How to Invest in Real Estate - Debt Free vs. Using Leverage | Mikey Taylor

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Most real estate advice online is about “getting rich quick”- Mikey Taylor is doing the exact opposite.

In this episode, Mikey breaks down a smarter, more sustainable approach to real estate investing- focused on fundamentals, risk awareness, and building wealth over the long haul.

What we cover:

• The two types of real estate investors: active vs. passive - and how to know which one fits you
• Why not every real estate strategy works for everyone (and how to choose yours)
• Mikey’s philosophy: slow, steady, and focused on long-term demand
• Why “boring” real estate often wins and where leverage fits in (and where it can go wrong)
• How Mikey and his partners invest in distressed properties to add value and reduce risk
• The key questions you must ask before investing with any group
• What’s really happening in today’s housing market and why it’s harder for younger buyers
• The impact of low inventory, rising prices, and large investment funds
• What “passive income” in real estate actually looks like (beyond the buzzword)
• Can you invest in real estate without taking on debt? A real look at leverage vs. risk
• When using debt makes sense and when it doesn’t

If you’ve been curious about real estate investing but want a grounded, realistic approach - not hype - this episode is for you.

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Discussions in this show are for entertainment and educational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker/dealer, member FINRA/SIPC.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and SmartPro Financial are not affiliated.

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Transcript

SPEAKER_01 0:03

Discussions in this show are for entertainment and educational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Incorporated, a broker dealer, member FINRA SIPC. Advisory services through Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and SmartPro Financial are not affiliated.

SPEAKER_02 0:36

All right, welcome back to SmartPro Radio, where we love people and like finance. I'm so excited today because we're going to talk about a topic that I think confuses so many people, but it's one that you really need to get your arms wrapped around and understand. And we have an expert that's going to be talking about it today with us. Joining us today is Mikey Taylor, entrepreneur, investor, founder of Commune Capital, mayor of a Thousand Oaks, California, former pro skateboarder. I mean, there's like five or six different things. So I have to read this out so I don't forget. But man, this is a guy that's done so much and is making a fantastic impact. Um, thanks for taking the time and thanks for joining us on SmartPro Radio today. Thank you for having me. So, the first question I want to get into because it's one that I think people get so confused, myself as well. I go online to understand how do you invest in real estate? And it seems like you get everything from people viewing their primary residence as a bank to Airbnb, to okay, just uh buy 10 homes and flip them or rent them out. And there's so much noise that I think the average person goes, I know that real estate is a great tool for building wealth, but I have no idea how to do it, what's real, what's the reality versus the 60-second clip that you might see. And you understand this. The content you and your team put out is real, it's great advice, but how do you cut through the noise if you're somebody just trying to figure out how do I even get involved in real estate investing?

SPEAKER_00 2:07

Okay, so there's a couple things. The first thing I will say is usually on social media, it looks better than it is. So we usually only see what happens after the success. We usually don't see everything that goes into getting us there. And second, the thing about real estate that actually makes it challenging, and it's what you just addressed, is there's a lot of different ways to do it. And that actually can become number one, a hindrance, or number two, for a lot of investors that get into real estate, they end up chasing the shiny object, and then they don't end up getting great at anything. So here's what I would say at the most simplistic, or maybe to really oversimplify it. There's really two positions you can be in as a real estate investor. And these are the first, this is the first one you need to address. Either you are gonna be an active investor, which means you're gonna go do the real estate yourself, or you're gonna be a passive investor, which means you're gonna invest in other people that are doing the work, and you are gonna get a percentage typically of a deal or shares in a fund for you having your investment in it. Once you know which one you want to be, there's different steps to then getting going. So, number one, if you're gonna be active, you need to decide what the strategy is that you're gonna go after. You just rifled off a handful of them. To tell you the truth, there's not a good one for everyone. There's kind of a what strategy do you want to implement that is gonna get you to your goals? And what what fits for you could be completely different than what fits for me. If you're gonna be a passive investor, really what it comes down to is you learning how to underwrite the team that you're gonna invest in because you're putting your confidence in the team that they're going to implement the strategy that they're telling you they're gonna move forward on.

SPEAKER_02 4:10

So, with you and your team, thinking about how you view real estate and thinking about the different ways that are out there, you've seen multiple things. I remember, you know, very young, and there would be shows on TV about flipping houses, and that was a big thing until it wasn't, and maybe it's maybe that's back. I don't know. Then it turned into short-term rentals, and that was going to be the thing. What what is the what is now the best way or the way that you feel like, okay, here's here's the entry point, or here's what's what's tried and true, versus maybe what is the popular thing to do, or the advice that everyone's getting? We see this on the investment side all the time. Like there's just the slow way to build wealth and investments over time, and then there's the interesting, quicker way that people talk about, but it might not be long-term or it might have an enormous amount of risk associated in it. Do you find that there's certain ways that people engage with real estate investing that their risk goes way up? And maybe it's chasing uh a popular trend. Okay.

