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Mindset & Money | Uncertainty Requires Adjustment – Why The 5th Key is More Important Than Ever

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Hosted by
Mike Ayala

On this episode of Investing for Freedom, Mike gives us a reminder to be flexible. Just because 2020 is over, doesn’t mean it’s smooth sailing from here on in. Mike encourages us to aim for money in the short term and look at how we can best plan for the future and for more bumps in the road.

HIGHLIGHTS:

0:00 – Intro
0:51 – 2020 has taught us that we need to be flexible and able to to adjust
1:45 – We need to have our values written in stone, but our goals written in sand
2:47 – In a book Mike is reading, it says that sometimes you have vote with your feet
3:43 – Just because 2020 ended doesn’t mean things are going to be rosey
4:15 – We need to super flexible in our methods as we go into the years ahead of us
4:40 – Passive income is a long game and it’s extremely important, but the more money you can make in the short term the better
6:17 – After 2008 was an opportunity to invest in real estate
7:34 – There’s a big difference between active real estate and passive real estate
9:39 – There’s still opportunity out there to invest
10:10 – You might need to adjust your thinking if you’re going to go all in on real estate. Make sure you’re buying cash flow and make sure you’re using leverage
12:08 – Mike is offloading some of his communities that don’t fit his new model
13:06 – Mike is still excited about real estate and predicts great opportunities in the next couple years, but he’s adjusting to other streams of income
14:30 – Mike isn’t saying don’t invest in real estate, but it will be more challenging
16:03 – We don’t know what’s coming so we have to stay flexible

FULL TRANSCRIPTION:

Thank you for joining me on the Investing for Freedom podcast. Today I’m going to talk to you about the fifth part of the five parts of the investing for freedom formula that I’m constantly talking about. What do you really want? Why do you want it? What are you going to do to get it? Measure results and adjust.

Adjusting is so important and if there’s anything that 2020 taught us, it was really to be flexible and to adjust. And it’s funny because we’re sitting here in early January of 2021. And, you know, I just can’t tell you how many times, and I’m sure you saw this too, you know, scrolling through social media or having conversations with people that you know people talking about, I can’t wait until 2020’s over as if like some kind of magic line was drawn in the calendar to where, you know, the minute January 1st hit, it was going to be some new year. And as everybody can see, there’s a ton of volatility still. You know, a lot of crazy things happening. I think we’re in for some of the most interesting times that any of us have ever lived in.

The crazy thing about 2020, as I said, it really taught us to adjust. And you know, I’ve said this before so many times, but we need to have our values written in stone, but our goals and our methods and all of that kind of stuff need to be written in sand. Because we need to be able to adjust and we need to flex. There are so many things in life that we don’t control including, you know, the monetary supply, including what the federal reserve and Congress, and even the president and the house of representatives and the Supreme court and all of these things are going to do. I’m reading a book right now which by the way, if you’ve ever been interested in international business and international living, it’s a great book it’s called the nomad capitalist.

And one of the things that he talks about in there, and it really got me thinking, he talks about how you know, so many times we’re talking about voting with our dollars and if you don’t like something, you know, just change the elected officials and while that’s all great in theory, and maybe, by the way, I do believe that we can, you know, vote and speak with our voice, but there’s so much turmoil in the country. So divided right now. The thing that Andrew talks about in the nomad capitalist, sometimes you might have to vote with your feet, and he talks about going where you’re appreciated. And so anyway, with adjusting, and I’m not saying by the way that I’m leaving the country, or I don’t love America. In fact, I’m wearing a hat with an American flag on it.

I do love this country and I am a patriot. And, you know, one of the things that he talks about in the book is that you talk to any American’s going to say that this is the best country that has ever existed and what an amazing place we live in, the freedoms we have and everything else. But the reality is we’re in some very tumultuous times, we’re in for some turmoil and there’s so many things that we can’t control.

COVID just accelerated so many things that were coming and were going to happen anyway. And so here’s the point of my conversation with you today. Just because 2020 ended does not mean that things are just going to be rosy, COVID is not over, COVID is not gone. And when we look at the power grab that has happened and the amount of freedoms that have been lost. And when we look at the amount of I guess, when we look at the amount of freedoms that have been lost and the censorship that’s going on even on the social media platforms, which I’m coming to you on today, you know, probably via iTunes or possibly Instagram, or maybe even Facebook, but there’s so much censorship happening and everything else you can’t help or at least I can’t help, but thinking that we need to be super flexible in our methods and how we go into this year 2021 and the years that are ahead of us.

