The Coming Economic Crisis in The U.S.

Full Transcript Below

Intro
Hi. My name is Rod Khleif, and I’m the host of “The Lifetime Cash Flow Through Real Estate Investing” podcast. And every week, I interview Multifamily Rock Stars and we talk about how they’ve built incredible wealth for themselves and their families through multifamily properties. So hit the “Like” and “Subscribe” buttons to get notified every Monday when a new episode comes out. Let’s get to it.

Rod
Welcome to another edition of The Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif, and I am thrilled you’re here, and you are going to love today’s interview– well, maybe not, but you’re going to get tremendous value from today’s interview. The topic may scare the hell out of you, but I’ve got a very knowledgeable– I’m going to call him an economist, but he’s been a hedge fund manager forever. His name is Bruce Fraser, and Bruce now oversees a management of about a half a billion in assets. But Bruce timely called the 2008 crash, which is embarrassing for me because I sure as hell didn’t. But anyway, welcome to the show, brother.

Bruce
Good to be here. Yeah. Now you have my cell phone number that we can stay in touch.

Rod
Right. Right. We can stay in touch. Right. I really appreciate you coming down and doing this live and in person with us. This is just so much more fun than doing it on Zoom. And I’m really glad we got to meet because we know a lot of the same people. So let’s start with just having you bring us current– and you can do a hell of a lot better job on your bio than I just did. So please, you know, tell us who you are and where you came from.

Bruce
Sure. I mean, I think I came primed as a finance guy. I came out that way. I’ve always just been focused on numbers. And when I was a young teen, I was reading money magazines and Kiplinger. I don’t even know if they publish those anymore, but outgrew those by probably ’13, ’14 and started needing something a little bit more depth because they were just kind of regurgitating the same old thing, kind of like a lot of the Twitter accounts these days, and just a certain high-level narrative. And I just felt like there was always a better mousetrap, better way to do things if you really focused on the data. And so progressing through in undergrad, I got an Economics of Financial Applications degree and ended up getting an MBA in Finance. While I was working on my MBA, I actually had a couple of really pivotal courses, one of which was we had to create a strategy, a trading strategy. It was actually an options-based strategy and get to know what paper traded and things like that.

Rod
Fun.

Bruce
And part of our grade was contingent upon the results. And so I ended up– instead of doing a forward test, I wanted to do a backtest because just the nature of the trading style that I had and I didn’t know at the time as a student that that was going to be a lot of trouble. So I ended up spending a couple of months in the basement library building a database off microfiche, but tested it, got excited about it, and I knew there might be something to it when I was presenting out the case to all my peers in the MBA class. And this was a professional MBA, so it was nights and weekends. But, you know, when people go too long or they’re talking too much, at night, people just are checked out. But when I was presenting there was a ton of engagement, lots of questions, and that just kind of continued as we’d be going out, we’d have a beer somewhere and people were asking, hey, would you take some of my money and manage it? So I started looking into what would that even look like. This was quite some time ago. So people–

Rod
Now, when was this?

Bruce
This would have been in the late 90s.

Rod
Okay, got it.

Bruce
90s.

Rod
Okay.

Bruce
And so hedge fund was not even a very common word back then. To try to figure it out as a poor student, college student was pretty tricky. But I had a friend that introduced me to somebody, he’s like, hey, I know this guy through the art community that I think does this stuff. Do you want me to introduce you and something? Sure, I don’t know anything. Well, come to find out this is one of the richest guys on Wall Street and he just drilled me. Why the hell would you want to get in this business? Because he was one of these traders in and out.

Rod
Yeah, that’s a real high energy [inaudible]. Right.

Bruce
High stress. And so I explained to him what I was doing. You know, they poked at it. He handed me off to one of his partners, and they poked at it and they said, hey, you know what you’re doing and you should set up a fund. And when you do, we’ll give you a little bit of money. You know, it wasn’t Seed Capital but it was validating enough if you’re entrepreneurial at all that, hey, I should go try to do this and so just try to build a fund over the years and it was what’s called an absolute return strategy. So you’re trying to make a steady return no matter what. People hear options hedge fund and they think, you know, I ride to work on a Japanese motorcycle or something. But it’s the opposite of that, where you’re trying to be really low vol, really low risk, and, you know, fast forward without spending too much time on it. But, you know, get to the financial crisis, and yeah, we anticipated that to a large extent based on the data we were seeing and I think our max drawdown peaked to trough was less than 5% in the equity markets and we were at our all-time highs at the troughs of ’09 when most people were -60 or something. And so I had been investing in real estate with just one business partner prior to that and just doing some smaller stuff. It was you know, single-family rentals, some small duplexes or small multis.

Rod
This is pre-crash?

Bruce
Pre-crash.

Rod
Right.

Bruce
And we sold all of it in ’07 and late ’07.

Rod
Perfect timing.

Bruce
It was. And, you know, a lot of people say, oh, you’re so lucky. But for me, I was looking at price-to-rent ratios and things like that. They were hyperbolic. And we got to the point where we were having to develop property just to get that extra margin to make them break even in cash flow.

Rod
So you were looking at price-to-rent to come up with that conclusion. Interesting. So wasn’t it the macroeconomics going on in the world?

Bruce
It was that, too, but all that kind of combined together where I said, you know what? I’m good. Let’s go.

Rod
Yeah. What’s that boo– oh, “The Big Short” about you know, people that– the one guy became a billionaire.

Bruce
Yeah. And actually, there’s a neighbor of mine that was one of the– it was Paulson, Bass, and Bury that basically made that call. And Kyle Bass used to live in my neighborhood, but my wife gives me grief because she said, you talked about this, you said you saw it coming. He made a billion dollars.

Rod
Right. I saw Forbes– I think I saw Forbes picture him on the bow of his yacht or something. Because he shorted– yeah. Anyway but–

Bruce
[inaudible] little better than I did. But I at least stayed out of the [inaudible]

Rod
Well. Yeah. Well, you guys all know my story. I lost $50 million in 2008 and ’09. And how I justified in my own mind is there were countries that went bankrupt then. So, you know, guys, just so you know, we’re going to be talking about the economy, and I got to tell you, it’s going to be sobering. I’m going to warn you right now, it’s going to be sobering. I pulled some of Bruce’s– and Bruce is with Elkhorn Capital Partners, by the way, guys. And I pulled some of his LinkedIn articles that you wrote, and I want to go through those with you because– actually, the blood drained from my face a little bit. I mean, I knew this stuff, but I hadn’t seen it so well articulated.

Bruce
Hopefully, I have some tequila in here.

Rod
Yeah, I’ll tell you, you need some tequila for these. But the bottom line is the debt in this country, you know, there’s this graph if you guys can’t see that, but that’s how much we’ve borrowed over the last– what period of time is that when it really accelerated? I couldn’t remember the numbers.

Bruce
Post 1971.

Rod
So post ’71. That’s what’s happened with the US debt. Talk about that a little bit because it’s sobering.

Bruce
Yeah, it is. And, you know, right now we’ve got people, they think the Feds kind of this all mighty power that they can control. They can dampen inflation when they want to, or they can reduce debt at the same time, all while creating this soft landing and if you dig into the math, we just call bullshit. It’s not feasible.

Rod
Right.

Bruce
It’s just narrative. And they need to talk down inflation as best they can. And I’ll approach why they’re moving so rapidly in a bit, but yeah, the US government at this point is just in an extraordinary amount of debt. I think it’s good to give a background on how we got here. Just a real brief but–

Rod
Sure.

Bruce
The post World War II, you know, we came in, we helped our allies, we had all the tanks, at that time, we had two-thirds of the physical gold in the country.

Rod
In the world or in the country?

Bruce
In the world.

Rod
Right. In the world. Right.

Bruce
Our country had two-thirds of the physical gold. And so it made sense. We were brokering this agreement. There’s an agreement called Bretton Woods where we came to the table and we basically became the world reserve currency because of that because everybody said you know, I’ll just tag to the dollar because they’re tied to gold. And so it makes sense. So they pegged at the dollar. Subsequent to that, there was something called the petrodollar that was created. We basically went to the Saudis or Saudis and said, hey, we’ll protect you, but all oil has to be traded in US dollars. And that’s how it’s gone until very recently. And so that creates a tremendous amount of demand for these dollars, which really allowed us to abuse the system.

Rod
Yeah.

Bruce
So in 1971, the US went off the gold standard.

Rod
Right.

Bruce
A lot of people know that. And that graph goes hyperbolic, you took all constraints off the table. There’s all this demand out there for utilizing the dollar. All this global trade is being done in dollars. We had the goal at the time, but then we removed the constraint. And so, you know, it was like kids in a —

Rod
Oh, the politician. Oh yeah.

Bruce
You know, with Mom’s credit card there’s anything and everything was on the table.

Rod
Right. And it still is.

Bruce
And it still is.

Rod
Good God. Trillions of this last year alone.

Bruce
Yeah. One side of their mouth are talking about you know, pulling down inflation, but then they’ll announce another trillion dollar–

Rod
Right. It’s the stupidest stuff you’ve ever seen.

Bruce
Waiving student loans. Well, we could argue the politics of that. I don’t think that’s appropriate for the show. But at the end of the day, it’s a highly inflationary thing to do because you’re–

Rod
Of course, it is.

Bruce
Yeah.

Rod
Of course, it is. And let’s talk about the politics. It’s absolutely political. You’re paying off– you know, my daughter worked her ass off to go to school. She doesn’t have any debt and she’s paying for other people’s student loan debt. That’s BS. And it’s completely political. It’s an attempt to buy votes. And then they talk about inflation and they’re creating it.

Bruce
Yeah. It’s the fiscal spend [inaudible]

Rod
You can’t make up this stupidity governmentally.

Bruce
So at this point, the US government has approximately 32 trillion in debt.

Rod
32 trillion that we know of.

Bruce
That’s what they claim is debt.

Rod
Right.

Bruce
Now, there’s another 100 plus trillion that you or I, our bankers would call that their obligations that they have and they haven’t pre-escrowed them or pre-funded them. So it’s got to come from somewhere, their obligations that they have, but they don’t count that. So let’s just ignore that other 100 trillion because the math just becomes really stupid.

Rod
Right.

Bruce
But let’s say there’s a 32 trillion.

Rod
Right.

Bruce
So our interest expense at the end of 2021 before rates started going up, was $604 billion.