SPEAKER_00 5:19

So, yes, the trends. Okay, let's start here. In real estate, real estate as a whole, and then the different asset classes you invest in, and then the strategy that you're investing in, all of them have cycles. So there's there's moments where there's a lot of demand and there's a lot of growth happening in it. And then there's moments where it's saturated and there's a pullback. So that is always at play. What has worked for me is just really focusing on the principles and the fundamentals. So I am a long-term investor. I don't like doing things quickly. I don't like flipping, I don't like putting money in and taking a big amount of risk that I have to get out of a deal quickly. I prefer time. And so at the core of it, when I'm looking at making an investment, the first thing that we're looking at is is there demand for, let's say, this apartment? And do we see demand being there for the next 10 years? And if we can buy this asset or build this asset and we feel like we can hold it for the next 10 years, a lot of the things that happen in the interim, we're not so focused on, considering that we have done the correct underwriting for that project. Now, with real estate at the core of it, it is very boring and very basic. The thing that makes real estate exciting for most people is leverage. And the amount of leverage that you're going to use and then the terms that of that leverage can get you in trouble. So I think looking at things like if I buy this, let's say apartment, and I think there's going to be demand here for the next 10 years, how much debt am I am I putting on this project? And how comfortable is the revenue that that asset brings in to then pay my debt service? And so I think being lower leveraged and using really conservative expectations on a long-term hold put you in a position where maybe you're not going to get as exciting of a return as somebody that's flipping, I don't know, a mobile home park. But my view has always been I want my money to be there and I want it to be there long term. So I'm willing to take somewhat of a smaller return for the hedge against risk.

SPEAKER_02 7:41

So my question to that is that is that your companies, is that community capitals, how they view investing? Is that your personal view? Are they the same thing?

SPEAKER_00 7:54

Yeah, there's a lot of crossover. So in my company, I have three other partners, and we all three have a very similar outlook. Number one, we are long-term investors. And number two, we like adding value. So we typically want to look for a project that is maybe distressed or isn't being used for anything. And we like going through the exercise of adding value or creating the asset. And then once it's created, we like having a long-term hold on it. We just view that as an ability to offer us some added protections, not no risk, but added protections in our investments.

SPEAKER_02 8:36

That's really interesting because I think a lot of times, especially in the investment world where I live, you know, people go, How do I invest in real estate? And we go through, well, there's obviously you can go buy a property or something like that. We the they go through the different exercises of it. Should it be the short-term rental? Should I just invest in a real estate company? And what happens is you start looking at REITs or you start looking at different interval funds, and they have amazing slide decks, great marketing. And then you realize that, oh my goodness, the amount of risk here is off the charts, or their their debt is too much, and you get in an arena where you have higher interest rates, and all of a sudden those slide decks still look nice, but nothing else does. And we see this right now in the marketplace where redemptions or uh companies are struggling. I mean, is this how it's avoided by looking looking at the marketplace differently?

SPEAKER_00 9:37

Yeah, that's a really good question. So it kind of comes down to human behavior. I think we all struggle with this, which is we typically only focus on returns and we tend to not calculate the risk into that return. So, really how we should be looking at this is if something is promoting a higher return in theory, that should be taking on more risk. And maybe for some of your portfolio, you're okay with that. Maybe an extreme example would be crypto coin. Maybe you are willing to chase a higher return and you're okay if you lose the entirety of your investment. And then you move all the way over to maybe the lowest risk investment. Maybe that's a treasury bill, but your return is going to be down because of it. So I think what's really important to do is number one, include risk in your calculation. And then number two, ask the questions when you're looking at good slide decks. When you're talking to somebody who's good at selling, you need to be mindful that they're selling. And so some of the questions that I would ask for somebody who has not gone into a real estate investment before is number one, if you're showing me rent projections and rent growth and a forward-looking cap rate, what happens if those numbers aren't achieved? So maybe asking a question like, what happens to this deal if you have to decrease your rents by 10%, 20%, does the deal fall apart? What happens if you're expecting a 5% cap rate on exit and it ends up being a six, does this deal fall apart? So you want to make sure that if things go wrong, the project is still in a position of being successful. And I think a very important question to ask groups that you're investing with is tell me about a time where something went wrong. And what I have found is if you ask a group to tell you about an instance of something going wrong and they say nothing's ever gone wrong, one of two things is happening. Either one, they haven't been investing long enough, or two, they're lying to you. And so it's okay if things go wrong. Really, what you're trying to figure out is for the group that you're investing in, how do they solve problems? And when things go wrong, how do they create a solution for it? And then what was the overall outcome? I think asking questions like that are very important.

