Investing in Control: A Real Estate Journey with David Phelps

Picture this: a 22-year-old convincing his father to embark on a real estate investment journey with him. That's the inspiring story of our guest, David Phelps, CEO and founder of Freedom Founders. In our time together, David delves into the fascinating landscape of his real estate investing journey, from buying his first property to dealing with the turbulence of fluctuating interest rates.

Expect a deep dive into the strategies David used in scaling his business, creating a mastermind group that bridged the gap between investors and business owners. Get insights on how he navigated the murky waters of the 2008 market, and how he structured deals to return up to 14% on investments. You'll also learn about the downsides of traditional retirement accounts and why it's critical to have control over your financial future. Intrigued yet?

As we wrap up, we shine a light on the current real estate market. David shares his perspective on debt financing versus equity investments, the stagnation of real estate prices, and the importance of being in control of one's financial future. If you're an investor - or aspiring to be one - this episode is a treasure trove of practical insights and hard-earned wisdom from a seasoned player in the real estate game.


Get in touch: freedomfounders.com, Freedom Founders Youtube Channel, or the Podcast: Dentist Freedom Blueprint

If you need help finding the perfect location or your ready to invest in commercial real estate, email us at podcast@leadersre.com.

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Transcript

Speaker 1: 0:00

We can still earn double digit returns, but we're the bank. It's a lot safer place to be than in the equity space because we got the margin. We never loan 100% right on property. We might loan 70. We might loan 65. We might loan 50% because we don't want to be top heavy in the equity space.

Speaker 2: 0:18

The goal of this show is to help health care organization scale by leveraging real estate strategies and interviewing high level health care executives who are actively in the trenches in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's RE, as in real estate universityorg.

Speaker 3: 0:43

Hello and welcome back to helping health care scale. I'm Austin Hare. Our guest today is a repeat guest. His name is David Phelps. He's the CEO and founder of Freedom Founders, which is a mastermind group of high income business owners looking to take control of their financial future through alternative investments. David, thanks for coming back on the show.

Speaker 1: 1:01

Austin. It's always a pleasure, my friend.

Speaker 3: 1:03

Likewise Well cool. So you did tell your story in depth, but this was several years ago now, and so let's go ahead and just touch base on that, if you know, for everybody listening, if you can kind of tell it, because you were the dentist and you kind of retired from dentistry early. But I want to spoil it too much. So, yeah, why don't you just tell everyone your, your whole story?

Speaker 1: 1:24

So, as I, as I explained to people that know me today as being focused on alternative investments, we'll get into that a little bit. That's not where I really started. Well, actually, I did start there. I started by investing, buying, acquiring my first real estate investment property, if you will, when I was age 22. Now it's going to date me, but that was 1980, 43 years ago. A long time ago.

Speaker 1: 1:47

Austin and I convinced my father to be my, my joint venture partner because I had no money. I was, I was 22. I was getting ready to start dental school at that time, but I was between college and dentistry and I just was reading books about stock market investing, which is mutual funds, and I read some books about real estate because I just, I just wanted to be quote an investor. I want to learn what investing was about. Again, I'm a kid at that point, right, getting ready to start out got years to go through dental school. Someday I'll be a business owner, a practice owner, like everybody Aspires to be, but I still I'm always thinking ahead. I wanted to, like, get ahead, right, get ahead and understand. Well, someday I'll have some money, hopefully. So what am I going to do with it?

Speaker 1: 2:28

To be a quote investor and so the real estate made sense because it's a tangible object, tangible asset that I felt like I would have more control over. So my dad, by the financing, I was the manager. We split profits 50, 50. We split a little over $50,000, holding that property for about four years. I managed it and I took my time. I managed it and I took my $25,000 and partly that into more properties and after I graduated from dental school, Can you talk a little bit more about this first property?

Speaker 3: 2:56

Like what exactly was it? Where did you find it? Like, what made it special?

Speaker 1: 3:00

Yeah, so good question. So I went to school at Baylor dental school in Dallas and so, knowing I was going to be there for four years, that's when I told my dad, hey, would you invest with me? And he's in Colorado where I grew up, so he's not even close. I think he came down. He actually flew down, I think he came down twice and we just very, very conventionally found a realtor, you know, and told her what we were looking for. We're looking for investment property, right? So I remember, I still remember you know her driving us to different locations around Dallas. Look at different things townhouses, single family houses, a fourplex, you know stuff, different stuff that, would you know, kind of made the investment criteria and we finally found this one. I think it's a really good question. I guess it's a good question.

Speaker 1: 3:48

I was looking for a single, single family residential house. It was, you know, not not what I would not kind of a lot of the houses I bought after this. This was more stately, in a little bit older area, but stately part of Dallas, two story brick, and the thing that made this potentially a good buy is it was an estate sale. So the widow lady who had lived there probably, you know, without spouse, for, I'm guessing, 10, 15, 20 years, and probably had lived there, for, you know, probably for 30 years. You know nice area, but the house was dated, it was very estate sale. So, again, the heirs typically want to divest of property quickly because they just want the cash right. So put the house on the market, they're not going to fix it up.

Speaker 1: 4:29

And this was in 1980s. I said now just to give people context, 1980. We were starting what became back to back recessions, heavy duty, pretty solid recessions. And then we had the interest rates, the federal funds rate, which today people think is high at like 5.5%, 20%, yeah, 20% in 1980. Now that didn't mean mortgage interest rates were that high, they were about 13 to 15%, but that's still way higher than today. Right, that's almost two and a half times higher than today.

Speaker 1: 5:00

So credit was tightening up, and take note, because I think we're in that era right now where credit is tightening. So that meant properties that needed to be sold for whatever reason, and so we were able to get the money back. And so we were able to get the money back, and so we were able to get the money back. People were having a hard time financing them. What does that do? Well, it starts decreasing the prices and so we are able to pick up this house in a good neighborhood, just needed updating. Even though our interest rate was relatively high, the value we got at it still made sense and we could quote at least cash flow the property, which is important. So even though we were making any big spread on the rent over the mortgage payment, we could still cash flow break even and it was basically a growth play.

Speaker 3: 5:38

So what do you mean when you say cash flow break even, what do you? What do you mean Like, um, you had enough to like enough extra cash flow to pay for big expenditures when they happened, or no, no, no, I mean well expenditures we put into the property and they weren't huge because it really just needed updating.