Rod
Interest in one year. 604 billion. Okay, I know where this is going because I read this.

Bruce
That is IO, right?

Rod
Right.

Bruce
Interest only is not amortizing. They’re not paying it down.

Rod
That’s 603 billion.

Bruce
Yeah. 603. And so you look at how much they’ve raised interest rates.

Rod
Right.

Bruce
And what’s called 500 basis points, easy math on 32 trillion, that’s a trillion six incremental debt service. Incremental. On top of the 600–

Rod
Yes. So basically what he just said, guys, is that it has actually gone up, or it’s going up to 4X. Yeah. So it’s going up to 1.6 trillion in interest. Now, if you ever want to be freaked out, go online and look at a graph that shows a million with a billion with a trillion and see how much more a trillion is than a billion. It’ll blow your mind. I mean, that gives it visually, you can see just how staggering it is. And so, you know, talk about taxes and the tax implications of being able to pay that interest. And if you don’t have the numbers I have them here. You know I have the articles here.

Bruce
Yeah. So there are really four ways– well, and to your point on scale–

Rod
Right.

Bruce
To put that 1.6 incremental spend or the 2.2 trillion of interest, in perspective, we spend an 800 billion in its entirety on our military.

Rod
In the military. And we only collect three and a half trillion in taxes.

Bruce
That’s right. We collect approximately three and a half trillion in taxes. And that’s probably going down because a lot of the asset values have gone down and a significant amount of the taxes come from capital gains.

Rod
So sorry to interrupt. So we collect three and a half trillion in taxes. We’re talking about a 1.6 trillion interest payment on our debt?

Bruce
Right.

Rod
That’s half of our taxes.

Bruce
Yes.

Rod
Almost. Yeah.

Bruce
But the thing is our spending, right?

Rod
Right.

Bruce
Except if you take the interest out of it, we’re still spending 6.3 trillion.

Rod
Okay.

Bruce
So, we collect three and a half every year, we spend roughly 6.3 before interest.

Rod
Right.

Rod
I got to hammer these things home. I just want to make sure you guys heard what he just said. So we collect three and a half trillion in taxes. Right now, at our current spend level, the government spends 6.3 trillion. So we’re not even collecting enough to pay what we’re spending before interest, and it’s 1.6 trillion in interest. Can you see a problem with this, guys? Can you see what– I mean, to me, it’s like a ticking freaking nuclear bomb.

Bruce
It is.

Rod
Yes.

Bruce
You know, there are four things they can do to solve it. They can raise taxes.

Rod
Right. Which they’re talking about. 80 billion in money to the IRS to supposedly go after wealthy people. We’ll see if that–

Bruce
Let’s poke at that a little bit.

Rod
Okay?

Bruce
So it’s always, hey, we can raise taxes under the context of evil wealthy people.

Rod
Right.

Bruce
But the evil wealthy people have tax attorneys.

Rod
Right.

Bruce
They probably understand the taxes better than the regulators.

Rod
Yes, they do.

Bruce
And so every time it starts as the wealthy, they don’t actually end up auditing the wealthy and things like that. Very often it comes out of the pocket of normal folks out there.

Rod
Right. Because they audit and they find out they’re not getting anything because they’ve got incredible tax attorneys that fight these things. And, you know, the tax law is so incredibly cumbersome and difficult to understand and there are so many different loopholes and things.

Bruce
Yeah. I mean, if you do the math on it, even if they had a 100% wealth tax where they took the entire net worth of everybody in the country, it wouldn’t pay off all the obligations.

Rod
It wouldn’t pay the debt. So what’s the answer?

Bruce
So that can’t solve.

Rod
So what’s the answer?

Bruce
Inflation.

Rod
Inflation.

Bruce
Yeah. They can raise taxes, they can cut spending. They would have to, based on what we just talked about, they have to cut spending about in half just to break even on their regular spending, not to cover their interest. So they’re not going to cut half the government programs up.

Rod
Right.

Bruce
That’s not going to happen.

Rod
Right.

Bruce
To default, which they’re not going to do because they have to borrow. And so if they default, they can’t borrow for years. And that would be a catastrophic thing in this country. And so they– by design want inflation. And that’s what most people don’t get. They listen to the narrative that, oh, we want a strong dollar, we want low inflation. But that’s not really true. What they want is they have to have, absolutely have to it’s– you know, the technology sector would say it’s a feature, not a bug. Yeah. It’s by design, they have to have inflation, but they want it reported at a lower level.

Rod
Right. Yeah, you talked about that as well. In fact, let me find that article where you said the inflation rate has been calculated and changed literally two dozen times since 1980. So they’ve basically rewritten what inflation really is, just like they’ve rewritten whether or not we’re in a recession or not. Right?

Bruce
We’ll talk about that, too.

Rod
Okay.

Bruce
But yeah, every time they do the calculation, of course, it goes down. Right?

Rod
Right.

Bruce
It doesn’t go up.

Rod
Right.

Bruce
It’s not a real reassessment of how they’re doing things. It’s always trying to find a way to reduce the number. I mean, as an example, last summer when the inflation rate was around, the CPI was around 9% or so. About a third of the CPI comes from the owner’s equivalent rent, which is their representation.

Rod
I’m sorry, I didn’t catch that.

Bruce
It’s called owner’s equivalent rent.

Rod
Okay.

Bruce
It’s a Frankenstein number that’s supposed to represent housing.

Rod
Okay.

Bruce
Okay. And so they were saying when we were at a 9% inflation rate overall, that a third of it had only risen two to 3%. They were saying rental and housing prices in this country had only gone up two or 3%. Now, find me any market that is true. I mean, it’s just not true.

Rod
Tampa went up over 30% one year.

Bruce
Right. Some markets doubled.

Rod
Right.

Bruce
So it’s just absurd. So the number is grossly understated, always has been. And again, it’s by design. They changed it again in January. A lot of people didn’t catch it, but what they did, they historically had been comparing current prices to the last two years of prices. Well, prices rose a lot in that most recent year. And so what they did was they shortened the timeline that they compared against to just the last year, which was already the inflated number. And so that helps suppress the rate. It doesn’t mean the rate is going to go down, but it helps hide some of it.

Rod
So help me understand why inflation is the solution because I’m missing the parallel.

Bruce
So inflation is a solution because you can borrow today in today’s dollars, you know, fix obligations and things like that, and repay it in the future with the base currency. You prep the money in the future. And so it’s like Monopoly.

Rod
At what point does the proverbial bus hit the wall?

Bruce
You know, one of the things that–

Rod
I mean, let’s talk– I mean, China with all this brick currency thing that’s going on. I mean, it’s all over the news.

Bruce
Arguably, it’s starting, right?

Rod
Right.

Bruce
And I don’t want to say, hey, the sky is falling, but I’ve gotten some feedback, some great feedback on the LinkedIn post I do. But there are a couple of people out there that believe in this MMT theory where it’s, oh, we can just print money. It doesn’t matter. We can do it because we’re the world’s reserve currency. Okay? We’ve gotten away with that because we were [inaudible] reserve.

Rod
That’s changing.

Bruce
But what’s happened is we really abused that.

Rod
Right.

Bruce
There are a couple of triggers to that. People have gotten tired of it and have been– China, Japan, and others have been liquidating their treasury holdings over the years, slowly. Russia’s completely dumped all of theirs, for obvious reasons. But in January of 2023, a new law or new thing went into a place called Basel III. And it’s a rule that allows the world banks to claim gold as a reserve, where before it doesn’t really make sense, but before they weren’t allowed to count it as a reserve. So that happens in January. I can’t remember exactly when it was. February, March, we imposed sanctions on Russia and we crossed the tripwire. Basically, we said we froze their assets that were in– their country’s reserve assets that were in dollars. That had never been done before. And so that woke up even our allies to saying, hey, wait, if we piss off the US or they just have a bad day, they may take all of our reserves.

Rod
Wow.

Bruce
And so what immediately started happening, if you look at the graph of holdings of Treasuries from China, Japan, even, our allies dramatically started dumping. They’re reducing their holdings. Not disruptively, but to the point where it’s pretty clear that was a message to them. And at the same time, China is voraciously buying gold.

Rod
Gold, yeah.

Bruce
By a ton.

Rod
I mean, even other precious metals, I’ve read as well. Platinum, silver, and everything.

Bruce
It’s commodities.

Rod
Yeah.

Bruce
And we did this to really impair Russia. But Russia is a commodities-based economy. And like Putin or not, you know, he’s not–

Rod
Got plenty of that dude.

Bruce
But he’s a smart dude.

Rod
Yeah.

Bruce
And he said, hey, you want our oil and natural gas? Keep warm. You’re going to pay us in rubles for gold.

Rod
Right.

Bruce
And so the ruble crashed for about two weeks, and after he announced that, it was back to all-time highs.

Rod
No kidding.

Bruce
And so the sanctions have been completely unaffected from that perspective.

Rod
Well, I’ve seen alliances between you know, all the brick nations on this, you know, and even France, I think, got involved here recently. That macron– you know, we won’t go in the whole World Economic Forum to go down that rabbit hole, but good Lord, there’s some crazy stuff right now. And so–

Bruce
It’s definitely shifting. And they’re very open about it.

Rod
Yeah.

Bruce
China is very open about it. It’s not something that might be happening on the sidelines. They have policy committees formed to help create another reserve currency.

Rod
Yeah. So I was listening to Steve Forbes on Fox, I don’t know, about a week ago, and he wasn’t– it made me feel a little better, but now I’m back to where I was before. He’s like, you know, the US is still the reserve currency. It’s like comparing– how did he use a comparison where we’re so much above the other currencies in valuation and power and strength that there’s a long way for them to go to be able to compete. The other thing he mentioned was, you know, a lot of currency traders don’t want to mess with the one because they manipulate it. I mean, I think we manipulate the dollar as well. I think that’s apparent. But I think they’re a little more obvious about it.

Bruce
I think that’s true.

Rod
Okay.

Bruce
And I think that the– all of that’s true.

Rod
Right.

Bruce
You know, if you could look at Forbes’s comments. Well, sure, it’s got a long way to go, but is a trend up or down? Right? And it’s down.

Rod
It’s coming.

Bruce
And so it’s not going the other way. But I think the solution– and I don’t know when it’ll happen or if it’ll happen, but I think what they’re working on is a multi-country solution [inaudible]

Rod
Currency. Digital currency. Yeah.

