The Donohoe Bulletin
Issue 8: Real Estate Investing In A Down Market
May 6th, 2020
I came across a quote recently about the power of an idea.
“There is one thing stronger than all the armies in the world, and that is an idea whose time has come.”
—Victor Hugo
What are the ideas that shaped the way you viewed yourself, your career, where you live, and what you want for your life?
Several years ago I had the chance to be in a few study group sessions with Rich Dad Poor Dad author Robert Kiyosaki. They were intense to say the least. After years of reflection on those experiences, I realized why the book Rich Dad Poor Dad changed the course of my life and millions of other people. It implanted a new idea, one that was contrary to ideas I had previously believed.
The funny thing is that most people who make the same claim about this book can’t even remember the primary six lessons. Additionally, Kiyosaki doesn’t even tell you what to do in the book. He challenges the dominant ideas of society that have influenced education, politics, and money. Kiyosaki is never satisfied with his current perspective of the world and is constantly challenging his beliefs and ideas by reading, studying, thinking, and exploring the ideas of others. His approach is opposite to most who are constantly finding ways to validate the ideas they already have.
I characterize the idea from Rich Dad Poor Dad that changed me as simply the belief that there was another way to achieve what I wanted, and that I desired freedom over security.
I read Rich Dad Poor Dad many years ago, right before I moved from Connecticut to Utah. In the book, Robert talks about how he turned down a steady paying job as a commercial pilot after leaving the Marine Corps, opting instead to work as a salesman for Xerox. I assume most people would much prefer a career as a pilot, something many kids dream of being when they grow up, instead of selling copiers and printers, but Robert knew that the path he chose wasn’t about what he sold, it was about learning how to sell.
A big part of sales is learning how to listen. All over our downtown Salt Lake office, we have posters on the walls with this quote:
“Most people do not listen with the intent to understand, they listen with the intent to reply.”
—Stephen R. Covey
I knew, as Robert did, that in order to be successful, I had to learn how to listen with the intent to understand. The key to being prosperous is being able to offer a product or service that fills a need, and it’s impossible to know that need if you’re not listening.
Real estate investing isn’t dissimilar to sales. It takes keeping an ear to the ground to seek out opportunities. You must anticipate growth in a particular area and look for investments that fill people’s needs in order to be profitable. How can you appeal to renters or tenants? How is the property you’re renting or leasing better suited for them than the one across the street?
Young, enthusiastic, and ambitious, I moved to Salt Lake City and was adamant about getting a sales job as I worked my way through school at the University of Utah. But, as a poor college kid, sometimes you take the job you can get, not necessarily the one you want. The first job I got in Utah was delivering room service at the Little America hotel.
The story of Little America is an interesting one. The first Little America was built in the 1950s, not in Salt Lake, but alongside I-80 in Wyoming somewhere between Rock Springs and Green River. It was essentially a truck stop with two gas pumps, a cafe, and motel rooms. Shortly after it opened, it was bought by Robert Earl Holding, a civil engineer and fellow University of Utah alumni, who had originally moved his family to Wyoming to manage the hotel in exchange for a 10% ownership share.
The story of Earl Holding’s rise to billionaire real estate investor status is nothing short of amazing. The son of parents who survived the Great Depression, he grew up incredibly poor. Yet by the time of his death in 2013, he owned all the Little America hotels (four in total), the 5-star Grand America hotel, and three others, plus Sun Valley ski resort in Idaho, Snowbasin ski resort in Utah, and the Sinclair Oil company. He was also one of the largest landowners in the West, with 400,000 acres to his name and a net worth of $3 billion. Real estate mogul doesn’t even begin to describe what he accomplished over the 86 years of his life.
After I left Little America, I joined a non-profit call center with a mortgage arm. I worked to help people consolidate debt. I was still in school, but between Robert Kiyosaki’s philosophy and Earl Holding’s inspiring accomplishments in real estate, I decided to buy a duplex when my apartment lease came up. I still own that duplex to this day, and it’s a great source of passive income for me and my family.
After the original duplex purchase, I went on to buy seven other rentals. Then the Great Recession hit. It was an extremely challenging time to be in real estate, and I ended up having to sell some of my properties. It was a hard lesson in the right and wrong ways to invest in real estate, and realizing what I could and couldn’t manage. Many of the properties I owned needed work, which I had planned to hire out, but due to the financial crisis I didn’t have the money to do so. It became a huge hassle for me. My wife Synthia was helping manage properties, but it wasn’t where either of our focuses were—or wanted to be.
I learned that nearly anyone can get into being a real estate investor, but if real estate isn’t your main business it can become a distraction. It wasn’t my main business; at the time I was trying to keep Paradigm Life afloat. I wasn’t good at fixing things and I wasn’t good at property management. The properties I owned became a distraction and took away from what I was actually good at.
Looking back, this is where I see most real estate investors get into trouble. Long hours spent on nights and weekends trying to tackle repairs, yard maintenance, cleaning apartments between renters, and all the other responsibilities of being a property manager steal precious time that could be spent investing in yourself. It’s better to focus your time on ways to maximize your income, your human life capital, and making yourself more productive. You are your best asset, not your property or passive income stream.