Speaker 1: 5:52

There's no like major mechanicals or things like that or like structural, but it's mostly updating, so we include that as part of the investment on the front. So you buy the property for X price, you do whatever renovations, updates you want to. That just goes into the initial investment. Now, you're right, you have to have some, some capital available for things that might break, like a sewer line or you know, an HVAC, heating, ventilation, air conditioning could go bad, things like that water heater. Those can come up in an older home. But yeah, so the margin really I'm looking for is enough margin to break even over the normal operating expenses.

Speaker 1: 6:31

Most of that comes up in turnover. So if you have a tenant turnover which you don't want with with rental property, that's when you have to come in and clean up, fix up, repair all that stuff and you lose rent. So if you can keep someone in the property for quite a while, then it reduces those costs. So for at least we could break even on a relatively modest, you know, vacancy turnover. Right, two tenants in four years, that's not bad. It's not my record by any means, but two tenants and four years. Not bad. So average of two years, not bad for turnover and and not have any major expenditures, as long as my writ would cover any, any, any basic operating costs.

Speaker 1: 7:05

You know, little repairs here and there, right that might come up. Might have a little electrical problem. Little problem would cover that and in this case the mortgage payment, property taxes and insurance cover that. Then at least I'm breaking even with a little bit of surplus. To me that was good enough for our first purchase and I've got more criteria beyond that today. But that's what made this property work for us, that we weren't like negative cash flowing it for four years. We were at least breaking even and then got the growth spurt because we bought it, you know, at time when houses were lower value because of the interest rates and recession and so that when we were coming out of the recession interest rates were coming down, prices were going back up again because the cost of financing was was lower than it was when we bought the property. Does that make sense?

Speaker 3: 7:48

Yeah. So actually I want to kind of take a sidetrack for a second here, because you mentioned, the increase of interest rates decreases the price that you can sell houses, and so and it applies all real estate, not just residential but also commercial, and we're having this conversation a lot right now and what we're the way, the best way that I can phrase it, is that you have both headwinds and tailwinds, which is true of any market at any time, right, and it's like which wind is stronger will determine the direction of the price. And so in commercial real estate in particular, what's using dental offices or healthcare you know offices as an example there are a lot of headwinds when it comes to interest rates. Interest rates are like this huge, you know massive problem that increases your monthly payments. That'll keep it from cash flowing. It makes it harder to get your debt coverage ratio, which means you don't have to charge more rent or you have to put a larger down payment down to get approved from the bank, where you got to have negative cash flow. Like, none of those three options are really great, right, Right, that's a headwind.

Speaker 3: 8:46

However, they still have tailwinds, and what I mean is, specifically, there's a couple of things. Number one is the fact that healthcare is like very recession resistant and it's been doing very, very well recently, did really well during COVID and there are not very many you know dental offices going out of business, which means that you, if you want to have a, you know, if you want to, if you want to occupy space, you're not going to get a second generation dental office, right. So you're either going to have to acquire a practice or you're going to have to build a new one maybe, or convert it at an existing location. Yeah, I mean, you convert it you know a different space into a dental office, right? So somebody's already got a dental office. I mean, they're not really going to want to be flexible in pricing because they know, like anybody else who wants one is going to have to go out and build it up for the ground up, right? So that's number one is like the fact that they are just not going out of business. Number two, which is related, is the replacement cost, and so when you think about how labor has increased over the past three years and how the cost of supplies has increased over the past three years, well, now you've got a group of people who aren't really going out of business and selling their buildings, which forces people to go and build new. And so now you've got like, if somebody does want to sell, you're comparing that cost to the cost of new construction, which is really expensive.

Speaker 3: 9:55

And so there is the question that you know I've heard people saying commercial real estate when it comes to high interest rates is how long can you carry the piano? Meaning when you have a lot of interest, you're using a lot of leverage, the weight becomes heavier and heavier, right Like carrying a piano. Eventually you just got to drop it, meaning you'll slash your prices. Now that's mostly true for developers who are planning on flipping and you know they have good profits built in typically and it's like as interest rates increase, they kind of just cut some of their profits and so as they try and wait to get the price, they want longer and longer and longer eventually, like something's got to give.

Speaker 3: 10:29

But this is all kind of just speculation on my part. Like I'm curious as to how it actually played out back in the 80s, because you said you said the Fed fund rate went to 20% and right now we're at 5.5. Okay, so my question is I have a couple of questions. But number one, like we, the reason that interest rates are so painful right now is because we came out of an extraordinarily low interest rate period, and so the price of real estate reflects the low interest rates, that's right.

Speaker 3: 10:56

So the like I do hear people say interest rates can go way up, and maybe they can, but I think it hurts more now than it did back then because we're coming from a zero interest rate environment. Now is that true? Like what were interest rates back in the 70s?

Speaker 1: 11:09

No, you're 100% right. I love the context you just laid out because I agree with you 100%. Yeah, real quickly and I'll answer your question about the interest rates. But yes, you're talking about what I call playing the long game. You know an investor versus a short game, which is a flipper, and flippers have done very well up till about now or the last six months, when rates have topped out. You're 100% right and that's why, to your point, knowing what the tenancy is of any building, residential or commercial, makes all the difference. And we're talking about here dental or healthcare businesses which are very resilient. They're great long-term tenants. So if you're playing the long game and you know what your acquisition price is, what your debt service is, even if your debt service is 7.5 or 8% today, if you buy right and have the tenant with a lease that you know is sustainable, with appropriate increases, you're gonna be fine Doesn't mean you shouldn't go out there and do it. Agree 100% versus. Like office, it's cratering for the reasons we don't have to go into, but office is cratering right now. Other segments will also have trouble because the short game players who, as you said, use bridge loans for construction or big renovation projects, get caught in the middle of the fluctuating interest rates and they got in when rates were lower. Now rates have doubled and their profits get squeezed and they can't refi, they can't sell big trouble. That's where the roll-off happens. So back to your question about interest rates. Yes, people will say. Over the last 40 years the average 30 year fixed mortgage rate was 7.78%, so we're just now kind of getting there. We're just getting there, so shouldn't be a big problem.