Bruce
Where they all contribute, and it’s tied to some sort of commodity pool and so that there’s something real behind it. And I think if they are able to pull that off, it will be attractive. It won’t eliminate the dollar as a reserve, but it will reduce the demand for it.

Rod
Really? Okay, well–

Bruce
Or has a propensity to it.

Rod
I have to tell you, I’m a bear. I’m very, very concerned about it and concerned about the country as a whole, frankly. But again, we won’t go down that rabbit hole. So how can people best protect themselves in this current environment?

Bruce
Buy hard assets.

Rod
Buy hard assets.

Bruce
Yeah. And that’s the way to do it. Because you buy something in today’s dollars, just like the Fed.

Rod
Right.

Bruce
And lock it in at fixed rates.

Rod
Right.

Bruce
And then you have something, whether it’s multifamily, whether it’s timber, property, whether it’s oil and gas, mineral rights, whatever the vehicle is.

Rod
Gold, silver. Yes. No?

Bruce
For sure.Yeah.

Rod
Okay.

Bruce
But if you have something like that, you have something that when they pull it out of the ground or when you rent your unit and however many years you can trade for whatever the going concern is, then.

Rod
Correct.

Bruce
If it’s a lot more dollars, fine. If it’s Airbnb or [inaudible] or something else, fine. It doesn’t matter. You’ve got this asset, you can trade for whatever the rate is in the future.

Rod
Got it. So we’re in the right business.

Bruce
I think so.

Rod
I do too. Actually, I just wanted to hear you say it.

Bruce
Yeah, no, and it’s– you know, again, I still oversee quite a bit of money in the public markets and we’re very good at that, but I spend the vast majority of my time focused on–

Rod
Oh, so you’re in the stock market as well?

Bruce
Yeah, we have quantitative strategies that run in the [inaudible]. Elkhorn doesn’t. That’s a separate business.

Rod
Oh, right, okay.

Bruce
There’s the old company that ran the hedge fund still exists.

Rod
I got you.

Bruce
We still oversee several hundred million dollars.

Rod
You do? Wow. Interesting. So you’re not concerned about a crash in the stock market?

Bruce
Well, I would be if I was your typical investment advisor buying gold. I would not do that.

Rod
Okay.

Bruce
The enemies [inaudible]

Rod
So you’re actively trading?

Bruce
It’s active, not day trading or anything, but it has very strict risk controls and repositions and it will reposition into gold and things like that when things trigger.

Rod
Yeah, I bought a lot. I had a lot of gold these last year. I mean, I’m in a ton of gold right now and silver as well. But silver takes up so much room. I like to hold it and it’s down at a vault downtown, you know, but it takes [inaudible]

Bruce
It’s the best but I also trade it and, you know, I blow a bunch of call options on gold miners and they’re doing quite [inaudible]

Rod
Yeah, you know, I listen to Kiyosaki and he’s in tons of gold as well. And, you know, of course, if you listen to him, the world is going to end here soon and it’s going to be like a bloodbath and he’ll eventually be right. I think based on what we’re talking about here, I–

Bruce
He’s a step further down. I think he bought the cows and goats and–

Rod
Oh, yeah. Well, you know, he said he’s invested in oil drilling as well. And I think he said he had gold over in Switzerland, I think I’ve heard, and just all sorts of crazy stuff that may not be so crazy. And then I’ve had Harry Dent on the show, and of course, you know, his framework is pretty doom and gloom. Peter Schiff as well. Both those guys live in Puerto Rico, and, you know, they say it’s going to be really ugly. And I mean the metrics, you know, the things we just talked about, you know, it’s very scary.

Bruce
The great thing about multifamily, in my perspective is I love the risk profile of it, first of all, but it’s a great investment business to be in, whether this happens or not. Right?

Rod
Right.

Bruce
And so it’s a good vehicle to make money. I love it compared to the stock market because I can affect the outcome.

Rod
So you’ve got a couple of thousand doors in Oklahoma, I think you said. Right? That’s your market right now, and you’re vertically integrated now as well. By the way, if you guys don’t know what that means. That means he manages himself rather than using third-party property management. Do you have your own construction division as well, or just a management for right now?

Bruce
No, I don’t.

Rod
Yeah. Is the plan to continue to purchase there? Are you looking at other markets?

Bruce
We take a rigorous– the people listening guess this, but the mathematical view of the world.

Rod
Sure.

Bruce
And so we quantify all different markets. One of them is whether it’s business-friendly or not.

Rod
Oh, sure.

Bruce
It’s not political, but that keeps us away from the coast.

Rod
I stay away from blue states. Yeah.

Bruce
If my product is a unit to rent and someone’s living in it, I can’t get evict them.

Rod
They can squat. Right. Yeah. Right.

Bruce
And so I don’t invest in places like that.

Rod
Right.

Bruce
So we do have kind of a top ten target market. We’re in two of them already. We plan to expand that footprint, for sure.

Rod
We like the Sunbelt. Love the Phoenix, Texas. Except for Houston, right now. We’re in San Antonio and Dallas, of course, Florida. We’re in Georgia, we’re in the Carolinas, and we’re in Ohio and Indianapolis. Do any of those ring a bell for you?

Bruce
They do.

Rod
Okay. All right.

Bruce
There’s some heavy overlap there.

Rod
Right, okay.

Bruce
You know, because it makes sense.

Rod
Right.

Bruce
You know, we look at population growth.

Rod
Right.

Bruce
We look at unemployment trends. We look at unemployment trends pre-Covid, what happened during Covid, and how it recovered coming off.

Rod
Sure.

Bruce
You look at industry diversification.

Rod
That’s right.

Bruce
There was someone posting on LinkedIn this week you know arguing that multifamily wasn’t a good inflation hedge because– and he named, I think, three markets, and they were Seattle, Detroit, a couple just like–

Rod
Hello. Come on.

Bruce
So it would have kept us out of those markets.

Rod
Right. Oh, that’s funny.

Bruce
That doesn’t mean it’s a bad–

Rod
And by the way, guys, he’s talking about employment diversification. That’s a huge piece because what’s the number one thing with apartments? It’s jobs. That’s the number one thing. And so unemployment is critical. We always trend that as well. We trend the local market. That city, the state, and then compare it to the national average. But the diversification is huge because when I lost everything in 2008 and ’09, I didn’t pay attention to that. And I had tons of tenants that were contractors, plumbers, electricians, drywallers, painters, and roofers, which fell off a freaking cliff in 2008 and ’09. They didn’t have work. So I will tell you, like this last asset we bought in Nashville, 145 doors a few months ago, I literally looked where every single person was working. Engaged recession resistance, you know. What sort of industries are they in? And then we look at Nashville as a whole, and again, we want to see lots of different industries and lots of diversification. No one horse towns, you know. If you’ve got a town that relies on one big business or even a military base, I won’t do it. It’s too risky. That horse gets sick or that horse leaves town, you’re in deep doom.

Bruce
There’s a base and there are support industries around it.

Rod
You’re done. Yeah. I was looking at stuff in Belleville, Illinois, where my wife is from. There’s a big base there, and I decided to pass just for that reason. Even though it’s a suburb of St. Louis, I didn’t want to do it. It would have devastated that local economy if it left. It hasn’t left, but if it did. So let me ask you this. Any insight on the banking crisis that– we don’t know if it’s going to continue. Jamie Dimon, head of Chase, says it seems like it can continue. See a lot of hyperbole around how regional banks are going to have some problems.

Bruce
Yeah, I mean–

Rod
I want to finish up with all the negative crap so we can talk about how awesome multifamily is.

Bruce
[inaudible]

Rod
Right.

Bruce
Yeah. The Silicon Valley Bank failure as well as the others that failed, it was stunning how rapidly that happened.

Rod
Right.

Bruce
It caught a lot of people off guard. It was about 72-hour period. Part of that was due to the concentration of their depositor base.

Rod
Right.

Bruce
Some really big depositors. And part of it was just the world that we live in now is electronic and–

Rod
They had a lot of–

Bruce
I can give my phone and wire money out in seconds. And so what happened– a lot of these banks had so much money flow-in in 2020, 2021 during all the stimulus money and all that, and they just couldn’t put out good loans enough to put it to work. And so specifically SVB, what they did was they went and bought mortgage-backed securities, which are–

Rod
Oh, they did. I thought they were involved more in the startup business in tech.

Bruce
They are. On their loans that they’re making are startup in tech.

Rod
Okay.

Bruce
They had this big pool of money, like, how do we put it to work? They went and bought MBS.

Rod
No kidding.

Bruce
Yeah. And it was ten-year or more duration, and it was paying them up a percent and a half. And so the way bonds work and this is kind of– I’m sure you know this, but if a bond is paying you a percent and a half, that’s fine if that’s the rate at the time. But if now bonds, the new bonds are paying 5%, nobody wants the ones that are paying a point and a half.

Rod
Right.

Bruce
And so the face value of that bond goes way down to get to an equivalent of a 5% yield if you bought it there. And so if you have a long duration on the bond, a 1% interest rate move can impact you very materially. Rough math, 1% move in interest rates on a ten-year, you just multiply it by the duration, so it’s roughly a 10% hit. So a 5% move on a ten-year could be as high as a 50%.

Rod
So their book value on these bonds just plummeted.

Bruce
Got destroyed.

Rod
Got destroyed. So they could–

Bruce
And it was hidden though, because of ’08 and ’09, the financial crisis, the government changed the accounting rules for the banks. And so there’s something called held to maturity. They can kind of put it in their back pocket. They don’t have to report it, they don’t have to market to market as long as it’s in held to maturity. Now what happens then though is they had some people that needed cash, more cash than they had on hand because it’s what’s called a ratio reserve bank and we can touch on that in a second. But they needed cash and so they had to pull some out of this back pocket that was hidden, sell them at the market. People saw the huge losses that they were taking on that portfolio, freaked them out and they all wanted to pull the money.

Rod
That’s what happened. Wow. So they really had a client base that had their eyes on how that bank was performing. I mean, a very sophisticated client base.

Bruce
They have a bunch of VCs.

Rod
Right.

Bruce
Tech people and so they are very–

Rod
And I’m sure once the word got out, it was like wildfire. Everybody’s telling everybody else. Wow. So, you know, in your opinion– well, with what little we know about what’s really going on behind the scenes there, do you think there could be some more bank issues?

