Balancing Real Estate and Business in Today's Economy

0:00The benefit of real estate was it was the debt was so easy to get and the tax advantages were so good on real estate that it just made so much sense from a cash on cash return on cash return. but let's assume that they stay there. What we have seen is just the opportunities that are on the market and the volume of buyers that are out there, including, by the way, retail buyers. So people who just want to buy a house to live in it, right? They are there and they're always going to be willing to spend more than an investor is because they don't need to make margin on the sell side.

0:56Hey, everybody. We are here with another episode of Business Lunch with your hosts, Ryan Dice, the inimitable, cannot be imitated, Ryan Dice, and me, completely imitable, Roland Frazier. Good to see you. Ryan, how are you doing? I'm great. I loved it. It's worth going to YouTube just to see. I'm pretty sure that was your son, Ryan Frazier, was behind you at one point, and you saw him crawl behind you, so he's like trying to not be seen. But you could definitely see him. It was amazing. So I'll just say, if you are not subscribed to this channel on YouTube, it's worth doing it just for that scene.

1:34Just for that scene. But no, I'm amazingly great because I got to see that. So thank you all for that level of entertainment. You know, it's hard to engineer these stunts on a regular basis to entertain everybody. But thanks to Gemini, GPT, and Claude were able to put in there and say, what would be the most entertaining thing we could do? And they said, have somebody related to somebody that's on a podcast crawl under and behind a pool table. This is going to wind up like being in a talk of some like podcast growth hack or something like that. Yes. Some of that. That's how we figured it out. That's the subliminal, you know, advertising.

2:15I was talking to you earlier. So I was out in my driveway taking pictures of my car, which one of our friends said he wanted to buy. Oh, really? Yeah, yeah, yeah, yeah. My leases are up in August. And so I have been kind of thinking about that. And I was talking to J-Cron actually about it. about it. And he was like, he had been kind of telling me over the last probably two years saying, um, Hey, listen, when it comes up, I, uh, you know, if you're not going to buy it out, I'm, I'm interested. Let me know. And, um, so, uh, so I was taking pictures and sending it to him. And as the, uh, and now I have two new cars before we move on, I need you to absolutely sell it to him because I just want to screw with him relentlessly.

3:06Cause after he buys, would be like, oh, couldn't afford a new one, huh? Had to go with rolling sloppy seconds. Yeah. And I just like, I don't, by the way, I don't mean any of it. I just want to screw with them. Um, so they can't get the full enjoyment out of, uh, what will almost certainly be a significant investment. You know why? Cause that's what friends do for one. Yeah. That is what friends do. My, uh, my son, uh, Ryan and his friends suggested that we buy something like Lindberger cheese and put it underneath the, um, holding, you know, like under the hood where it could be warmed over time, but near an air conditioning vent so that it would, you know, kind of ruminate through the car.

3:46I thought that was a good idea too. You could also, um, just like hide. Um, I don't know how you'd get it, but I mean, let's say you, you were to find just some meth laying around. Okay. Dark web. I would go to dark web. Yeah. Hide meth somewhere in the car and then put in an anonymous report so that the police come and search it. It would be hilarious. That would be really funny. These are pranks that are good to play on your friends. Good pranks. I love playing. So anyway, I was I was there and a couple walked by who I think, you know, Bob and Dellerine, who are agents that are real estate agents here, primarily focused in in the area that I live.

4:29and I hadn't talked to them in a while. I mean, actually they've been really busy and I have too. So I hadn't probably seen them in maybe as much as two years. They helped us sell one of our houses back right before all the prices of houses went through the roof. So, you know, and then that house sold for a million dollars more than we sold it for a year later. So that was, you know, That was one way, one more way in my book of ways not to make a million dollars or more that's coming out soon. But anyway, I started talking to them and I said, you know, hey, what's going on? And they were talking about what they were doing and everything.

5:10And then I said, so, yeah, I mean, I'd love to get another place because I'd like to have a place that I could just have my studio and stuff in. But I don't want it in my house because it's going to be too businessy, too industrial. It's not going to look pretty. I have wires everywhere and all that. But I just got to get interest rates come down or house prices go down. I said, what do you think of this? And they said, no, this is the new normal. Now, I will tell you that everyone who's in construction and real estate always thinks prices are going up and never going down in my experience. So when things are at their peak, very often that's how it's going to be forever and it's going to continue to grow.