Speaker 1: 12:49

It's the rate of increase from, as you said, like zero federal funds rate like back March of last year, now rising to five and a half as of last month, july. Is that rate of increase? We haven't seen it historically. It's too fast and there's a lag effect that people are not taking into account. A lot of the media today is saying. In fact I just read in the Wall Street Journal the Fed, jerome Powell said just over the weekend they're not expecting any recession at all. For a while it was like soft landing, hard landing. We don't know. We gotta fight this inflation dragon that's got out of the bottle, but now we think we got to cover. We're hitting normalcy here. It's all gonna be good. They are not taking into account the lag effect that's still coming. I mean six months, 12 months down the road from the last increase. We just had an increase last month, so that increase won't show up till probably this time next year. The increases that came over the last six, nine, 12 months are just now hitting.

Speaker 1: 13:44

So the Federal Reserve is not running the economy on a dial like this where, like, you're fine tuning it. No, it's like you've got a big wheel here and you turn it one way and you can't reverse course. So I think the danger is that they're trying to fight inflation, they're hitting it so hard that there's gonna be a fallout more fallout across the board in the economy is my feeling. So that's where I look at interest rates. It's not like we're just getting back to what the average was in the last 40 years. It's the rate of increase that we're seeing and the fact that there's still kind of a mania, a speculative mindset in the marketplace, where there's been such a burst of capital that came flowing into the markets, particularly with COVID. I mean trillions of dollars added to the Federal Reserve balance sheet to placate all the destruction that happened during the COVID lockdowns in 2020, going into 2021.

Speaker 1: 14:37

Well heck, student loans are still on pause until October. Three years of pause on student loan payments. All of this is starting to come due. And all the money that people had during COVID, they're stacking it up. They couldn't spend it. They're spending it down and we're getting close to the end of that and we're seeing the credit card balances revolving credit for consumers ticking back up again. This is all not a good sign.

Speaker 1: 15:00

Corporations well, people say well, thanks. Corporations are still doing it. They're showing strong profits because they locked in a lot of low-cost capital. When they saw the Federal Reserve starting to raise interest rates over a year ago, a lot of them locked in and so they're still riding that. But again they're gonna have to refi that debt. This is all coming, awesome, this is coming. So it's not to say just to throw your hands up and go, well, I'm not gonna invest in anything. No, I think you have to just be very more critical on discerning in where you invest, how you invest, to make sense out of it. That's the key here, and most people are not that discerning. They just don't understand it. They don't pay attention or they're following what I call the media group think, which I think is gonna be in for a nasty surprise. But again, you can ride the wave or you can get pummeled by it, and it's a choice.

Speaker 3: 15:46

There's a lot to unpack there. Yeah, and I agree with so much of what you're saying. It's just like I've been wrong so many times in my predictions, because when COVID happened, it was like, oh, the stock market is gonna go to zero Like we never could have predicted March 21st 2020 would have been the very, very bottom right. That guy was just at the very beginning and then I thought, oh like, well, the housing recession is coming next, because nobody's gonna be working, so they don't have any jobs. Well, I didn't realize how much rising tide lifts all boats, right. Even in states that lost populations, like California, the price of the real estate went way up because the entire country was flooded with cash, right. These are all things that are easy to predict in hindsight, but at the time, I was predicting it to get a lot lower. A lot of people were predicting it to get a lot lower, and we were all talking about the crash and like the next housing bubble pop and all this kind of stuff. And so, yeah, it's just like it's not until it's too late that you can really go back in hindsight and dissect what actually happened. And so, yeah, I think like what you're saying resonates and it's just like I would have thought, when it came to rising interest rates, that we'd have already seen like a hard landing, you know, and it's like it does you know what it's hard? I have less conviction. I've been thinking that we're gonna go into a recession for a long time, but with every day that goes on, like I have less and less conviction about it, because it just does like we, and to your point about it takes six months to find the effects.

Speaker 3: 17:15

Yeah, that's absolutely true. I mean we were talking with some developers who had the $70 million deal that they put on pause for, you know, a year essentially, and so because of interest rates, like that's the only reason I mean we've been. You know there's some land that we had under contract and my partner had under contract, I should say. But you know they were getting ready to move forward with this multifamily development and like they had interest rates real quick, like in 30 day succession periods, and like then that two month period where they were trying to finalize all their documents, because it takes a long time to close on commercial real estate, they just said sorry, like we can't do this right now, and so that's like that's something where all those contract workers, all the painters, all you know every single person, all the admins, all the stuff that was going to go into that development that they had lined up, like that's they're not going to be doing that anymore.

Speaker 3: 18:03

And so I mean, yeah, it's definitely all those types of people is going to, it's going to affect and it's going to take an effect on the economy. I guess what I'm still unsure about is just how much? Because, like, if you would have asked me a year ago, I would have thought, for sure, by Q3, 23, we'd for sure be in a recession, you know, and like we kind of had a little blip of one, like we had two quarters of negative GDP growth but nobody stopped going out. I mean, people were still spending money. Like it was a very, very light one. You know, our luxury Airbnb's are still getting booked, and so, yeah, that's kind of what I'm, you know, playing with in my mind right now.

Speaker 1: 18:39

No, I agree with what we're seeing. Yeah, you go to the airports today, they're just packed. They're packed. Tourism, hospitality you know people are taking vacations like there's no tomorrow. I still believe that we're seeing the tail end of all the liquidity that was pumped into the market artificially by fiscal and monetary policy, starting back in COVID once you mentioned, you know, march of 2020. Yeah, I think the Fed had to do what they did, because I think we would have just spoiled out. So I am not negating doing something, but, like everything the government does and again it's just government, it's inefficient, right? So, and look, still today we have major deficit spending. I mean the current administration not getting political, but just I don't think it's no matter who's in administration.

Speaker 3: 19:35

You know Congress Go party to the bad at spending. Well, party to the bad, other parties are just yeah.

Speaker 1: 19:40

They're all just spending and no one's talking about the debt. You know that. You remember, eight weeks ago thereabouts we had the debt ceiling crisis, remember, which comes up every few years. It's like, oh, you know, the most sides are fighting. You know, we don't want to extend it, we need to have more budgetary constraints. And finally they get. You know, this time eight weeks ago they said, okay, we'll just blow the lid off the debt ceiling cap for the next two years, get us past the 2024 elections conveniently, so no one has to get involved with that. There, you know, in eight weeks we've added $1.8 trillion to the national deficit in eight weeks.