Bruce
Well, there are other bank issues.

Rod
Yeah.

Bruce
I mean, there’s never one road.

Rod
Yeah.

Bruce
And so we see it in the data. There are massive flows coming out of regional banks. I think it’s slowing. But a lot of people were scared because by definition, the FDIC should not have bailed that out.

Rod
Right.

Bruce
Because they should have bailed out. Everybody was 250,000 or less–

Rod
Right. Like their charter says. Right.

Bruce
But it was highly political and it could have been devastating for the tech world. So they just jumped in and did it. Yeah. It’s a whole other discussion. It’s the right thing to do.

Rod
Right.

Bruce
But implicitly that meant, okay, well, all of everybody’s deposits are fine.

Rod
Right.

Bruce
And a couple of people came out and started talking about it and reassured the market a little bit. And then Janet Yellen came out and said, no, no, no. Don’t take that implication because that’s not true. We’re not going to bail out everybody over 250. That freaked everybody. And she said that a couple of times now. And so that freaks everybody out. So if you’re above limits, which if you’ve had some success, you probably are somewhere.

Rod
Sure.

Bruce
You start shoveling–

Rod
Moving stuff around. Yeah, we’re opening some new bank accounts across the street from where we are now, probably Monday or Tuesday. We’ve been out of town, been out of the country. So, I mean, yeah, I’m concerned about it as well. But of course, Janet Yellen just said that the economy is doing great, too.

Bruce
She also said there’d never be a financial crisis.

Rod
Right. Yeah. God help us from these morons.

Bruce
It’s scary.

Rod
Well, you know, I did a Facebook Live recently. I just pulled some articles. I’d love to just mention them here in this interview because we’re talking about some of this doom and gloom stuff, but more importantly, what you can do to, you know, forestall some of this doom and gloom. But, you know, I think there’s an incredible opportunity coming in our space. Like CoStar just said, there’s a 74% year-over-year decline in sales. So they’ve dropped, really dropped. Okay? This was last quarter. Additionally, we have $430 billion worth of multifamily debt that comes due this year or next. And so why that’s a big deal is the interest rates, obviously. You know, Powell has said they have to continue raising the rates and so, you know, they’re expecting 25 basis points. Was it next month or this month?

Bruce
May. Yeah.

Rod
May. You know, so we know that’s continuing to go. And I’ve got another article here. Lenders are anticipating a surge of bad loans. You know, we just talked about that huge failure in Houston, although I think there were some bad actors in that from what I’m hearing behind the scenes. They just left the country and everything else.

Bruce
Oh, yeah?

Rod
Yeah. That friend of mine knows them, but, you know, there’s that. And then the thing I mentioned to you before we started recording. More than half of Americans say they’d lose everything in a recession and there are a ton of them using credit cards to fight inflation. And you’re saying inflation is going to continue, which I believe. So, yeah. I think we’re headed for some pain. I think we really are. But, you know, what I tell people is with crisis comes opportunity. And as things really go down, everything’s going to be on sale. And so, you know, I think businesses– you have the opportunity to buy businesses. You have the opportunity to buy out certainly other asset classes besides multifamily. I wouldn’t touch office right now, but there are some solid other asset classes. Of course, we love multifamily and I think there’s going to be an opportunity. Even if it’s just mild, which I don’t think it’s going to be, but even if it is, in the bridge debt sector, there are a lot of people hurting and, you know, they’ve got debt coming due. They have to refinance, you know, put additional debt on. Maybe they don’t have the debt service coverage ratios to be able to get conforming debt, they have to put a ton of money in to get the debt, and or they have to pay big rate caps and so, you know, to keep the rates reasonable. And so I think there’s going to be some real opportunity there and yeah, I don’t know, what do you think?

Bruce
I completely agree.

Rod
Okay.

Bruce
And I think you have to have your own house in order.

Rod
Sure.

Bruce
In order to take advantage of that opportunity.

Rod
Sure.

Bruce
If part of your portfolio is in trouble like that and you’re experiencing those pains, that’s where you’re going to be focused.

Rod
Sure.

Bruce
You’re going to miss it. But it’s times like these that wealth is created and destroyed and I want to be on the right side of that.

Rod
Right.

Bruce
I’ve always been– in spite of being a hedge fund guy. I think, again, that sounds scary, but I’m super paranoid about what all could go wrong.

Rod
Right.

Bruce
And so two years ago, I would have never gone floating rate personally.

Rod
Right.

Bruce
Just because we were at historic lows.

Rod
Right.

Bruce
There was a lot of risk to the upside. Why wouldn’t I lock in at historic lows? Well, the argument against that would be, of course, floating rates were a tiny bit cheaper, right?

Rod
Yeah.

Bruce
You could get 10, 20 basis points off. But look at the risk they took for them.

Rod
Right.

Bruce
And so those are the people that are really in the biggest trouble right now, are the ones that were floating.

Rod
And there were a ton of them this last couple of years because they got higher loan-to-value, so they were able to show better returns for investors. Many of them are under-capitalized, they don’t have big operating reserves and, you know, they’re getting hammered right now. In my experience, there are operators that are in some of the lower-tier asset classes that are suffering because that demographic is in trouble. So, you know, I think that there is a reckoning coming and I think there’s an opportunity coming. And that being said, you know, we’re in a lot of cash. You know, I’ve got a pretty huge pool of investors that have cash and we’re just kind of gearing up here in anticipation of some opportunity. I mean, it’s going to be ugly for a lot of people. It’s sad that was that Houston portfolio, those investors all lost their capital and they actually did 100% capital call before that happened and then the guy left the country. So real ugly nefarious thing. But, you know, those investors, it’s really sad what happened to them.

Bruce
I mean, I think was it Buffet is the one that said you know, “When the tide goes out, you see who’s swimming naked”.

Rod
Right.

Bruce
I think the opposite of that is when the tide is running quickly and everybody’s out there swimming, they look like they can swim really fast, like how great of a swimmer that guy is.

Rod
Right.

Bruce
But I think there was a lot of that in the last few years. There are a lot of people that were buying deals that they shouldn’t been buying.

Rod
New operators.

Bruce
A lot of new operators hadn’t experienced pain and, you know, learned, hey, we should be more risk-managed here.

Rod
Right.

Bruce
And so they just felt like it was always going to be that way. And in fact, I was on a panel talking about a very similar outlook a year ago, March of last year. And when I came down, people were waiting to talk to me and there was this one guy in particular. I could tell he was kind of hanging back. You could tell he didn’t want everybody else to hear his question. And so I cleared the others and started speaking to him and he said, well, if what you say is going to really happens, he said, I’ve got this deal under contract. I think it was like a three and a half cap or four cap. He said, how would I make money on that? I said, I have no idea.

Rod
Right.

Bruce
I said in fact, even if it doesn’t happen, I don’t know how you make money on it.

Rod
Right.

Bruce
And so, you know, you’re absolutely dependent on cap rate compression and that’s a very dangerous position.

Rod
Or continued rent increases. I mean, rents are flatlined in most places.

Bruce
Well, one thing a lot of people don’t look at is the affordability of the rental market they’re investing in. And Austin’s, a great sized market.

Rod
Sure.

Bruce
But people are really pushing the limits of what they can afford.

Rod
Right.

Bruce
And so you want to concentrate on markets where the average rents are well– as a percentage of income are well below what the national average is. Now, they may not like it if you push rents.

Rod
Right.

Bruce
But they can afford it.

Rod
Right.

Bruce
You know, I think almost are increasing rents by ten to 20%.

Rod
Are they?

Bruce
Yeah.

Rod
No kidding. Wow. Well, I’ll tell you, a lot of these operators projected you know 5% rent increases every year. You know, there’s a huge operator out of Miami that everybody knows, and I just went to his event in Vegas, and he had a 10% increase per year for the next five years on his portfolio.

Bruce
Wow. So the other mistake I think a lot of people even right now would be making is they’ll see the rent growth.

Rod
Right.

Bruce
Model for– even if they’re being conservative, just one year of the rent growth. Okay?

Rod
Right.

Bruce
But they won’t do the same with the expenses.

Rod
Right. They don’t model the expense increases.

Bruce
That’s of 2%.

Rod
Right.

Bruce
But we’re not at 2%. We’re not going to be for a long time.

Rod
Yeah. I remember seeing the memes along the lines of I’m going to go do a bank robbery. And it was a pile of wood. You know, like the cost of building materials has gone up so much that they equated it to wood. So you’re right. Guys, when you’re doing a proforma and you’re estimating what a property is going to do, you’re going to estimate what sort of rent increases you’re going to project, but you also got to project increases in the expenses, which is you know, a lot of these operators didn’t do that or they had way pie in the sky increases in the rents, and then they’ll close on a deal and they haven’t got any money in the bank in case they you know what hits the fan?

Bruce
Yeah. They’ve probably also built an infrastructure team of payroll and everything else.

Rod
Sure.

Bruce
That’s absolutely dependent on doing transactions.

Rod
Right. Oh, that’s a very good point as well.

Bruce
[inaudible] fees at all costs just to make payroll.

Rod
Right.

Bruce
And so you need to build your organization in a way that just holding on to what you have you know, you just weather the storm.

Rod
Sure. And, you know, a lot of them have never had to asset manage in a downturn. And the critical nature of paying attention to every minute thing and monitoring what’s happening on a weekly, if not a daily basis, to see what’s going on with your renewals, with your vacancies, with your leasing and dissecting that consistently, to stay on top of things and stay competitive.

Bruce
And, you know, I’ve seen it at some of these conferences. A lot of these newer members will partner together, you know, which can be a great thing.

Rod
Sure.

Bruce
Someone has one strength, someone has another strength that fits together.

Rod
Sure.

Bruce
But it can reach a point of inefficiency if there are, say, four or five KPs in a deal. And none of them are really actually operating. You know, they’re all in different states from the asset. One guy might be in Hawaii, one guy might be in Connecticut. And the assets and I don’t know, Nevada.

Rod
Yeah. I teach my students to always have somebody’s boots on the ground. Yeah.

Bruce
It can be an asset manager that you hire.

Rod
Sure.

Bruce
That’s fine.

Rod
Sure.

Rod
But it doesn’t have to be you. But somebody’s got to be on that asset because you know the day-to-day decisions can be very impactful to the NOI and thus the value of the property.

