how to do.”
[3:00] Mitch new how to survive the recession in real estate, but he wasn’t as comfortable with his lending business. He received a request to make a loan for 15 properties in a gated community that averaged $120,000 apiece on 1-acre lots. He knew how to make loans on little houses, but not how to execute a $15 Million loan.
[4:30] The two investors discuss the temptation to deviate beyond your area of expertise. In his ordinary career, he always had ways to make his money back in the event of a defaulted loan: “If you can’t sell your house, what can you do with it? You can rent it.”
[4:55] Mitch expressed his concerns about their inexperience to his partner, but the two were drawn in by the high value and projected return rates on the loan.
[6:00] The nature of lots as an asset class meant that Mitch’s usual “exit strategies” weren’t available to him.
[7:30] Mitch made the loan, and not 30 days later, Countrywide went under, officially starting the 2009 recession: “Within 15 days, every bank in the world was dried up and confessing that they were insolvent too.”
[7:59] So within that month, he had every lot back and nobody set foot on one for roughly two years. Banks were reluctant to loan to even those with excellent credit in the wake of the crash.
[8:45] This bad timing made the deal go South immediately. $750,000 was the average home price in Mitch’s area. He points out that “That market is the first market to die in a recession.” This left Mitch in the position of owing $8,000 a month for the next 2.5 years.
[9:15] Mitch didn’t sell his first lot for 2 years and 6 months, and didn’t sell all of them for four years. The properties were essentially burning a hole in his pocket.
[10:21] Mitch was able to endure this loss for a couple of reasons. The first is simply about his own financial responsibility: “For as wealthy as I am, I’m ridiculously frugal.” He also credits his partner, who took on half of the costs. That partner had another partner who stuck with them both. In these ways, Mitch was able to keep his head above water, even in the face of rising property taxes.
[11:30] This combination of factors meant this Bad Beat didn’t compromise Mitch’s quality of life: “Even though I took a hit that was unpleasant, it didn’t affect me that much because I’ve been a good steward of my money my whole life.” Scott observes that Mitch was smart because he had built habits that made this gamble worth taking. Even if he lost big, he wouldn’t struggle to fill his gas tank or enjoy a high standard of living.
[13:00] Scott points out that there are great deals that come from outside of our comfortable investment classes. He asks how Mitch balances these opportunities, and the two agree that it’s important to get advice from an expert in the asset class that is new to you. Mitch feels the right advisor with the right experience could have made an excellent partner, who may have been able to predict the recession and its impact on the class.
[13:50] Scott agrees and offers this tip to new investors, or investors in new asset classes: “When you’re first getting involved in real estate transactions, always partner with somebody else who’s experienced in that area to some degree.”
[15:00] Mitch points out that federal regulations forced banks to divest their exposure in real estate. On top of negative cashflow, the bank wanted to demand $1 million back within 8 months.
[16:00] Mitch tells Scott how he coped with this immense level of stress and many problems: “You wake up early, you go to bed late, you attack your problem head on, stay busy so busy confronting your problems the problems that you don’t have time to worry about it.” He was fortunately able to get private loans to make up for the bank’s demand.
[17:30] Mitch shares his strategy for recession-proofing his current portfolio in the event of another recession.
[18:30] The two investors share their strategies for avoiding burnout. For Mitch, he engages in a daily prayer practice to draw strength, get centered, and open his mind to creative solutions to his problems. Scott recognizes that highly effective and successful people seem to have systems for.
[19:31] Mitch has another tip for making it through hard times: “When times get tough, I stop drinking and doing all that fun stuff to stay focused.” Scott agrees this brings clarity and raises energy to take care of one’s health.
[20:43] Scott shares his own unusual piece of his morning routine. Before work, he boxes for an hour every day. His logic is that it shows him his strength and what he can make it through: “I already did three rounds this morning, there’s nothing that’s gonna hit me harder than my coach’s right cross!”
The Takeaways: The Risk of Raw Land and the Power of Conservative Investing Strategies
Mitch and Stephen conclude this episode with a discussion of the lessons listeners can learn from Mitch’s Bad Beat experience.