5:53So I don't know if that's, you know, what will happen or not. But but they said, you know, this is the new normal. The prices were suppressed before. I think that what you generally hear in the market bears that that's probably the case. So so what I started thinking about was and we were talking about business versus real estate. Right. And I just like to me right now, as expensive as it is, because they were talking about they like to say it's like a legal waterboarding to get approved for a loan for real estate these days. And they said like they said, I've never written so many explanation letters for every single thing that I bought over the last year.

6:36It's kind of crazy what is that. Is that with investment property specifically or is it for your main homestead? Everything. Everything, yeah. Is this because just of all the, you know, going back to 2008, 2009 shenanigans? Because I feel like, okay, I can tell you this. I know even just getting a business bank account fundamentally requires like a proctology examination. I mean, the KYC laws and all of this other stuff is so arduous just to open a freaking checking account. So I can't even, I mean, thank God I haven't bought a house in a while. So I haven't had to go through this. But so that makes sense.

7:17I mean, it doesn't make sense, but it makes sense that it's happening. Yeah. So what I was, it just kind of got me to thinking, and you and I were chatting about it briefly before we decided that we would talk about this on the show. But it's kind of interesting because really it's twice as expensive because of interest rates more than doubling. to get half as much value because the value of so many things have doubled and, you know, or, or at least increased by 50 % or more, um, over time. So you're paying double the rate to get half the stuff. So effectively you get a quarter of what you used to get.

7:55So if you think about that and, and then you say, well, what are the other things that I can do to invest in? And I know that a lot of our friends who are in the real estate education business, the real estate flipping business, the real estate wholesaling business are having a hard time because there just aren't the deals out there. And because money's too expensive and because there's not enough profit in the house because everything is selling for so much and they can't buy it at those high prices and then sell it for enough more to make it make sense to have held it and fixed it during that time.

8:28Not to say there's no opportunity ever because there's always opportunity. But it's significantly less than it used to be for now. So during that time, to me, it's like, what are the other things that you can do with your money? And it kind of comes back to, I have not seen that happen with businesses. In terms of buying businesses, there are still lots of motivated sellers who don't have a mature, efficient market full of buyers ready, willing, and able to buy that are sitting there looking for the opportunity to bid for the right to buy their business. And so like, if I'm comparing the real estate investment options to the business buying options, and I'm in both, you know, so I like, and you are too, right?

9:18So I like talking about it with somebody that's not completely biased. it just seems like if you're looking for stuff to do right now, I mean, I am having a hard time finding real estate that makes sense to do. And I'm not having any problem at all finding business deals to do. So I wanted to kind of get your thoughts on that. Well, really, you know, I've done some real estate deals. The thing about real estate is you either need to buy and hold and just wait for the market to go up as it generally does over a long enough period of time. If you have any sense of what you're doing and you have patience, it's really hard not to make money in investing.

10:04I mean, that's what Warren Buffett has proven. And not to say that - I'm not really about the making money as much as that it costs so much. Like if you look at the efficiency of your capital to get a return on - Yeah, just like the cash on cash return. Yeah. What is a return on invested capital, right? That's kind of what we're talking about. And that's the issue right now and has always been my issue. I mean, I guess the benefit of real estate was it was the debt was so easy to get. And the tax advantages were so good on real estate that it just made so much sense from a cash on cash return.

10:40And one of those is absolutely gone in terms of debt being easy to get and being inexpensive. expensive, but, and let's say the tax things are still on the table for now. We'll see how long they stay there with changes in capital gains and those kinds of things, but let's assume that they stay there. The, what we have seen is just the opportunities that are on the market and the volume of, of buyers that are out there, including by the way, retail buyers. So people who just want to buy a house to live in it, right? They are there and they're always going to be willing to spend more than an investor is because they don't need to make margin on the sell side.