Rod
Sure. No, they’re critical. And, you know, a lot of my students team together to do deals, and typically there’s one person that lives in that market which is super important that you have boots on the ground.

Bruce
Elkhorn is– we office in Dallas. None of our assets are in Dallas.

Rod
Right.

Bruce
But one of our rules is that we have to be able to get there by car in three to four hours or a direct southwest flight. Because if it’s not a southwest flight and then a two-hour drive or three-hour drive because we’re not going to check on that asset as often as we need to.

Rod
Right.

Bruce
So we’re there very frequently on our assets. Plus we have just an amazing asset manager that lives in the market.

Rod
Lives in Oklahoma. Okay.

Bruce
She’s always on our assets every time.

Rod
So talk about your team a little bit. You’re obviously analytical, you’re in the analysis piece of it. Who else is on your team?

Bruce
One of the great things about multifamily real estate investing, in my view, is the leverage of it. I’m not talking about debt.

Rod
Right.

Bruce
I’m talking about the benefit you get, you know, the production and the capabilities that you can deploy with just a small group. And so you don’t have to have hundreds of people to run quite a bit of money. And so we have– four of us in Elkhorn directly, and then our property management company has probably 35, 40 people.

Rod
Sure, onsite and off. And in your four or five internally, what sort of roles, what sort of hats are people wearing?

Bruce
Yeah. So this business requires strong analytical skills and strong organizational skills, project management skills. And so we have two members of the team, one’s an MBA, CFA, super bright, very quantitative. He helps with all kinds of modeling and math sort of issues. If I don’t have the capacity to do it. We’ve got another individual that basically runs day-to-day operations. He’s very smart about business decisions and hey, do we spend this money? Do we not spend this money? Do we move appliances from this property to that property? What do we need to be doing to make sure that we have units ready tomorrow for the move ends?

Rod
Right.

Bruce
You know, things like that keep the revenue going up. He had a background at a trust company, so he’s very good with investors, very calm.

Rod
So he does investor relations.

Bruce
He does a lot of investor relations. You know, he’ll set up a call and we’ll do that. And then he just says, come and pull my string and I’ll come to talk. But he’s very good at the investor relations, project management operations. And then we’ve got the asset manager.

Rod
Got you. Off-site. Got it. Okay. Well, you know, I’ve got a lot of listeners on the show that knows they want to get into this business. They’re intimidated by it. You know, it’s a little bit intimidating. And they haven’t pulled the trigger yet. They see the writing on the wall. They see the potential opportunity that’s coming. And I believe it’s not even potential. I believe it’s really definitely coming. But out of fear or limiting beliefs or comfort, they haven’t taken action. What would you tell these people that haven’t moved on with their dreams? What advice might you give them?

Bruce
There are a couple of things there that need to unpack, but one is the opportunity, which I’ll say for the last.

Rod
Right.

Bruce
But what would I tell them is the same thing that was told to me. Years ago, before I started in this business I was at a conference, and, you know, a lot of these conferences, they’ll have lunches and you just go sit down with whoever. And at the time, there was what I would call an old codger. He owned a bunch of stuff in the area, and he knew he had a ton of doors. And he has been super successful. I don’t know, now, I may be the old codger.

Rod
Same here.

Bruce
Yeah. I used to be at meetings. I say, oh, I’m so old. And people, oh, you’re not old. Now, people don’t say that you know. But this guy sat down with him. We had a great discussion over lunch, and then I asked him what advice would you give someone new starting on. And he said, just buy something.

Rod
Love it. Oh, I love it.

Bruce
Just buy something. He said, it may be the worst deal you ever buy, but you’ll learn so much from it that you’ll be off and running.

Rod
Right.

Bruce
And so I would reconvey that.

Rod
What a great piece of advice.

Bruce
You know, I’ve seen that with some of my friends that are in the business or do educating or help people, and they’re just so frustrated that the people won’t take that jump. I think a great coaching, mentor, or something of that nature or program, that money that you pay, and I don’t even–

Rod
You’re paying for speed, basically, really is what you’re doing. That’s really what it is. And avoid mistakes. Helps you avoid mistakes. No, it’s really interesting that you said that. Just buy something. Because I see it with my Warriors, my coaching students. I mean, I’m really proud of this. I’ve been teaching you know about five years, and they own somewhere between 150 and 160,000 units that we know of now. And we’re very, very proud of that. Next to my kids, probably most proud of that. And of course, most of those deals were done between Warriors. Like, we just talked about. Somebody with boots on the ground, somebody that’s analytical, and somebody that’s outgoing to build relationships. And those partnerships work really well. Maybe somebody that’s process-driven to do the asset management. And we’ve had a lot of successes. But what I’ve noticed is when a Warrior comes in, you know, it might be four months, six months, eight months, even a year sometimes before they get that first deal. And they’re frustrated, and I’m pushing them. You know, I’m known for mindset and psychology. Come on, massive freaking action brother. Go make it happen. Or sister, go make it happen. And then they get that deal, and the next thing I know, they’ve got three.

Bruce
Rule of the first deal. Yeah.

Rod
Right.

Bruce
So I go, that wasn’t so bad.

Rod
Right. Yeah.

Bruce
You know, I flashed to– I don’t even know what it’s called now, but Indian Princess or I think they call it Adventure Princess or something now. But with my daughters and one of these campsites because you go camp with the dads, go camping with the daughters and the whole thing. But there was a tower out in the middle of the lake, and it was a huge deal. I mean, it’s up there. It’s a couple of stories high. And it’s really tall. And so a lot of these girls were so scared, but they wanted–

Rod
Well, they’re supposed to go climb up there.

Bruce
If they wanted to.

Rod
In the lake. Okay.

Bruce
They’re not required to. I mean, you know, they can go climb, swim out there, climb up, jump off, just for fun, right?

Rod
Oh, cool. Okay.

Bruce
But some of them would do it, and then others would struggle and struggle and struggle. But then once they jump, they want just go over and over.

Rod
Right.

Bruce
Because they love it. And that’s kind of the same thing.

Rod
Sure.

Bruce
Once you realize, hey, this is great.

Rod
Right.

Bruce
It’s not going to kill me. I have a team around me, hopefully, or people that I can reach out to if I need help. And it’s a great business, you know. And I would say so many of the new people start off in single-family.

Rod
Right.

Bruce
You know, it’s an asset class–

Rod
Most people do.

Bruce
Yeah. Most people do.

Rod
Yeah.

Bruce
But it’s very rare to find somebody– now, you did it, of course.

Rod
Well, no, I got my clock clean, brother.

Bruce
It’s rare to find somebody that has more than ten because if someone’s in the corporate world, they’re not super happy with their role or they just want to be financially free. And so they realize that rental income from the property is a great way to do it.

Rod
Right.

Bruce
Multifamily seems insurmountable. So they start with single-family.

Rod
Right.

Bruce
But the problem is you don’t net very much on single-family.

Rod
No, you don’t.

Bruce
You end up with a portfolio of ten you might be making you know–

Rod
Hey, that’s why I crashed and burned because you don’t net very much from single-family. And I was at a 30% loan to value when it all went down. 30% is all I owed. And it still crashed and burned because they just don’t cash flow well. And so– hey, by the way, Matt, write down just buy something. I freaking love that. I’m stealing that. I love that one. Let me share something. I met an old guy, same like you did, old codger, and I said you know, give me some of your secrets to success. This guy had so many free and clear buildings in Denver, it was insane. I mean, this guy was so wealthy, it’s ridiculous. And he told me, just buy real estate and get it paid off and you’ll have buckets of money. And I’ve never forgotten that quote. Yeah.

Bruce
In all multifamily, the difference between that and single-family rentals, I think I’ve heard you speak about it.

Rod
Right.

Bruce
But a single-family rental, let’s say you buy it for 100,000 and somehow you’re able to rent it for 15,000 a month, which you could do, but you could.

Rod
Right.

Bruce
When you go to sell it, it’s still going to trade based on comps as $100,000.

Rod
That’s it.

Bruce
You can’t create the value.

Rod
You can’t force appreciation.

Bruce
You can’t force the wealth creation.

Rod
Right.

Bruce
And so in multifamily, you know, you increase revenue a little bit, you decrease expense a little bit, drop 100 grand to the bottom line. You just created over a million dollars.

Rod
Right.

Bruce
Right?

Rod
Yeah.

Bruce
Because you’re buying and selling businesses, not–

Rod
Correct. Or even less than that you can create. I mean, I tell the story, you know, painting numbered spots in a parking lot on a 296-unit asset we have in San Antonio and charging $25 a month for the privilege of being able to park close to your unit, which was a real benefit to some people. And 100 people took us up on it. And at that time, that was an $800,000 increase in value.

Bruce
Yeah.

Rod
$25 a month.

Bruce
In my view, especially now that we’re vertically integrated and we have our own management team, we spend more time on this. But is teaching the people on the site to think that way.

Rod
Right.

Bruce
Because they’ll help you find those opportunities.

Rod
Sure.

Bruce
And they’ll tell you but it’s a situation where most of them they haven’t been to business school, generally. You maybe have a $20 million asset and someone making $50,000 as the quarterback.

Rod
Right.

Bruce
Right? And they didn’t go to business school. They don’t have an economics degree. And so I remember a real example, and I think I’ve mentioned this before publicly, but it’s a good example. We were at this property we bought, and it had formerly a three-bedroom apartment. They’d carved off one of the bedrooms to make a regional manager’s office for their company. So the manager was saying, we really need to put the door back in. We’re going to have to put a shower in to make it the third bedroom, make it workable again. And I said, well, how much rent would we get?

Rod
Right.

Bruce
Difference between two and three? Probably 100, maybe $200 a month.

Bruce
Right.

Bruce
Okay, I’m glad you’re thinking about that, but let’s think about it differently. What else could we do? What if we leave the wall and still put the shower in? The cost is the same either way. How much would I get for an efficiency? Well, probably 800.

Rod
Right.

Bruce
Right?

Rod
Well, there you go.

Bruce
So there we go.

Rod
There you go. That’s a great example.

Bruce
She’s like, well, I didn’t think about that.

Rod
And the other thing that they need to realize is you got to look at the repayment of that money. Now, we like to see a 36-month repayment on any CapEx that we do. So, you know, if we’re going to spend $3,600 to do some work, we want to get $100 down to the bottom line per month you know, for three years to repay that. That’s our kind of a high-level metric that we use. If it’s less than that, obviously, it’s even better. But let me ask you this. Growing up in the multi– well, not growing up, when you delved into multifamily, did you have any mentors at that time, or did you kind of learn on your own? How did you get acclimated to the business?