Speaker 1: 20:16

Austin, see, this is the problem. And the Inflation Reduction Act nothing about inflation reduction. It's really the inflation expansion act, because all of its pork barrels, it's spending, spending, spending money that we don't have. That is inflationary. So we've got Powell on one side saying he's going to be the hawk and he's going to tame inflation back down to 2% goal. He's going to get it there, he's not going to be a weasel. So I think he needs to maintain that he's going to keep rates, you know, up for this year, maybe even another little bump in September. Maybe they'll look at the data and all that they look at, which, by the way, they look at a lot of lagging indicators which I think, again, that's maybe all they have to work with, but that's what they do. But they keep the rates up. I just I think there's going to be a harder, stronger roll off.

Speaker 1: 20:58

Now I could be wrong too, for sure, I'm just saying this is what I see. Why don't you have me back in six months? Let's just see what happened, you know. Again, it's just we can see what happened. And again, it's not about who's right or wrong. I think what we all have to do is we have to look through our own crystal lens, look at data and I just say, you know, hope for the best, which I'm not a pessimist. I say hope for the best, yes, absolutely, but kind of plan for the worst. And so find somewhere in between where you're hedging your bets. You got to hedge a little bit. No one's going to be right ever, 100% of the time, can't be no way. So we have to hedge a little bit right and look more.

Speaker 1: 21:30

I think, at fundamentals, and you know we were just talking a little early about fundamentals. You know cash flow that will support the tenant base with fixed rate debt. I'm good with that. I'm good. Those fundamentals, rather than being more on the speculative side of just looking at what the momentum has been over the last several years. The momentum has been high in everything, right, well, I'm just saying the momentum. I don't think it's going to be there. I think we have to go back to more fundamentals. If you look at fundamentals, which you're making your investment decisions or business decisions, you're going to be fine. Just don't let the momentum of the exuberance that we've seen the last few years drive you to make speculative moves. That's my point.

Speaker 3: 22:07

Yeah, yeah, I agree, you know that's exactly what we decided too. It was like I don't believe in just sitting on the sidelines, because then you're timing the market and then you're essentially saying that, like I'm smart enough to figure out, you know when to get in and when to get out which I don't think I am, and most people are proven to not be and so what we just decided is we're going to be more strict in our parameters. So, like you said, make sure that the deal lines up. So maybe deals that we would have done two years ago we're going to pass on now, and it just means it means a lot less volume, and so it feels like eventually enough people are going to be doing that, that it's got it shirkeled its way down. It's just like it's surprising me, like how long it's taking, and so I mean we're still moving forward.

Speaker 3: 22:44

Sounds like you guys are too, and so, yeah, that's what I'm kind of curious. We kind of took a side path from your story. But like what let's yeah, let's talk a little bit about your investment strategies now, like we can just backtrack a little bit, like how did you make the pivot into real estate? And then let's talk about the story of, like you know how you founded the Freedom Founders and what you guys are doing now.

Speaker 1: 23:08

So, as I said, I took my profit my you were to take $25,000 from the sale of that first property that my dad and I co-invested in and I took that and I parlayed that in the more real estate, primarily all residential, cause that's, you know, that's the best place for a young guy to parlay. Commercial wouldn't have been on the radar for me, but I could do residential and so I just I leveraged a lot. But again, I was looking at fundamentals. I understood, you know, the cash flow game I had to negotiate. So I added quite a few properties from my portfolio over the next 15 years. I had somewhere around mid 30s, 35 or so, and what I did, my strategy, was this Even though I was you were a 100% owner of 35 residential.

Speaker 1: 23:49

Yeah, 100%, yeah yeah, I'm not a syndicator, I'm just, it's all me. But they were leveraged, they leveraged. So what I did is I took excess capital from the practice that normally would have gotten to quote savings or like a 401K or something like that, a retirement plan. Instead of doing that, I just took the excess and started paying off like one house at a time, like the higher interest rate house or the one that had the lower balance that I could pay off to zero faster. I started it's called snowballing, right, so snowballing the debt. So you'd snowball one, then you have extra capital from that one and you start snowballing. So 15 years or so down the road, not all, but a good portion of these properties were free and clear, so obviously the cash flow goes up from that. And in 2004, subsequent to my I'm talking about my daughter, why she made the shift.

Speaker 1: 24:40

My daughter. In 1995, age two and a half, she was diagnosed with high risk leukemia. She survived it, but it was a horrific time in our lives. Her mother and I didn't make it through our marriage, it was just. It was a lot of pain and physical pain and emotional pain. So, but she survived, my daughter survived that. And then she had seizures, off and on, uncontrolled seizures for the next several years. And then age 12, because of all the chemo and the seizure medication, she was in end stage liver failure. This is age 12 and this was 2004. I'm just going to go speed through this, but it was again another horrific time figuring out where to go, how to go get her on a transplant list, all this stuff, and she's vomiting blood. Her liver's backing up Can't process, it's just, and there's no dialysis. I mean, you don't have a lot of time to figure this out. You can't just go on a dialysis machine like you can for kidneys. Grace of God, another family's child life is lost in an automobile accident. My daughter's on the list and it's all a ranking system and basically you get the call. Is what happens to people who are waiting on some kind of transplants? You get the call, you're already, bags are packed, you got to be ready to go. Some angel care flight will fly you to the medical center if you don't live near it, which they were not and you receive the liver and, grace of God, the surgeons and all do their best and the patient survives. The genus survived.

Speaker 1: 26:07

That was when I really decided I can't keep doing what I'm doing, especially being the blessing of being a, as you said earlier, healthcare. It's very resilient. We always have business, but there I was, the guy I had to provide the business, so that was taking me away from the freedom. I wanted to spend time with my daughter, so I'm like going okay, do I keep doing this? What I did, austin, is I just kind of on the back of a napkin, no software, no Excel spreadsheet. I just figured out how much cash flow do I have coming from these, from the properties? And if I sold my practice, net, net, net, how much would I have to put back into real estate, which, unfortunately, I knew how to do, I knew where to put it to get you know the same kind of return. And I put that together on the back of a napkin, said you know what? I got enough for now. I got enough for now. And that's what I call the freedom number. Today, what do I need to get free or get some freedom, just to do whatever I want to do? To take my foot off the gas pedal and I thought maybe I'll be, I'll take a year, year and a half off from dentistry. I can always go back, I can be an associate somewhere. I could partner up, I could build another practice. I wasn't afraid of going back as long as I could sustain my family's financial needs during this interim period, whatever that was going to be. Well, that worked. I sold the practice and spent time with my daughter.