If you owned property or a business in 2008-2009, you likely understand the amount of financial uncertainty that was prevalent during that time. I speak extensively to it in the beginning chapters of Heads I Win, Tails You Lose, but the gist was that I was constantly questioning whether or not I could survive one more month. In fact, I was ready to file for bankruptcy, move to Phoenix to be closer to my wife’s family, and had the moving van ready to go when I received a voicemail out of the blue from a local real estate investment company. They wanted to know more about the cash flow banking concept I taught at Paradigm Life and were interested in doing business.
Around the same time, I was invited to a real estate investor conference called Summit at Sea with The Real Estate Guys, a radio show and podcast group out of San Jose, California. Over the course of a week-long cruise, I provided education to their audience about financial principles that would increase cash flow for real estate investors.
I didn’t anticipate the degree of response from their audience. The market correction and corresponding foreclosures of 2008 and 2009 presented a tremendous opportunity for real estate investors to buy investment properties at a fraction of their market value, and whole life insurance offered a very beneficial way to to take advantage of these new opportunities.
Whole life insurance plays multiple roles in your real estate investment strategy, depending on the situation.
Whole life insurance allows you to take advantage of investment opportunities when they arise because the cash value of your insurance policy is extremely liquid. I prefer the following strategies for acquiring property using your Wealth Maximization Account™:
Related: How a 15-Year Mortgage Could Bankrupt You
Over the years, of the thousands of investments I have analyzed, the ones I have seen perform the best and most consistently are real estate related. In terms of increasing passive cash flow and hedging inflation, I believe nothing else outperforms real estate, provided you get into it the right way. Use a high degree of discernment to understand numbers; know what you’re buying and become good at bookkeeping.
If you don’t educate yourself enough to know what you’re investing in, you have to trust someone else to make your investment decisions for you, and that increases risk. Investments that you control, especially as markets oscillate, decrease your exposure to market volatility.
“The individual investor should act consistently as an investor and not as a speculator.”
—Ben Graham
Consult the Hierarchy of Wealth before making any investment decisions. Make sure you have a solid Tier 1, consisting of your whole life insurance policy or 6-24 months of living expenses, before moving on to Tier 2 investments like real estate.
I have a personal set of criteria I adhere to when looking for deals in residential real estate. I learned it from a good friend and client of mine, Jason Hartman, one of the most informed people in the real estate world.
Related: Return on Investment vs. Return on Wealth
Real Estate Investment Trusts exist in a number of sectors, including medical space, assisted living, hotels, apartments, vacation rentals, commercial space, etc. They function similarly to mutual funds in that they diversify your investment among a number of properties and have relatively low barriers to entry. You can begin investing in some REITs, like the crowd-funded Fundrise, for as little as $500. If you don’t have much in the way of liquidity or capital on hand, these kinds of investments may be a good option.
As with any investment, you have to educate yourself and know what you’re investing in. When considering the Hierarchy of Wealth, these types of investments are Tier 3. By law, REITs are required to pay out 90% of their profits in the form of dividends to shareholders, but this doesn’t mean they’re without risk. Outside of dividends, REITs can be highly illiquid and management fees cut into your overall yield. However, they may offer tax benefits, and depending on whether you opt for a publicly traded or privately held REIT, you have the option of being an ultra-passive or ultra-active investor.
I recently hosted a webinar for clients where I answered financial questions and concerns amid the economic shutdown brought on by COVID-19. I was surprised at how many of the questions weren’t necessarily about financial insecurity; there were many questions from clients wanting to know how to take advantage of upcoming investment opportunities.
My advice is to look at the economy in seasons. Right now we’re in winter. It’s time to prepare to plant. Pay attention to the GDP. Watch housing prices over the next six months. Look at whether or not people are able to pay rent. The unemployment rate and health of the economy are big factors when it comes to real estate investing. I recommend increasing your liquidity so you’re ready when real estate opportunities arise.
In addition to advice from Jason Hartman and The Real Estate Guys, my friend and mentor Ken McElroy is an expert at real estate strategy. As you probably know from reading other issues of The Donohoe Bulletin or listening to The Perpetual Wealth Strategy and Wealth Standard podcasts, I’m a huge advocate of networking and learning from the experts, and I recommend you do the same. Check out this recent edition of the Wealth Standard podcast to hear my conversation with Ken about the current state of the real estate market amid COVID-19.
There will always be opportunity in real estate investment, even if things change due to the workforce. Educate yourself on the various types of real estate you’re interested in and ensure you examine these three criteria before investing:
If you don’t mind carrying debt—some people do; it’s a psychological hang up for them and something to seriously consider before buying real estate—a real estate investment can be one of the best ways to generate passive income and increase cash flow. It is a tried and true way to build wealth, and utilizing whole life insurance to aid in your investment helps ensure it will be a success, regardless of what happens in the market.
A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™