Bruce
Like I said, I had been heavily invested in real estate already.

Rod
Okay.

Bruce
I knew real estate. I knew how to work with investors. I’d done that for years in the public markets.

Rod
But you were doing mostly singles and duplexes.

Bruce
I was.

Rod
Right.

Bruce
And so when I did make the decision, I really wanted to be in a multifamily because we’ve done some hard money lending, we’ve done some smaller fix and flips, things like that. But it’s very transactional.

Rod
Sure.

Bruce
And so we were wanting, like a lot of people, longer-term passive income. We want to hold the assets because of our inflation views. And so, yeah, at the time, I built some models. I’d seen some models online looking at some deals. But yeah, I reached out to one of the guys in my group here and said, hey, could you take a look at this? Look over my shoulder. I think I know what I’m doing, but I don’t want to go buy a $6 million asset. And then as soon as I own it, they say, oh, you forgot this line item.

Rod
Right.

Bruce
You know, now the deal doesn’t work. And so I think even being a sophisticated investor and having been in real estate, I think it makes a lot of sense, especially if it gets you over the hump of going and doing it.

Rod
Sure.

Bruce
Just to have somebody looking over your shoulder and make sure–

Rod
Yeah. And guys, I don’t care if you use me or who you use, but you absolutely should get some help. And you could get local help. You had that guy long a tooth like I did. Some of these old guys love to just help young people, but get some help and it’ll prevent mistakes and help ramp you much quicker. You know, as you were starting out– well, not even starting out. During this journey of yours, can you think of any pivotal moments, any aha moments, any epiphanies that you had as you were getting into this? And by the way, let me back up on something here. You mentioned somebody from your group that looked over your shoulder. We talked about this offline. You’re in a Mastermind with a whole bunch of people that I know. Several are thought leaders in the space that actually compete with me, actually. But we’re all friendly. Has that Mastermind been effective?

Bruce
It’s very helpful.

Rod
Yeah.

Bruce
It’s a group of names that most of your listeners would know.

Rod
Right.

Bruce
But it’s tightly knit. We’re getting together this summer in person again, but we take it very seriously. And in fact, when I first joined, there was an agreement we signed to each other and said, listen, we’re all busy.

Rod
Right.

Bruce
We’re all working on deals. Either make this a commitment or don’t because we’re all getting on the call.

Rod
Right.

Bruce
Now, we give some flexibility. But originally, if you miss two meetings, you’re out.

Rod
You’re out. Yeah.

Bruce
It has to be 100%. They’ll get you back in.

Rod
Right.

Bruce
And, you know, we don’t hold quite as true to that because we all know each other so well now.

Rod
Right.

Bruce
But it’s serious, it’s important, and we all get value in it in different ways. And you don’t know when or where or why, but I do investing one way, some of the other guys do it a different way.

Rod
Sure.

Bruce
And buy the really pretty stuff. I buy distressed.

Rod
Right.

Bruce
So it’s very different. But we all have similar concerns. Sometimes insurance and how to structure that in a way that might be more beneficial. That’s a big problem.

Rod
We’re dealing with that right now. We’re looking at an asset in Louisiana that’s a screaming deal. But if we can’t get the insurance worked out– and it’s looking like the only way we can get it worked out is if the seller takes a $2 million haircut, which is going to be a painful conversation. And they may not want to do it, but I hope they do because we really love the deal. We’ll know here probably today or tomorrow, actually. It’s a $48 million deal.

Bruce
On that note, there are going to be a lot of people taking haircuts out there.

Rod
Right.

Bruce
There’ll be a lot of negative headlines out there about commercial real estate.

Rod
Sure.

Bruce
A lot of them when you double click on them, they’re usually talking about office right now.

Rod
Right.

Bruce
Well, of course, I’ve never liked office too tied to business. Now, I didn’t know about the change we’re going to have from Covid, of course.

Rod
Right.

Bruce
To be experiencing the same rate environment with a 50% occupied office, that’s going to be catastrophic for a lot of people.

Rod
Oh, it already is. I mean, there’s 30% vacancy in San Francisco right now, I mean, in the old office environment. And see, that’s the other reason I think that these banks are going to see a lot more pain because those buildings are coming back. And office in general. You know, I read that the government is the largest lessee– I’m sorry, lessor. I forget the ee and the or which is which, but rents the most office space. Okay, let me do it like that. I forgot from my broker days. So they rent more office space than any organization in the country. And a lot of those government employees don’t want to go back to work. They want to work at home. I mean, don’t get me started on government employees anyway, but dealing with them it’s– I just sent my passport in. God, I hope I get it back in time for my Italy trip. But the point is that office is going to get their clocks cleaned. But I think you know–

Bruce
I know a lot of pain in multifamily, too, but that doesn’t mean it should scare you away.

Rod
Right.

Bruce
And there are a lot of people that– you know, they say, is now the time to buy? Is now the time to buy? Prices were too extended last year, maybe, or the year before, but now that prices are coming in some, they’re going to be scared from the environment.

Rod
Right.

Bruce
Everything is getting on sale, so now’s the time to buy.

Rod
Right.

Bruce
You have to think about it more thoughtfully, underwrite it conservatively.

Rod
Right.

Bruce
Next six months might be bumpy.

Rod
Right.

Bruce
Add some additional capital reserves.

Rod
No question.

Bruce
Two, three years from now, you’re going to be in great shape.

Rod
You bet.

Bruce
Five years from now, I guarantee you a dollar is not going to buy what it does today.

Rod
Right.

Bruce
And so I want to be in hard assets.

Rod
I agree completely. And it’s the absolute best hedge against this inflation. And you just said they have to continue to do the inflation.

Bruce
And I really think multifamily is the best subsegment of it.

Rod
Oh, no question. Best asset class out there.

Bruce
Sure.

Rod
I mean, you know, when Covid hit, people in self-storage didn’t get help. People in office didn’t get help. People in retail, industrial, they didn’t get help. We got hundreds of thousands of dollars in aid because people have to have a place to live, you know, the government in government assistance on our assets, our C-assets at the time.

Bruce
Commercial real estate is the number one performing asset during inflationary periods. But you have to be careful with it. It doesn’t mean your voice goes like the guy that had the note about Detroit and everything.

Rod
Right.

Bruce
You have to be careful about how you do it.

Rod
Sure.

Bruce
I wouldn’t express that view or as you’re looking for an inflation hedge and buy strip centers.

Rod
Right.

Bruce
Because some of those, let’s say there’s a CVS center, those guys do 10, 20-year leases.

Rod
Right.

Bruce
Well, the CPI calculation of the rent bumps every year is predetermined in the contract.

Rod
Right.

Bruce
And so if you’re planning on a 2% bump a year, but you get a 20, you’re getting just crushed.

Rod
Right.

Bruce
And so the nice thing about multifamily is you probably have a couple of hundred tenants in the property.

Rod
Right.

Bruce
Almost every day you have a lease renewing and you can immediately start adjusting to the changes.

Rod
That’s right. Well, actually within less than three years of the ’08, ’09 crash rents exceeded pre-crash levels. That’s how fast it rebounded. And the reason I crashed and burned was my single-family portfolio. I’d had 800 houses, but my apartments did just fine. They pulled back about 11%, but they would have easily survived if I hadn’t cross-collateralized them with packages of houses. I still have those apartment complexes.

Bruce
Many houses are hard to manage even in a good [inaudible]

Rod
Oh, yeah, no, it was a mistake. You know, I make lots of mistakes. That was a big one. But, you know, I’ll never buy another home unless it’s a 2nd, 3rd, 4th home for me. You know, I just won’t. To me, it’s ridiculous.

Bruce
You know, the last time everybody was really scared of Covid lockdowns.

Rod
You’re right. Right.

Bruce
We’re about four deals during Covid. Now, it was difficult to get the lending on it.

Rod
Right.

Bruce
But because of our experience and capitalization, we were– Elkhorn was able to do that. But those four deals have been life-changing, not only for us but for our partners.

Rod
Sure.

Bruce
The returns we made are crazy. And this is another period like that.

Rod
Right.

Bruce
This is going to be a great buying opportunity. It doesn’t mean you should go buy everything.

Rod
No.

Bruce
Because they’re going to be some people in trouble that just still don’t reprice. But the ones that get repriced, they’re going to be more people are willing to carry a note to get you better leverage and things like that. We were shown a deal this week where they really need to get out. Even the price isn’t terrible, but the leverage is low. And so they do have a Freddie Mac note that could be assumed. And he’s willing to carry a note at 1% for the same term and match it, like your capital cost or your weighted average cost of capital. I think it was like low threes.

Rod
Wow. Fantastic. Well, yeah.

Bruce
That deal could work, right?

Rod
You bet it could. Sure.

Bruce
And so, we buy that deal, am I going to be upset in five years that had made me pay a couple of thousand door too much? Probably not.

Rod
No. Very unlikely. Really, honestly, it’s all about cash flow. Bottom line. You know, I don’t care what somebody paid for it ten years ago and you can buy it for now. It’s all about cash flow.

Bruce
Look at the prior, the great financial crisis, ’07.

Rod
Right.

Bruce
I would kill to buy in ’07 prices now.

Rod
Oh, no kidding.

Bruce
Either people in ’07, they’re like, oh, my gosh, look what’s happening, I’m going to get destroyed. Well, you know, and there were problems, to be fair, but I would kill to buy an ’07 prices now.

Rod
Right. Oh, no question.

Bruce
It’s the right time to start now, as a lot of people say.

Rod
Well, that’s it. You know, people say, should I wait to buy? And absolutely no. I’m looking at a deal right now. The thing about our business is it’s empirical, it’s primarily numbers. You get the numbers right and you ask all the right questions, and you know, I’ve got resources for that. You guys know that. You go to “RodsLinks.com” and there are all sorts of free books there. There’s my tool book there with just about every due diligence question you can think of. But the bottom line is, it’s empirical, you get the numbers right, and that’s why– you know, like we’re looking at this $48 million deal. We’re going to probably have to pay 46 for it to make sense. That’s it. Because the insurance is so ridiculous right now and if the seller is not willing to adjust, we’re going to have to pass.