[21:00] Mitch shares the main lesson he wants listeners to learn from his story: “Raw land is an alligator if you get stuck with it.” Nowadays, he still buys these lots but owner-finances them to mitigate potential problems. He also monitors his inventory to prevent it from getting too high, and sells off notes if necessary as a hedge against future recessions.
[22:30] Scott shares his own favorite take away from Mitch’s story: “If you work your ass of and do it the right way, you can do a lot of great things in real estate very conservatively.” He admires Mitch’s conservatism and highlights his success. Mitch confirms that he’s only lost on 6 houses in his entire career–not bad for a man who moves 100 houses a year!
[24:00] Mitch also advises that when you take a loss, if you can hang in long enough, you can find a way to come back. Quitting should never be your Plan A. There’s always a way to come back.
[25:00] Scott and Mitch close with one thing they have in common: a love of giving away free information and tools for investors to use. While both are criticized by other professionals for giving away too much information, they have a wise and philanthropic reason for providing the many free educational resources they do. Check them out under Listener Resources!
Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.
For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.
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About Mitch Stephen
Self-employed since 1996, Mitch Stephen has purchased well over 1000 houses in and around his hometown of San Antonio, TX. He is a high school graduate who never stopped learning. Books, CDs, seminars and webinars were his classroom. That education made him into the self-made entrepreneur he is today.
Today, he specializes in owner financing properties to individuals left behind by traditional lending institutions. He also loves giving new life to properties that other investors consider blemishes on their neighborhoods.
He has perfected a method of achieving cash-flow without having to be a landlord and without having to rehab properties. He’s mastered the art of raising private money and the classic “Nothing Down” deal. He also pioneered the idea that you don’t have to give discounts to sell your notes.
Mitch is a passionate speaker who delivers the message of integrity first and profits second; an expert at keeping it simple and explaining, in plain English, the theories that made him financially independent. He is always an inspiration to those around him.
When making business decisions that affect your long-term goals, like what types of investments to make with your retirement dollars and which vehicles to use, it really is best to be aware of all of your options. We frequently talk about the Solo 401(k) and Self-Directed IRA as tools for funding your retirement. But what about life insurance? And what about the stock market? What if we told you there is a tool that allows to to reap some benefits of both? It’s called Indexed Universal Life Insurance–and some investors have found it a useful addition to their retirement plans.
What Is Indexed Universal Life Insurance?
Indexed Universal Life Insurance (IUL) plans are a variety of permanent life insurance plan that features a cash-building element. One primary benefit of these plans is that the policy holder gets some of the gains of being associated with the stock market without all of the risk Wall Street is famous for. This is in no small part because of how these policies are designed. IULs earn in part because they are directly linked to a market index, such as the Dow or the S&P 500. Any gains remain within the policy, albeit a cap rate will limit how much you can make. However, you are protected during a particularly bad year for your index with an IUL. The worst case scenario with these plans is that you make nothing, but you never actually lose money no matter how poorly your index performs. The protection of your principal is actually derived in part from the same cap rate that limits your gains.
How much money do policyholders stand to make? Historically, returns run between 5-9%. The S&P Index has actually returned at 9-11%, but the upside limit on UILs stems from the account’s cap rate. For this reason, many advisors argue that the UIL can make a wise addition to a retirement or estate plan once more traditional and self-directed accounts are maxed out.
Tax Benefits of Indexed Universal Life Insurance (IUL) Plans
There are three key tax benefits of IULs. First, you may pay into the policy with pre-tax or after-tax funds. Withdrawals from the policy may be made tax-free if you are under 59 1/2. Such withdrawals are regarded as loans, with your death benefit serving as collateral. Any funds paid out to the beneficiary are also tax-free, including normal benefits upon your passing. This is true regardless of their value.
Ask the Experts at Royal Legal Solutions About Your Retirement Planning Options
Regardless of where you are in the retirement planning process, Royal Legal Solutions an assist you. We have extensive experience educating investors about self-directed investment options. Many of our investor-clients love our Solo 401k information, product, and compliance services. Our Self-Directed IRA services can also be helpful for retirement planning, as the SDIRA is yet another vehicle that allows you to diversify and take total control of your investments. To determine which of the available retirement planning strategies are best for you, consult with one of our experts at Royal Legal Solutions. You may also contact us with any questions you may have about your options.