11:17They just need a roof over their head. And so that's what you're competing against in real estate. You're competing against a retail buyer. Now, by the way, we're just talking really residential real estate here. We're not talking about commercial and multifamily and all that. Sure. Yeah. I don't know anything about, I mean, full disclosure, I've done some, you know, residential stuff. I haven't done much in the way of, of commercial multifamily or anything like that. But I have friends who do, and they're saying similar things, especially from an interest rate perspective and the cost and what it takes going into it, because what you actually have there is less demand.

11:53You have less people wanting to occupy as much space as the world has gone a little bit more remote as belts begin to tighten. So in commercial, you've got all the same headwinds of interest rate environment. But instead of this influx of demand, you actually have a pullback of demand. So there it's like, so I don't know. I'm not saying it's like, like we already disclosed. This is not our area of expertise. What you're seeing though in, in business buying is, is the opposite is true. You can find deals that are out there because so many of the, the, the real estate companies, the institution, I'm sorry, the private equity companies, the institutions, they pulled out.

12:402023 was one of the lowest, lowest private equity investment like deal flow times that we have seen in a decade and a half. And there was this whole prediction, the Wall Street Journal ran this article about how 2024 was going to be the year of private equity investments. And it really hasn't come true. Why? Why hasn't it come true? It hasn't come true because that Wall Street Journal article was speculating that they were going to be rate cuts. There are going to be three rate cuts this year. Well, guess what? We've had exactly zero rate cuts. Now, Jerome Powell just came out and said - Six rate cuts is what I saw everywhere.

13:16It's going to be six rate cuts. I think maybe even the Fed said it, but six rate cuts was what everybody was saying. And we're almost halfway through the year as we record this. And I mean, they're going to have to hurry up on that. So in the recent Fed meeting, Jerome Powell, that the economy actually got, stock market actually got a surge because all he said was, we're probably not going to have another rate increase. Right. So we now have regulated since that Wall Street Journal article came out saying, oh, 2024 is going to be the year of private equity. At the end of 2023, we've now regulated to please, the love of God, just don't keep raising rates.

13:52We'll be happy if you do that. That tells me that the smart money is not expecting rate cuts in 2024. which tells me that institutional investment is going to look a whole lot like it looked in 2023, which tells me that you're still not going to see a lot of private equity throwing money at private businesses, which means there's still going to be opportunities for people who know how to do those kind of deals. So, yeah, I think given my general lack of knowledge and where interest rates stand right now and the demand that's out there in real estate, I'm not doing any buying in real estate. I know there's people making money.

14:28I know there's people doing fine. there are people who will buy high and sell higher, right? So yes, it's high there. They've got the capital and cashflow that they can buy now and they can wait five to 10 years. And it will almost certainly be higher, no guarantee, but decent enough bet. The challenge is there's not enough margin there. You know, so you've got the buy high sell higher model. You've got the, I'm going to go in and I'm just going to improve the, I'm going to value add model. Well, there's not enough margin anymore. And the cost of materials and labor is also high that there's not even enough if you're willing to do a value add in real estate.

15:07But in business, man, you can do some value adds for nothing, like just your brains. You go in there and you improve the marketing. You do some not even advanced financial engineering. You just go out there and make some tweaks to who they're paying and how they're paying and when they're paying and create some margin and some cash flow. So the opportunity to value add in business is so much grader. And then kind of the third way that people make money is they just find a deal that nobody else saw, the diamond in the rough. And in real estate, it's really hard to do right now when everybody's looking.

15:39And it's really hard to do right now when all the sellers are educated on the fact that they got what people want. Even if it's a freaking shack, somebody's going to buy it. Somebody's going to want it probably four or five. On the business side, nobody wants to buy companies. So if you just believe in contrarian investing, I would say that now is definitely the time. And I was worried that this year, private equity was going to come in with a fury and just gobble up. They're not, they won't. I think we've got a window here. I'd be doubling down on investing in businesses. Yeah. Yeah. I agree with you a hundred percent.