Speaker 1: 27:23

And then I had this margin of time and people came to me, started hearing the story and go well, why did you leave dentistry? Cause they understood my daughter's situation, austin. But it's like how could you do that? Cause not a lot of people knew I didn't real estate on the side, I kind of kept that in a side pocket. You know, nope, didn't make a big deal of that. And so these are colleagues in dentistry and medicine who I knew and just started to ask me, just just organically. And you know they say well, could you show me? Let's get this a handful, could you show me? You know how you did it. And I said well, I can show you how I started when I was in my twenties, but it's probably not the way you're going to want to do it, because you know you're 40s, 50s, whatever it might be, and you're busy. Your time's more valuable what you're doing right now than my time when I was single starting this out. So basically I just had a handful of people just piggybacking on deals that I was already doing.

Speaker 1: 28:09

Again, small deals, not big syndication. Small deals, mostly, again, single family, easy to put together, easy to figure out. I mean I could do single family, you know, blindfolded. I mean it was that easy because I had a market. I had a market and people knew me. I got deals right. Which is key to alternatives is access to good deals, which is what you do. So the small cadre of people who were jumping on my deals and this is now we're hitting 2008, 9, 10,. The deal flow is crazy because we're going through the great financial crisis and now the deal flows are just like easy because there's no money. Credit crunch Again, I'm forecasting what I think we're going to see in this market credit crunch, liquidity tightening, deals are going to be plentiful, and so we did that.

Speaker 1: 28:54

And then I'm thinking well, I can't be the supplier to a lot of people, but obviously I'm helping people who want to get involved in real estate, but they didn't want to be hands on. So how can I scale this without me doing all the work of putting deals together and stuff like that, because that's a business in itself. I thought, well, I know people in the real estate space. I've been doing this for 20 years. I'll just bring a handful of them to a group and we'll just call it. We'll just have a small group, call it a mastermind and just see what works. I was the connector, I'm the translator right between the two parties. Got investors high income, high net worth investors. They got business owners who need the private capital. I'll just show them how to put together deals.

Speaker 1: 29:31

We started very simply like my model of equity or debt investing, and then the group just started to grow. It started to grow and then over time I added places where more money could flow to, with syndications and funds, cause I think you need to be diversified. I love single family, but I also think there's less scalability with single family, so at some point people want to move to do a higher level and just then to do that well, to do that well by underwriting, vetting, background checks, all the stuff is really important. When you're basically giving your hard earned money to some operator to quote, manage for you, you want to make sure that you're giving to people who at least have some track record and, you think, have some experience. So that's how freedom founders came about a little over a decade or so ago, as we kind of became formalized and have grown from there.

Speaker 3: 30:23

Yeah, so many little attendance that we could go off of. So, yeah, it started out with single family. So essentially, when you said you had your market and people were like I guess, agents or whoever was coming to you it was in the Texas area whenever they had a distress property that they needed to buy or for, and then you knew that you would pick it up.

Speaker 1: 30:43

Yeah, for me in my own portfolio this is North Texas and even specifically, really more specifically, in the area where I had my practice when I started way back in the early 80s, is I invested time not outside my practice in meeting all we call them the movers and shakers in a certain community right or a certain local. It's like a farming market. So I would meet the local bankers, the real estate attorneys, the telecom companies, real estate agents, brokers, property management, cpas, right. So you start to kind of get involved in what I call the quasi real estate financial arena. And when they knew that I was a buyer at the right price and or terms, then I got deals that were brought to me because I would, if I could, I would figure out a way to put a deal together that met my needs but also meet the primary needs of a motivated seller. And that's who I became, and again, a small market right.

Speaker 1: 31:40

Yeah, and that's the advantage of being, you know, like a small fish in a smaller market. You know you can stand out and again, that's not something I could scale. You know I'm not big enough to scale that to. You know, nationwide commercial stuff, like, but you do the same thing. You've got a network. It's just, you know, more vast, but you build a network and that's what most people don't have when they want to get involved in real estate. It's like, okay, they want to do it right, but they don't have a network. You've got to connect with people who have a network and then you find out where you can fit in to whatever your goals are.

Speaker 3: 32:14

What kind of returns were you generating Like? What kind of percentages Like do you have, like an average, like you know deal size? But like I know this is a while ago now, but like deal size and returns you got Well, you mean when I was doing it personally- yeah, just yeah, when you had 36 and when you started like get more gosh.

Speaker 1: 32:31

Yeah, I mean I mean hard, hard to say, but. But I would say with the leverage I was using. Now, remember I was putting my time into this, so a lot of people they look at, look at returns. If they're doing the, doing it, they're not putting their time. That's a great point yeah when I say I was getting 30% plus. Remember my time, so probably whack that in half.

Speaker 3: 32:52

Yeah, I was hired somebody to do the job you were doing, yet Then probably somewhere around, you know, mid teens, Really yeah, half. That was your salary, right like for your time.

Speaker 3: 33:03

The other half was the return on capital. Okay, and so then, when you started bringing people in, how did you structure? You mentioned, you know, investors and business owners like how did you structure the GP LP split, like general partner being, you know the sponsors or the syndicators, and the limited partner being investors? How did you guys sponsor those? I mean, how did you guys structure those?

Speaker 1: 33:23

Well, okay, so so two parts. When I was very organic, just with a handful I'm talking about five or six that before we didn't have kind of the community those were simple I structured those either as as debt investments, so they would just basically provide the capital and I would just give them a stated return. So I'm not a flipper, so I couldn't cash flow 12%. So what I would do is I like give them 6% interest only payments but give them an equity participation on the backside, which is kind of typical of a syndication day. But this is not really syndication. I'm doing one off property so I could return which I could. I could, I could cash flow that. And then, given the back end, we were buying cheap. So they made easily 1213, 14% on their money, 6% now. But the rest of the back end and I did buy, I had, I had a little money in the deals, I was the, the, the doer, right back in referring to when you sold it to.