Bruce
Let me just add one thing.

Rod
Please.

Bruce
I mean, one thing we say to Elkhorn is we buy an asset and we underwrite it so that we can make money by owning it.

Rod
Right.

Bruce
Underscore owning it, not by just selling it.

Rod
Right.

Bruce
And so I think a lot of the market the last couple of years, it was all these people are going in and trying to flip it in two years.

Rod
Right.

Bruce
Maxify.

Rod
Right.

Bruce
But if you have underwritten it to own it and make money that way, and your debt is structured properly and matched up with your timelines and everything else, then a period like last year when transaction– I would have guessed transaction volume fell 90%, honestly.

Rod
Really? It could be.

Bruce
Well, that stinks. I was going to peel one or two off this year, but I’ll wait till next year.

Rod
Right. So I know you use bridge debt. Is your model to stabilize and increase and then refinance into Fannie Freddie?

Bruce
Generally, yeah. Not necessarily Fannie and Freddie. It doesn’t have to be agency, but, yeah, we are distressed situation buyers, and I’m not– a vast majority of the market out there are value add people and they’ll go in and buy something that’s already performing well, 95%, maybe something like that, and they think they can put in 10, 20 grand a door. Boost amenities and boost rents. Well, that is a great model in some cycles, right? But when the economy is getting hurt and things like that, that’s a higher risk strategy to me, because you don’t know if you can still push those rents. And so we buy assets that are broken. I mean, there is something absolutely broken about it. Maybe it’s 20%, 30% occupancy. Maybe it’s–

Rod
Give me examples of why it’s broken.

Bruce
It varies. I mean, one of the most common ones that we see is that someone owns the property. Mom & Pop. It’s not an institutional group, it’s an individual who owns the property and they literally pull every dime out of the property.

Rod
Right.

Bruce
And so the property management company doesn’t have any dollars to fix anything, so someone moves out, appliance is broken, that unit’s now offline.

Rod
Or it gets cannibalized from another appliance somewhere else. We’ve seen that.

Bruce
So someone else who’s out of another unit, there’s a hole in the wall, they don’t have money to fix it so that units offline. So they end up with a half-full unit and no money to fix anything and no inventory to rent. And so we see that a lot. And then the lender starts knocking on the door because their coverages are blown and everything else. And so we are deep enough in the markets we’re in, and people know that we do exactly what we say we’re going to do and that we have the money. That people ask me, where do you get the deals? Like, we pick up the phone. That’s literally where we get the deals. The [inaudible] know us in the calls. And so by doing distressed, though, if we fix anything, it’s going to be worth more. We aren’t dependent on necessarily boosting rents, we’re taking a half-full property and putting some people in it.

Rod
Yeah. And the only caveat I would–

Rod
As long as you know the reason.

Rod
Well, yeah, exactly. As long as it’s not the area, as long as it’s not the demographic there. As long as it’s not because it’s gridded with crime or whatever. If it’s poor management–

Bruce
You don’t want a war zone.

Rod
Right, yeah. If you’re in a war zone. If it’s poor management, yeah, absolutely– I agree with you.

Bruce
We bought a deal from Freddie in December of ’21, which a lot of people would say, gosh, anything done last year, you’re getting killed on.

Rod
Right.

Bruce
Well, this asset, it was half occupied, half of it was hard down. Hard down.

Rod
And Freddie owned it.

Bruce
Freddie owned it because the owner that did have it refi got some money out, actually spent a lot of the money on the property, bought new ACs, new windows, things like that. It’s a C-plus property.

Rod
Right.

Bruce
But he misrepresented the numbers. There are fraudulent numbers. So Freddie took the property.

Rod
Wow.

Bruce
And we got it because Freddie knew us and we weren’t the highest bidder. They vetted the highest bidder. He couldn’t get it done. And they said, can you do it in 30 days? Well, absolutely. So we took that property it had– when we took over, I think it had 45,000 revenue a month. It now has almost 140,000.

Rod
How big is a unit?

Bruce
260.

Rod
260? And it had 45,000 a month in revenue? Holy crap.

Bruce
It was half-full and they weren’t all paying. And so we had to push all– most of those people out, rebuild that 50, and now we’re right at 90.

Rod
And you just vertically integrated recently, correct?

Bruce
That’s right.

Rod
So you used a third-party property management company to do that?

Bruce
We could spend a whole episode on that.

Rod
Yeah, because there are a lot of crappy third-party property management companies out there.

Bruce
They are stealing from us.

Rod
Yeah, me too.

Bruce
We’ve had managers selling drugs out of the property.

Rod
Right.

Bruce
Stolen car [inaudible]

Rod
That’s why I asked because that’s pretty challenging because– well, I’m not going to say– it’s always challenging, but it can be really challenging to turn around a tough asset. You know, I had a 403-unit asset in Shreveport that a partner brought us. And the partner, I assumed he knew what he was doing and separate the word assumed there. He had his own management company and 4,000 doors. And I thought he knew what he was doing. And eight months in, I go visit this thing and the pools are green. Two pools are green. There are 50 shopping carts, broken windows everywhere, just a catastrophe. And I told him, get your ass out of here. And we took it over. At that time it was generating about 90, a little over 90,000 a month in revenue. And I got it up to 280 and we were able to sell it. Thank God. But it took years off my life.

Bruce
It is a lot of work.

Rod
Yeah, it is a lot of–

Bruce
Trust is really heavy lifting for a year or two.

Rod
I asked you about this. I asked you about this and I’d like you to expand on it because I don’t think I gave you a chance. What is your feeling on– because you’re in C-assets and, you know, that demographic is, you know, the working stiff. It’s the blue-collar, people in retail, people in construction, people in, you know, not high-collar jobs. And with inflation, like you said, inflation is going to continue. How– you know, do you think that they could be impacted negatively? And if so, how are you going to counteract that? How are you going to deal with that potential with your tenant base?

Bruce
It’s a great question. We’ve thought a lot about it. But in fact, with the views of an inflation that we’ve had, and I published a piece on inflation a couple, two, three years ago that at the time was fairly controversial. But now everybody like, oh yeah, of course, that’s true. But having those views for so long, I said back then, if there was a way for me to short the middle class, I would do it.

Rod
Okay.

Bruce
And so I do know that they’re getting squeezed. They don’t have financial assets that are going, like, multifamily.

Rod
Right. Or a lot of cash in the bank. They’re paycheck to paycheck and–

Bruce
And buy gold. And so there is pressure on that class. Now, the assets that we own, they’re not government housing. They’re not slums. You know, they’re a layer above that, but they’re definitely at the lower end.

Rod
Right.

Bruce
And so, that sub-market has been the most economically protected or desensitized market historically. Now, even during inflationary periods, that’s because–

Rod
I’m sorry, they’ve been the most protected. What do you mean by that?

Bruce
The least insulated.

Rod
Insulated?

Bruce
Insulated. It would be a better word. The reason for that is because I don’t know, I’m thinking about Dallas. There’s this area called uptown. It’s really hot. All the trendy stuff, all the [inaudible]

Rod
Endowments.

Bruce
Beautiful, like wool stoves.

Rod
Right.

Bruce
So something like that, times get hard, people go to something not quite as nice.

Rod
Right.

Rod
They don’t need the wolf stove. You know, G is just fine.

Rod
Okay.

Bruce
Right? And so they rent something for less. And so it’s very hard, in my view, to play in the A space at the top of the market unless times are great. And even then, you have a three-year-old asset, there’s a new one built next to you. They want to in the brand new one. And so it’s very hard to stay at the top of the game there. Whereas at the lower end, if someone starts struggling, having a hard time, they move down the asset class. Right?

Rod
Okay. So you think you’ll have occupancy, even if things get really tough. I could see that frame of mind, but you’re certainly going to have collection issues, and you have to evict people and so on and so forth.

Bruce
That’s always in the [inaudible]

Rod
That just is what it is. You have to be strict to no partial payments. So you know if they can’t pay, they’re gone. And unfortunately, and it is what it is, but if you run a tight ship, you can absolutely manage through that, for sure. Yeah.

Bruce
It is a concern.

Rod
Yeah. Starting– well, you know, part of– on my podcast, I do these clips every week called “Own Your Power”. They’re motivational clips, and that’s, I think, one of the big reasons that the podcast has been so successful. You know, people really enjoy getting that juice once a week. Do you have a family? Yes. Do you have kids?

Bruce
Two girls.

Rod
How old?

Bruce
21 and 24.

Rod
Oh, so they’re they’re out of the house. Okay. Well, what’s your driver? I mean, you flew down here to meet with me. You’re still very motivated. You’re still driven. You’re kicking ass. What’s the why? What’s making you push like this?

Bruce
Yeah, there are a couple of things. You know, number one, I used to call it– I’ve got iced tea right here. So, you know, I have an iced tea issue. I don’t drink coffee. I drink iced tea. But there were a number of warnings when I would go stop at Corner Bakery, which is now, I guess it’s bankrupt, but they had really good tea. And so I would stop there. I would be on my third huge cup while I’m reading a research and trading and already completely wound up.

Rod
Right.

Bruce
And I’ll look over and there’ll be a table full of people there having a Bible study or just having a casual breakfast. And I look at that like, that would be so nice.

Rod
Really?

Bruce
But I could never have thought of doing that. You know, similar to that when I was in grad school, I remember this guy had just come in from New York and he joined the program and he was making half a million dollars a year. And this was a long time.

Rod
When a half a million was a lot of money.

Bruce
It’s still a lot of money.

Rod
Right.

Bruce
A lot more money.

Rod
Right.

Bruce
And I said, oh my gosh, how could you leave that? He said I would be dead in a year if I kept doing it.

Rod
Yeah.

Bruce
And he realized that even as a young person. So part of it is I love real estate, the asset class. It’s a lot of work on these, but once they are in a stabilized environment–

Rod
That’s a weekly call or every other week.

Bruce
You are overseeing it like any other business. So that’s part of why I do it. Now, why do I keep doing it and doing more? I try to use this argument with my daughters, and they’re very, very bright women, but I said, listen, because of what we’re doing and how we’re doing and doing this distress stuff, we’re buying assets that are you know, armpit of the neighborhood, a city problem in some cases. We can come and clean that up and make it a productive asset again and make the world a better place without having to push rents. Now, I’m not going to say we won’t push rents if we have to. And so I pulled the whole social impact thing on them. They’re like, Dad, you’re doing it for the money.