16:16And the financing is so much more frequently seller financing these days than it is in real estate and at significantly more favorable rates. So there's all kinds of things going. Yeah, you bought your house, correct me if I'm wrong, seller financing, right? I did, yes. What is the chance that you get that deal now? I mean, you'd have to have, because think about it, like the house had sat on the market for, I want to say like 572 days or something like it was, you know, almost two years that they'd been trying to sell it. Now, of course, they could have lowered the price, but they weren't asking even in that market a crazy price.

16:58It was a good price. And then you also think about what can you get on your money and how motivated they are. And the people that were here, it's actually this house, right? The people that were here got offered a job that they kind of had to go to. And then I think it was just like, well, we want to get a house up there and we need to do something. So it worked out well. But yeah, it was a 10-year interest-only loan. I still have four more years at my roughly 3 % before I have to pay the amount that was financed. But I got to think you can find that deal, but it's not going to be. Because why wouldn't, let's say that just for argument's sake, let's say you find a piece of property and it is$3 million.

17:55And that was three or four years ago and now it's six. Let's say it's doubled. Could you find the seller financing on the six like you could before? Probably yes. For the same reasons, right? The same, well, I'd like to make, but it's going to be higher interest. It might be instead of 3%, maybe it's 6 % because they have a hard time getting 6%, but 6 % is kind of the risk-free rate now. So it's probably 9 % or 10%, which historically over all of real estate is still not horrible, right? But it's not. It's three plus times what you were paying just a couple of years ago. Yeah, a couple of years ago, that would have been considered a hard money loan.

18:41Yeah, seriously, right? Yeah. Yeah. So, so I think that that's, I guess that's my, you know, my point and my, my issue is just that when you look at how much more it costs now than it costs before, it's, it's really hard with, if you do take a broader perspective and think, you know, well, their rates were 16. I remember my mom got a 16 % mortgage back in the eighties, I think it was, you know, early nineties. And, and that's just what they were. They were all, you know, 12 % was good. 14 was kind of okay. and 16 or more was, you know, was up there. So the 6 % still is pretty good if you can get a 6 % loan and you probably can make money on it because people have historically.

19:26But when I look at that, plus the ridiculous increase in prices, like if it was just that rates had gone to 6%, that'd be fine, even if the prices had stayed the same. But the thing that just constantly blows my mind, I still can't get my head around is the lack of economic tradition of that. If interest rates go up, then prices of homes go down because they become less affordable. No, no, no. We're going to double the prices of the houses and double the price of the rates and still have it go up. That's what's really, really tough to, you know, to come to terms with. And, you know, And you're not seeing that in businesses.

20:07I think that's so not even the biggest distinction. You're seeing more, you know, creative financing getting done. You're seeing still plenty of deals that are on the market and you're seeing less buyers and specifically less cash buyers coming in with a lot of debt. So it's definitely and that's why I asked about about your house. Like you got a great deal. You're obviously one of the best in the world at doing creative. um financing structures and things like that but i think even you would have had a hard time pulling off the deal that you pulled off which even for then was an awesome deal i think for now it'd be almost it's hard for me to imagine that house sitting on the market at that price for as long as it did it snapped up yeah right and if it did if it did it would be a house that was that was worth you know in these times right it would be it would be twice as much and the cost for me to finance would be twice as much, which still like if I could get a 6 % 10-year interest-only loan on twice the value that I paid for it before, that is market now, right?

21:16It's within the range of market now. That's still probably not a horrible deal if you can carry it, but it's not, you know, it's just in dollars, in terms of dollars, it's like, this was amazing. You know, it's less for me to own this than it is for most people to pay rent. And that's just crazy. So that deal is not out there at that price anymore. It's probably out there at twice the price. And it's an okay deal, but it's way less affordable, I guess, in terms of just dollars. So if you're an investor and you want to do more than just kind of a stick your money in a fund or somewhere in the stock market.

22:01If you want to be a little bit more active with your investment, try to seek a higher return than what the market will deliver. You don't just want to have it all sitting in cash. Real estate was kind of the place where you went. Then maybe after that, it became Bitcoin and Dale Earnhardt collector plates and stuff like that. But the one that everybody, that most people don't think about is private companies. And yet that, if you look at it, that has actually created, people talk about real estate being the largest wealth creating vehicle in the world. Sure, maybe across the board, but when you look at the people who have the most money and who have built the most wealth, most of them are in private equity.