Speaker 1: 34:19

I'm talking about yeah, well, I'm talking about, you know, writing the mainly like the 2008 on up to 1516, right right up. That that's how I did, but I'd structure some deals also as equity deals, which means, again, you just split the cash flow and you split the back end, which is safer for the operator but not market the less actually made more, but safer for me.

Speaker 1: 34:42

So the basic deals syndications though, as you, as you do is now, I don't do syndications I don't do. I don't do any splits with anybody in our community. I'm a connector and an educator and so people I know, or I get referred people who are operators that can do the bigger syndications or funds. So we have a whole vetting process to do. Number one I have to know them, or somebody has to know them that knows me well I got. Then we just do a heavy background check, we dig deep into the financials and and and. Because I need that to, because that's how I invest today, I don't go out and find my own deals anymore. I'm past that. I don't want to do that anymore. Been there, done that. No, and nor do the people who are part of our community. These are not people who want to be active on the street.

Speaker 1: 35:23

When you're younger, I think it's a great place to be. You know, if you got time, go, be active and learn some stuff and then over time, you'll probably grow into be more of a past investor. But the whole thing Austin requires, I think, the diligence and desire to become more financially an advocate of your future rather than what I call advocating to. You know the Wall Street, financial markets, which is where most people go. This takes more work on the front end, but, gosh, you have so much more control and you can see your future more clearly than you can. Oh, how much is enough with my 401k or whatever? That's where I think people running into trouble is and that's why there's so much uncertainty about do I have enough? To quote retire I'm not going to practice to a DSO bringing a partner associate. There's just no clarity about that. And we give people clarity because they can actually see and measure how they're doing with income replacement versus just piling it up and hoping to have enough.

Speaker 3: 36:17

Yeah, I like that. So, yeah, let's talk. Then I know that we you have strong opinions about you know, 401ks and that sort of investing, and so there's a lot more control when it comes to real estate. So what was your experience with, like the traditional kind of I don't know, you know 401k, roth, ira, post retirement kind of yeah yeah, well so.

Speaker 1: 36:46

So back in the 90s I've been doing real estate that point probably for 1516 years, you know, seeing the results of that, which was a good thing. But I also felt a little guilty because everybody else, all my other friends in dentistry you know we're signed up for with some, some, some people or financial advisors and money managers, that kind of person, people who were, you know, helping them get set up with our office, 401ks, right, and I'm thinking, gosh, you know, maybe I, maybe I should be doing that. So you know, I didn't. I didn't have more than 15 years of a track record and I still felt like maybe there's a hole in my bucket somewhere. So I jumped into that too for a few years and after being having my own 401k, you know, administered by the administrators and the managers, and putting that money, you know, in every year, like they tell you, and getting the tax deferral which you know I get. That I'll talk about that in a minute. But the tax deferral portion and yes, you can have a Roth component and I'm not I'm not negative about a Roth and there's ways to build a Roth up. I'm just going to talk about traditional non Roth here for a minute, the traditional tax deferral. I did that for about three and a half four years and I just looked at it and and not that we had any bad market during that time. But I just realized I wasn't getting near the returns that could get in real estate, so I shut it all down. Everybody got their money rolled over to traditional IRAs. That's how I ended up with it, with how I ended up with a traditional IRA which I later converted over period of some years, converted to a Roth, and that's a strategy I'll give you back, come back to in a minute.

Speaker 1: 38:10

For those who have 401ks or traditional qualified retirement accounts, I'm not saying it's a bad thing because again, I got sucked into it and most people do, because it's all about well, I got to save taxes, I got to say taxes, I'm making money now and I don't want to pay taxes. So your CPA unintentionally or I guess, intentionally, but not meaning to give you bad advice, because the standard advice is whatever is going to give you do tax deferral because you get the compound effect. You're not paying taxes every year. But here's the downside. There's several downsides. One you're locking up your money in that qualified account. Set simple traditional Roth 401k. Tell your 59 and a half you can't take it back out, so you've already said well, my I'm not going to retire to on 59 and a half.

Speaker 1: 38:53

I have people in Freedom Founders who are at age 42, who have done really well and actually taking some exit with a DSO or say it's a multiple and they've got some good money, but they've got so much that's still locked up in a 401k they can't touch it without taking a big big hit on the. I don't like. The penalty is 10% plus the plus in the tax. I mean you could do it. You could do it.

Speaker 3: 39:15

I guess there's a mathematical.

Speaker 1: 39:17

There's a mathematical reason you can look at to do it. But but I but see, I think if you're, if you're an entrepreneur which I would still classify most dentists who go into business as being an entrepreneurial I mean that's why a lot of people do it. Not everybody wants to be an owner. I get that, and that's fine. For those who want to be owners, you go do that because you want to have some control over your business, your practice, how you treat people, the whole thing right. I mean, that's, that's kind of the fun, the challenge of it. Then why don't you want to do the same thing with your money outside of your practice? You want to do the same puzzle, look, Well, because that's why you have a 401k, that's why, okay. But if you, if you want to be in control of your own future, don't you control of your finances? Well, it's too hard. Why don't have time? Well, you do. If you want to make a, make a priority. So, so that's, that's one downside.

Speaker 1: 40:02

Secondly, let's think about taxes, tax rates. I mean, you know, I mean we could probably agree that tax rates are probably going to go higher, not lower. That's my feeling. I don't. I don't see, with the debt we have in this country, with entitlement spending, I don't see how taxes will go lower. I think they will go higher. Now, if that's, if that's what you believe, understand that when you take withdrawals at the appropriate time from your traditional tax deferred account, those withdrawals come out in our tax debt, ordinary income tax rates, ordinary income tax rates highest rate of tax there is, and we'll only stay high, I think, go higher.

