"How To Navigate Through Market Storms"
Real Estate Investing Expert
Episode 26: "Bad Beats"
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Kathy Fettke’s early career was nothing but clear skies. So when a storm came, in the form of a down market, she didn’t have the experience to be prepared. She got wet, but has dried off enough to join us and tell us about her experience. On today’s episode of The Real Estate Nerds Podcast, our host and real estate attorney Scott Smith interviews Kathy Fettke about her all-time worst deal. Learn how Kathy lost big twice, what she had to do to recover, and how she now uses her famous Real Wealth Network–and their combined experience–to avoid future bad deals. Thanks for joining us!
Kathy Fettke on Her First Bad Deal & Not Listening to Her Own Advice
Scott welcomes investor and coach Kathy Fettke to the show. The two investors chat about Kathy’s early real estate career and the prelude to her deal.
[1:00] Kathy now makes a habit of partnering with people who have survived down markets. She began investing in 1997 by buying her first house and turning it into a fourplex. “It quadrupled in value in a 10-year span…What did I know about real estate? I only knew that if you bought something, it makes money.”
[2:48] Kathy stresses the importance of knowing the downsides of markets, reinforcing her thoughts on partners: “Would you get into an airplane with a pilot who had only flown blue skies? No. You want to know that they can survive the storm.”
[3:10] Scott asks how Kathy developed her substantial network. She began developing her network when her husband received troubling health news. The two burned through their savings amidst uncertainty. During this time, Kathy set about learning how to create real, lasting wealth. She started by simply interviewing investors, one after another. The Real Wealth Show was born.
[4:30] Today, Kathy has an audience of over 40,000 members looking to her for advice on cash-flow and investing strategies, as well as networking opportunities. Scott points out that her success and growth are underscored by her tenacity in the face of challenges.
[6:00] Scott and Kathy fast forward to 2007 to discuss the beginnings of Kathy’s deal. Kathy credits The Real Wealth Show with helping her identify over-leveraged markets where homes were under-valued. She had a connection that helped her learn about the opportunities available in a down market.
[7:20] Kathy speaks a bit about her decision making process: “First of all, you have to trust your gut.” Common sense told her that the lending crisis was inevitable. She followed the instructions of the trusted mentor who helped her learn about preparing for the fall-out: “I wanted to own real estate where people could pay loans, where housing was affordable. That was Texas.”
[7:35] She bought 14 properties, all of which performed well.
[8:13] Kathy points out that she was teaching other investors as she went along, and knows exactly what her first mistake was: “I stopped listening to my own advice.” She realizes in retrospect she thought she was smarter than the smartest people she had advising her. She explains her rationale to Scott about why she deviated from the path that she encouraged others to follow. She figured diversification was good, and that she didn’t want to overinvest in Dallas.
[9:00] Kathy elaborates on her flawed logic: “I thought I could use the same reasoning and go find areas that had job growth and population growth. But somehow I didn’t pay attention to those two metrics that I was teaching.”
[9:30] Kathy briefly discusses the media’s role in her decision making. She has a journalism background, and bought into some media hype about Boise, Idaho. She knew from experience, but disregarded one of the main lessons she had already learned, which was to “Follow the jobs.” Where people need jobs, they will also need housing. In the case of Boise, the job market wasn’t growing–and neither was the population.
[10:50] Kathy shares a second rule that she broke: “Always invest in a metro area that has at least a million people, because if half are renters, you have a larger pool.” She believes she ignored her own advice based on Zillow metrics, and getting excited and big-headed.
[11:30] The two investors talk about how easy it is to be taken in by buzz and popular thought. Scott briefly paraphrases Oscar Wilde’s notion that “Everything that is popular is wrong.” If enough people say something, even smart investors can begin to accept it as truth without truly investigating. Scott and Kathy chat more about the emotional context of this deal, and how ego can cloud judgment.
[13:12] Kathy thinks her problematic thinking was even more basic: “It was more lack of experience mixed with too much eagerness.” If anything, she believes she got a little greedy.
[14:00] In the case of Boise, Californians were moving to the city and driving some prices up. But Kathy was moving on pure speculation rather than observable metrics: “The properties didn’t make sense the day I bought them, and they didn’t cash-flow.”
[14:36] She couldn’t manage her way out of the problem, either, and ultimately sold the property at a loss.
Kathy’s Worst Deal
That first deal Kathy mentioned wasn’t even the worst deal she’s here to tell us about. Her all-time worst deal took place several states over in Tennessee. She and Scott conduct a little post-mortem of her Bad Beat together.
[15:00] Kathy shares about her next, even more painful deal. She continued hunting markets around the country and found an area in Tennessee, but it was low on inventory. She made a deal with a builder, who agreed to give her network 10% of what he built in exchange for her purchasing some of the properties.