So there’s a few things that I really want to talk to you about around adjusting. I’m a real estate guy at my core. I have loved real estate. I have loved passive income, but I’m telling you after everything that I’ve seen happen in the last year or two and this isn’t something that just happened, you know, halfway through 2020, because of COVID, I’ve been thinking this for a while. Passive income is a long game and it’s extremely important. I will never ever tell you something otherwise, but in this day and age right now, with everything that’s going on, while I’m not saying don’t focus on passive income and that you shouldn’t try to build up your passive income. What I am saying is the more money that you can make in the near term, in the short term, meaning cash flowing businesses, meaning, you know, double down on your sales, meaning if you’ve got a good real estate business if you’ve got a W2 job and you can figure out how to do a side hustle, the more revenue and income that we can figure out how to make in the next year, two years, three years, while we have the opportunity, the better off we’re going to be. Because right now I’m not in any way saying that you can’t buy real estate or that you shouldn’t buy real estate. But as we all know through COVID and with supply being so short and interest rates being so low and demand being so high for not only just living real estate, like single-family residence, people want to have their own residents. Not only that, but investment real estate, there are more investors coming into the real estate market still today than any time in the past. And I won’t go into this too deep right now, but 2008 was a real estate crisis. And so in 2011, 12, 13, 14, and escalating up, all of that was an opportunity to grow in real estate, money around real estate financing, Fannie Mae, Freddie Mac, the federal reserve, institutional money, investment money. It has all been pouring into real estate and it’s still pouring into real estate faster than ever at this point in time, because we’re having a hard time finding returns people just in general.

And so, you know, we’re seeing mobile home parks trading at three and a half four caps, which is crazy. I literally have a broker friend who has been selling getting some deals done. He represents the sellers and they’re getting deals done at three and a half and four caps on mobile home parks, apartment complexes are an all-time high. One of my mentors, Ken McElroy, you know, I mean, he’s been saying this for a couple of years, but you know, they’ll look at 600, 700 deals a year and be best and final in 10 or 15 or 20 and end up closing on one. It’s extremely challenging to find cashflow. Now you can still find deals out there. It’s just going to be hard. And you’re going to have to put in a lot more work than you might have had to have done 5 or 10 years ago. And that being said, if you’re listening to me right now, and you already own a real estate investment company, and this is a key differentiator, there’s a big difference between passive real estate and active real estate. And in GoBundance, we spend a lot of time talking about horizontal or passive income versus vertical or active income.

And it’s really hard to draw the line. And the thing that I realized is, you know, what used to be really passive for me when I would buy a single-family house and, you know, basically a property manager would run it. Then once I sold my business and I really became an active real estate investor, meaning I built out a team, I have, you know, 60, 70 employees at any given time running a mobile home park community. I’ve got multiple people managing our single families and we’ve got a team managing our commercial properties and that kind of stuff. So it’s really, that’s no longer really a passive investment. I’m literally running a real estate business. And so there’s a big differentiator between those of us that are running real estate businesses and those that are investing passively. And I really want to draw that differentiation.

So, you know, if you’re a person that’s flipping five, 10, 15, 20, 25 homes a year, you’re not really a passive real estate investor. If you’re investing passively, you’re a doctor or even, you know, maybe you are in real estate, maybe you’re a real estate broker and that’s your active business, but then you invest a $100,000 at a time with someone who puts together a fund and syndication like we would do in the mobile home park space. And you invest with us, that’s passive or another opportunity that I know a lot of people do is they buy turnkey rental properties. And so, you know, they might be living in Phoenix, Arizona, and maybe they buy a turnkey property in Atlanta, Georgia, because Atlanta’s’ rental market is great. And they can still find good deals there. And they buy it from a turnkey operator. Someone who would find a house, identify the house, remodel it, get it ready to rent, find a renter, and then they sell it to an investor. And then they manage it for that investor, that is truly passive. So there is still some opportunities out there for people to find passive investment opportunities with active real estate operators, people who are running real estate businesses.

And by the way, there is still opportunity out there for you to find investment real estate even if you are a passive investor. Meaning you want to find a single-family house and then turn it over to an operator, or even if it’s not fully passive, you’re looking to buy your first investment property. Can you do that? Yeah, sure, you can. It’s just harder than it’s been in the past. You’re going to have to work a lot harder to find the right deals. You’re going to have to have a lot more conversations. You’re going to have to be in the right network. And so the question that I would ask you to pull this together with adjusting, if you’ve been finding yourself thinking like I’m going to go all-in on real estate, I’m not saying you can’t, but you might need to adjust that model for a while. And when we’re in times like we are right now, you just need to be really careful and stick to the fundamentals. So am I saying stand on the sidelines? No. What I am saying is, again, stick to the fundamentals. So make sure you buy for cash flow, make sure you’re not over-leveraging. You know, we’ve had a lot of conversations over the years about no money down deals and stuff like that that I was a proponent of it. And I still am, if you can find the right deal. But the challenge is, it’s going to be harder and harder to find a deal where you should go into it with no money down, because if you’re buying at the top of the market and then you’re going in with no money down, you’re leveraged and the amount of the mortgage payments that you’re paying, whether it’s private money or you’ve got a mortgage and you’ve borrowed the down payment, the more money you borrow against an asset at all-time highs, the less cash flow there’s going to be in that. And if rents drop in any way, shape or form or we’ve over projected or are under projected our occupancy, any of that stuff, if there’s any variable there, we have any drops of rental rates, or if you have some kind of adjustable-rate mortgage, and that ticks up on you a little bit, or if you’ve got a balloon payment due in a couple of years, all those are things that you’ve got to be really careful with always, but especially in times when real estate is all-time high.