Speaker 1: 40:40

Another reason is you don't get any benefit of investing like we do in, in in tangible assets, your business, real estate. In the growth component we get long term capital gains treatment, which is about half what the top rate of ordinary income rate is. So you lose it. So if you own what you can, you can own real estate in your tax deferred retirement account, but you don't get any benefits of cost aggregation, bonus, depreciation, a capital gains, long term capital gains, for you go get none of that. It all gets converted to ordinary income. Just lost all that if you want to do that in your account. The reason is you're familiar with I'm sure your listeners are familiar with the fact that when with capital assets, when we die, when we pass away our ears, get what's called a stepped up basis, which means that they don't have to pay tax on the game that you had while you held the business or the real estate or the stock or the bond. So if you get a stepped up basis, if you have that inside of your IRA which a lot of people have stocks, bonds, mutual funds etc. That all comes out as tax. That ordinary income just lost the stepped up basis completely. So it's terrible for generational wealth transfer.

Speaker 1: 41:45

Those are some of the primary reasons I don't like the tax deferred vehicles. But so I said earlier, there's a. There's a way to make make make up for that and I'll just be very quick about this. Take your traditional and convert it to a Roth. They're still. They try to change that rule a year ago and remove that. But you can. You can convert to a Roth any amount you want to. You just only have to pay the tax or current tax on whatever you convert. You convert to a Roth. Now you have that money in a account. Today at least that always tax deferred, but also the withdrawals come out tax free. Now I think they're going to probably means test that in the future. So don't load up too big, but there's one, that's one way to do better.

Speaker 1: 42:24

Me. Average it out, me know. Means test meaning You've got so much net worth, you've got so much income. We're going to tax you to some extent on that Roth that was supposed to be tax free, but look there there. Means there means testing everything right now. So securities means test. I'm on Medicare, believe it or not, I'm on Medicare. It means tested. Trust me, I pay at the top level. It's, it's, it's not cheap. Okay so so the more the better you do in life. Unfortunately, we're becoming more socialistic environment society.

Speaker 1: 42:58

And I'm not saying we shouldn't be helping other people, but it's wealth redistribution and it's what it is and it's not good in the long run. There are places where we need support, but you're gonna be means tested. So you do really well in life and I think a lot of the benefits well. So security is gonna get means tested. I guarantee you those that I'll be able to start taking it in three years. It's the highest level, but sometime before I die they're gonna means test that too, and I'll probably get taxed a whole bunch or low reduce it. I mean it's common Austin, just like higher tax rates. I mean just, you have to be more self-sufficient than ever before and not rely on whatever the government says. The rules are today. They will change them, I promise.

Speaker 3: 43:38

Yeah, no, that's a good point, all right. So specifically, what we're talking about is taking the. Well, there isn't. It's essentially stop if you are investing. You have been investing. A lot of what you talk about in your group is stop investing in these retirement accounts, that you get penalized before you take it out If you have, and let's start doing alternative investments. Now, if you have invested a lot in them and you do wanna take it out, or can you convert that into a self-directed rock-eye array, and then is there a penalty for that?

Speaker 1: 44:11

No, no, there's no penalty. If you wanna convert from, let's just say, wherever your custodian is right now, and it could be as simple as a Vanguard, a Fidelity Schwab well, fine, right, you can move that money to a self-directed custodian, which there are myriad in this country, which then allows you to invest we call self-direct into all the other alternative investments that we've been speaking about, and you're not just limited to the menu of your 401k administrator, who gives you kind of some mutual funds and things like that. You can go into alternative investments as you wish. Now, as I said, also, you can convert to a Roth at the same time, also self-directed. But that just takes you out of the current designation of being taxed on withdrawals when you're 59 and a half, again under current rules.

Speaker 3: 45:03

Okay. So generally, when people come into your group, the first thing you guys talk about is like, hey, stop investing in these Roths and these or whatever. These 401ks and these IRAs hold the money and invest them in alternative assets. That, yes, you may object yourself to taxes, but that's really the only benefit. And even then there's a lot of advantages and ways to get around paying top tax and the top tax bracket, because you can do cost segregations and you can do 1031 exchanges and so, yeah, is that kind of like the gist of some of the things that you talk about?

Speaker 1: 45:36

That's my model. I never tell anybody what to do. I don't tell them the. But the social proof, give options. Yeah, yeah, we have options, the social proof and the education. I let people they make up their own mind. And most people that are part of our community, yes, in time first few months, six months they are terminating just like I did back in the 90s their general 401k, a cash balance plan, whatever they're doing, and getting control not taking receipt but getting control so they can self-direct it until which time, after 59 and a half, then if they want to take distributions they can do that, but at least they're putting it into other investments that they're feeling more comfortable with. Because that's really what we do.

Speaker 1: 46:15

It's what I call proximity to your investments, being closer to your investments than Wall Street. Wall Street, you're separate from you. Don't get inside the board rooms, right. You just get the financials from your financial advisor. You just kind of have to go on the whims of whatever they think.

Speaker 1: 46:31

I like to be closer to the investment. I like to see the property, know the property or at least who's managing it, and that kind of thing. That's just me and I know that's what you do as well. I mean, you're helping people invest in real estate that is tenanted by healthcare. It's a strong marketplace, right, but it takes knowing somebody and understanding what that model looks like. But I just like that better from a control standpoint, because I know I'm going to see that through ups and downs of the economy and I think long-term, those tangible assets are going to mitigate the inflation. I think we're going to see deflation for a few years and then we're going to see inflation for the long-term. So we're going to have this dip, probably some deflation in assets, because we've been in a bubble, but long-term we're just not getting out of this inflation. I think we've tipped over into that side and we're going to see inflation here or now. Well, we have to. They have to monetize the debt and that's due to inflation.

Speaker 3: 47:24

Do you hold any individual stocks or no? All real estate.

Speaker 1: 47:26

Zero. I did some 15 some years ago. I'm completely out.

Speaker 3: 47:32

That's just me.

Speaker 1: 47:32

I'm not telling other people you should do that I just, that's just me.

Speaker 3: 47:36

Well, no, and I have a lot of individual stocks. Actually I'm mostly real estate, but I do like holding the individuals. Covid was great, took a huge hit. Now I'm getting back close to the highs lately. But the whole mutual fund idea like I've heard so many bad things about them, Like Tony Robbins talks about it a lot it's just like, yeah, you go, you look at anyone, take anyone at random, and it's like 95% underperform the market, so you're essentially 5% probability that you can pick the one that outperforms the market and then you want to give them time because it also changes. The 5% that outperform one year might not be the same and in fact, usually aren't the same five, 10 years later. So I mean, yeah, I think we do. We already agreement about that. Now back to real estate. We talked a little bit. You mentioned you're doing a lot of debt financing or investing in debt funds. Can you explain why? And then we'll first of all explain what that is and then, secondly, why are you doing that?