Rod
Right.

Bruce
I said okay, yes. But it’s not at somebody’s expense. Which is actually really nice.

Rod
Yeah.

Bruce
But the biggest driver for me is my family, of course. And the legacy. You see all these people that are in your programs and just thousands of people out there, they’re in the corporate world, they may not love what they do. They find a path that maybe ultimately gets them onto your show or your coaching programs and they start thinking about how to do that. Well, they may have lost decades that they could have had in a more relaxed, happy environment, enjoying their families, doing more. And I think one of my biggest regrets–

Rod
You mean if they’d done it sooner.

Bruce
They have done it sooner.

Rod
Got it. Yeah. Got it. Okay.

Bruce
And so one of the things that I hope to achieve for my family is just to have some legacy assets, but also to put them in a position earlier than I was, where they don’t have– you know, they’re still going to want to work and do all those things that they want to do, but they don’t have to.

Rod
Any chips off the old block? Is anybody interested in your business yet?

Bruce
Funny you said. Well, they’re both incredibly bright, but my youngest has, in some cases, felt a little bit– well, the youngest. Right?

Rod
Right.

Bruce
And then the oldest kind of picks on her sometimes.

Rod
Sure.

Bruce
Not always. They’re very loving. But she spoke up to me the other day, and she said, I’m the heir apparent.

Rod
You’re the heir apparent. Got it.

Bruce
She’s in business school and studying real estate, and she’s actually going to–

Rod
Oh, she’s studying real estate?

Bruce
Yeah. It wasn’t me. I had nothing to do with her.

Rod
Wow.

Bruce
I think she saw the stress the stock market put on me, and we deliver these great returns in the public markets, but it wasn’t stress-free to accomplish that.

Rod
For sure.

Bruce
And my oldest is, I think, about to go to the law school.

Rod
Oh, wow. Oh, boy. Counselor. Okay, well, listen, you should have her go to my boot camp. I’ll let you know. Get her access because she’s interested.

Bruce
They don’t want to listen to Dad.

Rod
Yeah, right.

Bruce
Have them find their own way.

Rod
Right.

Bruce
I think what was triggering for them was when some of their friends started asking, hey, could I get a meeting with your dad? Like, why don’t you want to talk to my dad? Because my wife–

Rod
Sure.

Bruce
As far as they know, I’m just the guy that can’t remember to take the trash out.

Rod
Right.

Rod
That’s funny. Oh, that’s awesome. That’s awesome.

Bruce
But, yeah, it’s a legacy for me.

Rod
Could you share a war story? You know, a time you got your butt-kicked in this multifamily space? Now, we all got tons of them. They know that. But think of a doozy you know, and maybe there’s a lesson in there that we could communicate. Does anything come to mind?

Bruce
One of our early assets we bought was a small– well, it’s all relatively– I guess it was an 80-unit. We probably couldn’t do an 80-unit.

Rod
Right.

Bruce
But when we bought it, it had a drug dealer living in it and her whole crew, and it wasn’t her. And so probably 15, almost 20 units were a dru-dealing group.

Rod
No kidding.

Bruce
And that was not in our financial modeling. Right?

Rod
Right.

Bruce
So getting rid of them and the struggles of that.

Rod
Having to get rid of 20 units, redo them, rerent them, and that’s pretty expensive. Yeah. Wow.

Bruce
Another mistake would be in the early days, we were in a similar situation. Powell was saying, hey, I’m going to raise rents. I mean, not rents, but–

Rod
Interest rate.

Bruce
Interest rates.

Rod
Right.

Bruce
And so we did a couple of yield maintenance loans where there’s this black box calculation that if rates go up, it’s good. If rates go down, it can trap you in the property. And so, luckily, you know, we’ve been able to manage through that. But we had that on some early assets. And it’s frustrating because even though we made great money on them, we would have made even more money had we not had that penalty. And so I think it’s really important that new people coming in match their debt to their business plan and leave themselves off.

Rod
Oh, that’s really powerful what he just said, guys. Match your debt to your business plan. Super important. And not just your business plan, but what’s anticipated to happen in the future with your best guess as well. Yeah. That’s really good advice.

Bruce
Leave the door that you can still open, right?

Rod
Right.

Bruce
Now, if you think– you know, I think rates will go down in the not-so-distant future because the Fed simply can’t afford based on the math we went over earlier to keep them high, and that’s why they’ve been moving so rapidly. But I don’t want to trap myself in something in case that doesn’t happen, right? And so we’ll do– if we’re doing agency loans, we’ll do soft step downs so that we pay a point or two in a couple of years to get out of it if we want to. But we’re not going to do yield maintenance now, for goodness sake, because we do think rates are going to go lower and it would traffic. But even if I thought rates were going up more, I wouldn’t do yield maintenance because it’s a complicated calculation. You just don’t know.

Rod
He’s talking about prepayment penalties, guys. That’s basically a fancy word for prepayment penalties, that the lender needs to have a certain amount of yield in their debt. And so, you know, if you sell the debt early, you pay yield maintenance. A prepayment penalty. And then sometimes it’s a step-down. It can go 5, 4, 3, 2, 1, year by year, or typically it’s not that high, but it can be high.

Bruce
And a lot of the regional banks won’t even have one.

Rod
Right.

Bruce
And so they’re often more flexible.

Rod
Right.

Bruce
They’ll want recourse, of course. But I think that even if you plan to own the asset, which some of these that we bought, we did, said, hey, we’re going to own this ten years plus.

Rod
Right. Legacy asset.

Bruce
But you still want to be able to get out if someone knocks on the door and offers you something.

Rod
Well, sure, everything’s for sale. You know, one of the things you said that I meant to circle back on was you said that sometimes, you know, an operator, that one of these assets that you would buy is making those stupid moves. They’re not putting money in the property, they’re not taking care of it, and the lender, they’re not meeting coverage. And I wanted to explain what that meant for my listeners. So what he meant by that is there’s something called debt service coverage ratio, and lenders require you to stay with a particular debt service coverage ratio, otherwise, they can default the loan. And an example of this– and this is why you should come to my boot camp if you’re interested in this because this is just one of the myriad of things we teach. But let’s say you’ve got– and this is an annualized number, by the way, guys. So let’s say you’ve got an income of 125,000 a year for simplicity purposes, and your debt is 100,000 a year. That’s a 1.25% debt service coverage ratio, and that’s typically the minimum most banks will allow. So, you know, the banks, lenders are not interested in your ability to service the debt. They’re interested in the property’s ability to service the debt. And then if you don’t meet that coverage, that’s when they step in. And I guess they took a property over in receivership, and Freddie Mac just took it back, and you were able to come in and get it. So, yeah. Love it. Love it. Are there any books that you gift more than another?

Bruce
That I gift?

Rod
Yeah, that you give away?

Bruce
You know, I actually paid my daughters to read the original “Rich Dad Poor Dad”.

Rod
Of course. Paid them.

Bruce
Which is a staple because they weren’t interested. This was years ago. And I said, read this. It’ll make you think differently.

Rod
Right.

Bruce
Just the whole employee versus business owner and investor and all of that.

Rod
Right.

Bruce
I would say one thing that is not necessarily a fun read but will change the way you think about the world is “Creature” from Jekyll Island.

Rod
Oh, yeah, that’s a crazy book.

Bruce
That is– talks about the Fed, the Federal Reserve, which, by the way, is not federal.

Rod
Right. It’s private. Right.

Bruce
It’s a private entity that was formed by the banks.

Rod
Right.

Bruce
And that really makes you think about the world differently.

Rod
Yeah. That’s great advice. That’s great advice.

Bruce
I think the main thing and it relates to the advice of the old codger, tie that back. But it’s just cognitive dissonance, and that’s the propensity for people to just believe things are going to continue as they’ve always continued, and you’re comfortable. They don’t want to think about it. This is all stressful topics.

Rod
Right.

Bruce
I am by no means a doom and gloom guy. People just pay me to understand what’s going on in the world. So I do my best to get that right. And right now, there are some risks, big risks out there.

Rod
Big.

Bruce
And so if you pretend it’s not happening and you don’t want to think about it, you’re not going to be prepared for it.

Rod
It’s like the frog, the boiling water thing, you know. If you throw a frog in hot water, it’ll jump out. If you turn it up slow, it won’t. And that’s a very common dynamic with human beings where they don’t realize you know, really bad things are on the horizon or could be, and they don’t prepare for them, and they’re caught and they’re surprised when it happens. And so, you know, guys, there are incredible opportunities to take advantage of what’s coming and hedge yourself in case things do get ugly. Well, listen, brother, I really appreciate you coming on the show. This was a lot of fun, and I’m really glad we got to meet and spend some time together. And I’m sure we’ll have you back on, say, in a year or so just to see how well things– you know, what happened between now and then.

Bruce
See what happened. See if we’re right.

Rod
Thanks for coming on, buddy. Thank you.

Bruce
Thanks, Rod.

Outro
So one other quick thing. We encounter so many people that are frankly frustrated. They’re looking in the mirror and they’re frustrated that they haven’t been able to escape the rat race. They haven’t been able to build cash flow to the point where they’re able to have financial and time freedom with their families. And maybe they see other people buying real estate and creating incredible cash flow, and they think, well, it’s just scary. You know, buying apartments is intimidating, and I get it. See, that’s why we created our Warrior Mentorship Program. They’re our coaching students, and they’ve had extraordinary results. My students, I’ve been teaching about five years and own upwards of 140,000 units now that we know of. Right? And we feel like it’s just getting going. Now, we’re looking to grow this group and really take it to the next level, and honestly believe that the greatest transfer of wealth could be upon us right now with this current economic environment. Everything’s going on sale. So we’re looking for people who want to follow a proven framework, really like a blueprint or a map, literally, step by step. And then they’re able to leverage our systems and our incredible network to raise money and equity, to find deals and close those deals and build partnerships really nationwide. So if you’re interested in finding out more about how you can become more in our incredible network and take advantage of the unbelievable opportunities that are upon us, you can apply to my Warrior Mentorship Program by texting the word “CRUSH” to “72345”. Or you can go to “MentorWithRod.com” and what we’ll do is we’ll set up a call so you can check us out and we can check you out and see if it’s a fit. Now, again, you can go to “MentorWithRod.com” or text the word “CRUSH” to “72345” to apply, and we will speak soon.