SPEAKER_02 12:06

Hey, if you've been listening for a while, you know that we care about doing things the right way and helping people make choices that truly matter. But here's the thing: you don't have to do it alone. At Smart Pro Financial, we build a custom step-by-step plan that has the potential to help you today, but also guides you into the future you're hoping for. We use Ramsey-inspired investment models. So your money's invested the same way the Ramsey team talks about. And get this, there's no account minimums because we believe that everyone deserves trustworthy financial advice no matter where they're starting. If you're ready to get started, then click the link below to meet with a smart pro financial professional today. Something you said a moment ago, you talked about we want to create value. We look for properties that are distressed. How do we make this better? Underutilized or non-used areas. Uh, I know right now there's somebody listening that's skeptical of real estate investing, not the practice of doing it, but more so I don't want to use the word morals behind it, but there's been a so much in politics. You've probably, I'm sure you've seen this. There's been so much in the news about big companies going in and buying neighborhoods, buying homes, buying individual houses, and making the price of houses go up, or at least that's what the headlines show, um, taking away people's ability to buy a home. We know right now it's very difficult for first-time home buyers. The age is getting pushed out to what 40 plus for people buying their first home. Um, a lot of people attach, and and and I don't know if I'm in this camp, but they attach the American dream to home ownership. How do you feel that this industry is can be part of the solution to those things rather than part of the problem? And is that just the way of how you add value to the communities that you invest in and how you approach it? And is there ways that the industry is approaching it and it's actually doing the opposite and making home ownership more unaffordable for people?

SPEAKER_00 14:07

Okay, that's a really good question. There's a lot there. So I would say I do view the American dream as home ownership. That that's, you know, from when I was a kid and starting to make money, my goal was own a home. And I still think that is a big part of the American dream for most of us. And if it wasn't, I don't think we would see the frustration we're seeing right now for mainly millennials and Gen Z that they can't get into the house at the time that they're, you know, the older generations were able to. So yes, I think that's still the American dream. Now, what caused that is, you know, these big firms, these, you know, big hedge funds or private equity groups that are coming in and buying up single family or building, you know, build-to-rent communities. Is that having an impact? I think it is having the impact. But how much of an impact is that one thing making? I don't think that's the majority of the reason. I think it's one of the reasons. So if we look at the overall housing market, one, we have not added a lot of supply in many markets following the financial crisis. Number two, the extremely low interest rates that happened during the COVID era is a factor right now. If you're sitting on a 2%, 30-year fixed and interest rates now are closer to 7%, you're locked in. You're not selling assets because of that. So I think that's a factor. I think the institutions are a factor. So if you are asking me how you solve it, I think at the end of the day, you have to add supply. You know, most of the conversation that's happening politically right now is how do you increase the demand? So, how do you make loans more accessible? How do you put more people in a buying position? And I'm not saying it's not important to do that, but if we only do that, we don't add supply. That's what led to the financial crisis in 2008. So I do think we have to add supply. Now, some of the challenges you're seeing is most people are not building homes to sell. Most of them are building to rent. And so that is going to be a factor right now. For us, we focus on multifamily apartments. We do not focus on single family. And so that asset class typically is for groups that are investing. There are some mom and pop, but I would say on the single family home side, I wouldn't be mad if there were some regulation around making sure that first-time home buyers or the individual to buy a primary has the first position to go after assets and isn't necessarily competing with the big institutions. And then number two, I would be looking for ways to cut regulation so it's easier to get more homes online. And then three, you know, we've got to work out this inflationary moment. That's the thing that I think sucks about right now is inflation comes in very quickly. And then it takes forever to work out, to work out of the system. And we're just not there yet. The price of homes has gone up almost 50% since 2019. But if you look at the the wage growth, it's only increased by 20, 23%. And so we're not at equilibrium. And so I think that one's going to take some time to work out.

SPEAKER_02 17:26

Yeah. So when someone talks about investing in whether it's equities, real estate, specifically real estate, generally they're not saying, how do I get into rehabbing and flipping a home? At least I'm saying for our clients. They're not saying, um, how do I invest in a bunch of short-term rentals in a beach community or a vacation spot? They're generally saying, how do I create passive income? I guess my question to you really is, can you break that down? Like what is what truly is passive income versus just the buzzword that you might see in a click, you know, 60 second uh video online? Uh what is that?