Speaker 1: 48:39

Yeah, In what we call the normal retail market space. There's institutions, there's banks, institutions that do retail financing and when, especially when rates have been low because they have been for gosh the last 15 years, then using banks for long-term financing makes sense, even today, even with higher rates. Long-term financing, if you buy right, even at 7.5 or 8%, I mean it can make sense if you get fixed rate and you all your costs are covered. We talked about that earlier. So that's the retail market that most people know about. You go buy a house, you buy an office building, you're gonna go to the bank to get your financing, to use the leverage, which is the way you acquire and build a wealth.

Speaker 1: 49:20

But understand that there's a whole secondary market, which I would just call private capital. That's needed because the bank's institutions have what I call a buy box or lending box. It's got criteria right, they have to, they have criteria, and so there's a whole element of the marketplace out here that's not served by the institutions. So a lot of developers, a lot of fixing flippers and people who are operators on the street in the alternative markets, they need access to private capital because it's fast, it's easier. They're not gonna use private capital long, long-term, because the rates are gonna be higher. But select them, get in the game. If you're making deals in a marketplace that's turning quickly, where there's deals, you can't wait to go to the bank and get an appraisal and inspections and all the stuff that banks require. You wanna get the property, the asset acquire.

Speaker 3: 50:09

So they're waiting on banks and all this stuff, and then yeah, then you do what's called.

Speaker 1: 50:12

Then you do what's called stabilizer right. You stabilize. It means the bank institutions wanna see a tenant or a certain occupancy if it's a multi-family or a cell storage they want. So you get it stabilized and then you go refi out with the institution, take out your private capital investors. So there's a private capital marketplace for people like us to put our money in.

Speaker 1: 50:33

And instead of owning the equity piece, the ownership piece, which is usually where we wanna be when the market's going up, when the market's going sideways or maybe going to a correction mode, I'd rather be the bank. We can still earn double digit returns, but we're the bank. It's a lot safer place to be than in the equity space because we got the margin. We never loan 100% right on property. We might loan 70, we might loan 65, we might loan 50% because we don't wanna be top heavy in the equity space. So debt is a place to be, I think, right now much more heavily than the equity space where we've been in for the last 15 years. It's just a shift in the market. So there's syndications and funds that focus on that very element of bringing private capital to operators.

Speaker 3: 51:16

I'm kind of thinking the same thing too is like we saw such a quick expanse of the real estate and a lot of these assets that I do I can foresee a future.

Speaker 3: 51:27

I'm trying to shift my thinking into probabilities rather than definites or definitive outcomes, and it just seems like there is a slightly greater probability that we'll see a flattening of real estate increases, like a plateauing of real estate prices, rather than them to continue to go up, because they just went up so high so fast.

Speaker 3: 51:48

It's kind of like we went in and polled some of those gains from the future, you know, into the present and so, yeah, and I've been thinking about these things too, like in, you know, because we're doing short terminals and you know event spaces and you know doing syndicating for stuff like that, and it's like you know weighing the ownership of the business part of that, those deals, versus the real estate part, and it seems like the business part has more upside right now. So I think it's interesting that you're doing that. So, yeah, there's like there's so many things that we've mentioned talking about that we didn't even get to because we went real deep, which is great. So like we're kind of coming to the end of our time and this has been really fun for me and I really enjoyed it, and so is there anything that you want to talk about that we didn't get a chance to talk?

Speaker 1: 52:39

about. Yet, let's say we talked about a few things on the front end. No, I think we covered a lot of topics that are probably relevant to you know our respective audiences, and I would just I'd go back and say you know we talked about this earlier that you know healthcare, which is a lot of our audience. That is a resilient place to be as far as a business owner, that's what I call your plan A. So, you know, investing outside of your plan A, outside of your business, is something we all want to and should be doing. However, you do that, but I wouldn't, you know, I wouldn't let the carrot of some outside ventures take the place over focusing on the business aspect, your business or a similar business housed by real estate.

Speaker 1: 53:24

That's a great step into the arena of investing in real estate because, again, you've got a control factor there. But as you become more sophisticated, you can, you know, through connections and access points, through other people, you can, you know, expand your investments into other alternatives. Just, you know, do it step by step. I would just caution people today about going out and doing it by themselves just because the market's been very, very kind with tailwinds to a great extent. Big caution, you know, don't go do right now by yourself. Plug in with somebody and I'm just looking at you, austin who understands the markets and can help you do something in real estate that might make sense for you. And that's my only caution is just get help from people who have experience.

Speaker 3: 54:03

Yeah, that's great advice. So anybody listening that wants to get in touch and find out more information about what you guys do. What's a good resource for that?

Speaker 1: 54:12

Freedomfounderscom. I've also got, you know, a YouTube channel that I put out a lot of blog posts, video blogs. I've got a podcast, the Dentist Freedom Blueprint podcast, which is not just focused for Dennis, but I call it that because you know I still am one and that's my affinity group, but it's viable for anybody who's entrepreneurial and wants to learn a lot about finance investing in general. So those will be some places to connect Great.

Speaker 3: 54:39

Okay, well, this has been awesome. I guess we'll have to check back in six months and see how our predictions figured out.

Speaker 1: 54:45

Let's do it. Yeah, it would be fun just to see where the market is, because, again, we don't know for sure, and so it might be fun to come back and just talk about what's happened in six months and then we'll project again what we think is gonna happen in the next six months and see how right or wrong we are. But yeah, there's ways to navigate any market cycle and no one's gonna be perfect at it. But it's just like how do you try to thread through it without getting bumped around? You know and shove to the side, and that's what you don't want.

Speaker 3: 55:09

Mm-hmm, yep, yep, well, thanks very much, Austin always a pleasure, thank you.

Speaker 4: 55:15

If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leadersreecom. That's podcast at leadersree, reasinrealestatecom. Or go to leadersreecom and fill out our form. See you next time. Keep on twistin' like we're just bros.