[16:30] What got her into trouble with the first deal she talked about came back to bite her a second time: “Again, I didn’t follow my rules about following the jobs. This was vacation property.”
[17:00] During the building process, the market crashed. Kathy shares with Scott about how her failure to read the fine print on one loan led to a major problem. She was forced to refinance, and while investor loans were previously unlimited before the crash, banks were placing hard limits on the numbers of loans investors could have. Unfortunately, in Tennessee, you can actually go to jail for failing to pay debts–and the loan in question was in her husband’s name. What had started out as a labor of love ironically ended in a painful predicament.
[19:00] Just as timing had a role in getting Kathy into this problem, it also played a role in getting her out. Given how many people were having loan issues, new legislation passed that took jail for nonpayment off the table. She doesn’t know how she would have solved the problem without this legislative intervention. Simply selling isn’t an option in a market downturn.
[20:00] Scott asks if Kathy had a more experienced investor on board for these deals. They discuss the delicate balance of not deviating from models that work, while also leaving room to grow. She shares about learning from her experience, and believes she over-corrected in hindsight: “I missed an opportunity because of my fear of ever making mistakes again.” She was afraid to take properties that weren’t cash-flowing, but would have been lucrative if she had taken them.
[23:00] The two investors discuss the issues involved in market downturns. Scott points out one famous investor who dropped out of the market for four years when faced with a downturn. Kathy responds with the importance of taking the temperature of the market.
[26:00] Kathy shares an anecdote about a misguided investor who believed C-class properties will always be in demand: “In reality, the way it works, is everything kind of goes on sale…What happens in a downturn is the people in the nicest properties have to downsize into a B property, and people who have been living in C properties can now afford the B. The safest place to be is in the middle.”
[27:27] When asked if there are ways to learn without experience, Kathy tells Scott: “It’s a rare person who can make the right decisions without experience.” She does believe that you can account for inexperience, and circles back to her airplane analogy: “If you don’t have the experience to navigate a storm, you need a copilot.”
[28:18] This is particularly true when you’re investing other people’s money as well as your own. She now has experienced team members on her network to help with areas where she isn’t as experienced.
[29:10] Scott asks what younger investors with less experience bring to the real estate networking table. Kathy, who is often the younger party in her own deals, believes younger people bring understanding of the culture to their deals. She herself had to explain what a webinar is to another investor. Experiences like this have shown her that “Younger people can bring the technology and marketing that older people are clueless about.”
[30:25] Young investors also have high amounts of energy, drive, and willingness to learn and work hard.
[31:00] Kathy knows her own place in her network, as well: “I fill up a room, bring my experienced experts, and together, we make it happen.”
The Takeaways: Challenge What You Think You Know & Get Experienced Partners to Help You
As always, we like to wrap up the show with the greatest takeaways from Kathy’s story. Kathy and Scott each share their opinion on the strongest lessons listeners can learn from Kathy’s Bad Beat experience.
[32:00] For Kathy, the major lesson is to contain excitement. She dove directly into the deep end of investing and found herself lacking in experience. Her advice to new investors is simply “Jump in, but jump in with a partner who’s been there before or do an enormous amount of studying.”
[34:00] Kathy underscores her point about doing your homework: “Real estate isn’t that hard or that complicated, but a lot of people mistakenly believe they don’t need the education.” Scott agrees that this is vital, as is analyzing the details of any particular deal.
[35:00] Scott points out that Kathy’s story is a cautionary tale about the influence of mass media messaging, and the importance of challenging beliefs we take for granted. Identifying the truth amidst buzz is a skill that requires practice, as is challenging one’s own belief systems.
Connect with Kathy Fettke
Connect with Kathy at www.RealWealthNetwork.com. Membership is free, but you must be a member to access the many free webinars and other educational resources. SEC rules also prohibit publicly displaying deal details, which is why membership is required. That said, the value of her network alone is certainly worth investigating.
Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.
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About Kathy Fettke
Kathy Fettke is the Co-CEO of Real Wealth Network and best selling-author of Retire Rich with Rentals. She is an active real estate investor, licensed real estate agent, and former mortgage broker. Kathy currently specializes in helping other real estate investors build multi-million dollar real estate portfolios that generate passive monthly cash flow for life.
To share her passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.
Kathy hosts two podcasts, The Real Wealth Show and Real Estate News for Investor. Both shows are top ten podcasts on iTunes that draw in listeners from 27 different countries. Her company, Real Wealth Network, offers free resources and cutting-edge education for beginning and experienced real estate investors alike. Kathy is passionate about teaching others how to create “real wealth,” which she defines as having both the time and the money to live life on your own terms.
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.