22:41Most of them are running hedge funds and they're also buying private companies. It'd be nice to be like a Buffett to have the capital to go out there and buy public companies. But this is kind of the opportunity and it can be done. Obviously, we talk about this. You talk about this a lot. I don't want to turn this into a pitch or anything like that. But any tips that you would give people, aside from maybe showing up for the next Epic Challenge when you do that, any tips for how to think about it? Yeah. I mean, yes. So, yes, we do have a low-cost challenge to take that I think is a pretty good foundation for all of this at getepicchallenge.com.

23:21But just generally, conceptually, I would say that if you're thinking about buying real estate, look at the return on your capital that you can reasonably expect over the next three to five years and compare that to if you were able to acquire a business. And businesses are really just assets of income streams, if you think about that. They're an income stream that you can acquire generally at a discount. And so if a business is profiting at$400 ,000 a year and you can acquire that asset for, let's say, nothing out of your pocket, nothing out of your pocket, right, which is very common. Or you can do it for, let's say, 25%.

24:05If somewhere between nothing and 25 % should cover almost any acquisition of a business. So now you're basically buying a cash flow stream of$400 ,000 in profit a year with$100 ,000 out of your pocket. That's a pretty good return on your money on anybody's level. Plus, if you go into growing the business and optimizing it, because most of them are run by people who have nothing, who have started a business because they are accidental entrepreneurs. They didn't intend or plan to be in a business. And the truth is they're not really even entrepreneurs. They're just self-employed people. They basically said, here's a way I can make money without working for somebody else.

24:48I like that. Now they're doing it. They didn't know how to do pricing strategy. They don't know how to do acquisitions. acquisitions. They don't know how to grow the business. They don't know how to market effectively. They don't even have a customer list, a whole lot of them, right? There's so many optimization angles to increase the value of a business as opposed to like increasing a house. It's basically paint or remodel. If it's a commercial property, then it's raise rents, redo the property so that you can upgrade it so that you can raise rents. Maybe you can find some incidental income by adding laundromats and vending machines and things like that, but there's not a lot.

25:31In business, there's hundreds of things that you can do to increase the value. And very, very often, the simplest of all of those is simply raise your prices because most people who own businesses haven't done it or were afraid to do it for the past several years. So I think thinking about about just coming in and seeing if you've got somebody who wants to move on from a business, then they're a motivated seller. If they have tried to or don't know how to, then it's very likely that they will finance for you. So you won't have to do that yourself. You'll probably not pay what it would be worth if it was completely fixed up and made right for market because they don't know how to do that.

26:14And therefore you can not only come in and buy an income stream at a discount, you can also have an asset that with just a few tweaks, you know, the proverbial coat of paint can be worth a few times more than it is when you buy it. And if you do that even once or twice, you know, once a year, once every couple of years, it's because businesses sell for multiples of profits. It's very easy to get double digit plus returns and even triple digit returns on your capital because the markets are so inefficient for sellers. But a lot of that inefficiency is because the market has this floor. And until you hit the floor, you're not going to find a bunch of buyers who are willing to pay much for it.

27:01Once you hit the floor, there are lots of buyers. And so it's kind of just basically arbitraging the, you know, the sub floor acquisition with the above floor sale is really what you're after. Hopefully that's in a nutshell. I think it's a great point. Like what you're basically saying, like right now in real estate, I said before, and I, and I do kind of mean it. If you've got a shack to sell, someone will buy it right now in business, unless it is perfect, there's almost no buyers for it. Right. Right. And certainly not at the institutional level right now, there's a buyer for every address in real estate, pretty much with exception of like very rural areas or where there's not a lot of humans walking around.

27:40And there's no supply. That's the other challenge. Our inventory is about one fifth here in San Diego, what it was four years ago. So we have a real estate brokerage that is making less than it made a couple of years ago, not because prices are down, because they're up, right? Not because there's not a buyer for every address, because there is, It's just there aren't the addresses to sell, right? And that's also not a problem that we have in the business world. Right, because in 2020 and 2021, we saw the largest surge in new business formations that we have seen in the history of these United States of America, right?