So just stick to the fundamentals, try and find cashflow, don’t overleverage. If you find yourself doing loans that you know you’re going to have to refinance in two to three years, four years, five years, that’s going to be a really tricky period in time when I look forward. None of us have a crystal ball, but at the same time, I’d be really concerned about loans that I have coming due on a, you know, a single-family property that could potentially adjust up or a balloon payment needing to be made in three or four years and that kind of stuff. So when we talk about adjusting, that’s one thing that we’ve really done this last year. We’re offloading some of our communities that don’t fit our new model. When the outside market dictates change, you have to change with it. You have to adjust, and sometimes we can’t see these things coming. So the thing I’m telling you is just be flexible, stick with the fundamentals, buy for cash flow. There are tax advantages, obviously, in real estate, we’ve got to watch the tax changes that are probably coming. I don’t know that, you know, the new administration and the new house of representatives and the new Congress are going to be as open to, you know, big tax breaks for investors and that kind of stuff. So you just really got to be careful with the seasons you’re in and really adjust the plan with the time and the flow. And, you know, like I said, you know, I kind of started out at the beginning of this podcast with it, but we’re in interesting times in America and things are changing quickly and there’s a lot of things we can’t control. So just manage your risk. This is all about risk mitigation at this point in time.

I’m still excited about real estate. In fact, I think depending on exactly what happens and the opportunities in real estate are probably going to be as great as ever two, three, four years from now. But right now I’m honestly getting ready to adjust. You’re going to see me talking about a lot of different things. We’re launching a fund around buying HVAC businesses. We’re going to set up an operating company. I’m going to go back to my roots. I’m not moving away from real estate. We have built an amazing team at park place communities. That’s going to continue to get some of our properties turned around. We’ve got a lot of properties that are in value-add mode. We’re bringing in new homes, we’re remodeling homes. And like I said, we’re offloading some of the properties that you know, were underperforming and anything that basically we can look at that we can sell today that we can sell today at the same game, that it would take us two, three, four years to get the gain out of at all-time highs being right now, it makes sense to exit some of our properties.

So why am I telling you all this? Just be flexible and adjust with your plans because sometimes market conditions dictate it, sometimes diseases that we didn’t see coming dictate it, sometimes there’s a change in leadership that dictates it. There’s all kinds of things. Monetary policy, all of the above. So rather than getting stressed out about it, adjust the plan and what I would say to you to close on this. Real estate, I will always love real estate. I love real estate right now. We still have a lot of opportunity in our mobile home park funds. The communities that we’re doubling down on, there’s a lot of growth opportunities. Affordable housing looks as good as it’s ever looked. So I’m not saying don’t invest in real estate. What I am saying is, it’s going to be more challenging. You may have to adjust. And whatever you can do in the next one, two to three years, 12 to 36 months to make as much as I always say, fake money as possible. How do you increase your income? During times when a lot of people’s incomes are not increasing figure out how to increase your income, figure out how to produce more revenue, figure out how to add more value, because the more income that you can make during this time, the more fake money that you can store up when the time comes to be able to buy more assets, whether those are distressed businesses or whether those are distressed real estate assets, you need as much cash on hand as possible, or at least assets on hand, liquid assets on hand as possible. And what I mean by that is, you know, potentially a lot of people are like, well, I don’t want to have $1 or $2 or $3 million in the bank.

Well, you might have to figure out where to invest that cash in the short-term, maybe it’s short-term loans to secured real estate. Maybe it’s investing some of that in gold and silver. Maybe it’s putting it into some short-term investments and stuff like that. That’s probably a conversation for a different day, just be flexible. Be prepared in this time, as we learned in 2020, we don’t know exactly what’s coming and, you know, rather than sticking our head in the sand and not doing anything, we’ve got to remain flexible. We’ve got to keep our ears to the ground and figure out what’s going on and try the best as possible to figure out what’s coming ahead of us. And the thing that I can tell you is that I don’t think real estate prices are coming down in the next couple of months. So in the meantime, let’s figure out how to make a bunch of money and let’s figure out how to make 2021 the best year ever.

Let’s figure out how to adjust our plans and figure out how to clean up. There’s a lot of opportunity out there happening right now. Things are changing quickly and the more we can stay on the front side of that rather than, you know, looking backward in the rear-view mirror and wishing things are the way they used to be. How do we look forward and figure out what’s coming? So cheers to 2021 and hopefully, you know, it’s the best year of your life, even better than 2020 was. And just again, don’t be too scared to adjust and be flexible, go out there and make it great.

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