SPEAKER_00 18:06

Okay, so passive income is awesome. Of course it is. It means money's coming in and we don't have to work for it, right? And that can be achieved in multiple ways for you and you know, some of your clients, maybe you guys are investing in dividend stocks and there's some money coming in every month or every quarter because of that. You can invest in a credit fund, or you can be the lender and you can get interest off your money. In real estate, when you're in an ownership position, what it means is all the revenue that comes in from, let's say, an apartment, that revenue first pays your expenses and then it pays your debt service. And then whatever is left over or a percentage of what's left over can be distributed through a dividend or a monthly check, which is considered cash flow. So I think the important thing to decide for any investor is do I want to focus entirely on cash flow? Do I want to focus entirely on appreciation or do I want a combination of both? And I would say that's why most people like real estate is because you can have appreciation, which is helping you build your wealth, and you can also have some cash flow coming in with it. So I think it can offer the best of both worlds, but you just need to know what you're looking for. Usually you end up seeing wealth build happen when you're a little bit younger. And then as you start gearing towards retirement, you typically want to move or you see most people move into a position where it's more cash flow or more dividend-based investing.

SPEAKER_02 19:44

Yep. So you mentioned something in there about the kind of the hierarchy of how things are are paid out before that passive income can come through. A lot of people that we work with, they they really are um they're debt adverse. They don't want debt. They they're trying to get out of debt if they have personal debt. They're trying to figure out how do I pay off my home, how do I have a lifestyle where I have some freedom and can breathe from credit cards or student loans, you know, car payments, mortgages. And they're probably viewing real estate as going, oh my goodness, if I do that, I have to go and get into debt. I have to go get a big loan to go do this. If I wanted to go do this on my own, and we're talking about multifamily, like I have to go get a huge loan from the bank. That worries me, that scares me. Therefore, I then can't invest in real estate. And those are probably a lot of the people that just view their primary residence as their as their only asset in real estate. Is there a way to invest where you don't have to have the burden of debt other than having a huge cash flow or liquidation event that you can go buy properties with? Is there a way to do that for the everyday person that doesn't have that kind of liquidity or or cash?

SPEAKER_00 21:02

Okay. So there is a way to do it. It's, you know, just how you position that question, it's different than how I view debt, and we'll cover that in a second. But how you would go about it is you just don't use debt. You buy everything in cash. So if you're gonna buy an apartment, you're looking at not financing it. And if you don't have enough to do it yourself, that's probably where something like investing with others or finding a group that buys everything all cash. And maybe that's a better position for what you're looking for. That's not how I use debt. So I separate the two out. As far as consumer debt, credit card debt, you know, loans on cars. Yeah, I I think there's a very strong argument that you stay completely away from that. The way I look at debt on assets is different. So I am personally okay using debt on. productive assets because I view it as number one, a tool to stretch my dollar and stretch my return. And number two, I don't look at it the same because it's not me paying for that debt out of my pocket. So let's use a primary residence for example. Most of us get frustrated with a mortgage because we have to service that debt out of our pocket every month. When you start looking at investment properties, the income from the property pays your debt service. So it's not the same experience. Now some people will push back on that and say, yeah, but you're paying interest. You are. I tend to look at the net result. So if I were to buy a house in this example, let's say for a million dollars and I do it all cash and that home appreciates by 10%, I just made a 10% return of my money. But if I use somebody else's money with leverage on that asset and I put $200,000 down, so 20% and I finance the remainder and that same asset went up by 10%, the return on my investment is now 50% as opposed to the 10%. So you have the opportunity to increase your return through using leverage. But for some people that don't like using leverage at all, I would say yeah, most likely your move is going to be not using it and buying everything in cash. That's just a little bit different than how I view debt.

SPEAKER_02 23:32

Sure.

SPEAKER_00 23:33

And probably most people in the real estate investing world I would imagine, you know, so yeah I and I would say that there's a couple big reasons for it. Number one is the return part, right? So if you're just buying everything in cash, real estate probably starts to feel more like a bond than it does the stuff that you know you hear people talk about online. And number two, when you're using leverage, you do get a couple incentives to it. You get uh an ability to refinance your loans and pull cash out without having to pay taxes. So a lot of real estate investors enjoy that. And so I I think that one really comes down to the personality. If you're somebody that just is completely anti-debt and you don't want to use it at all, well, don't use it. I would recommend you staying away from it. But if you're somebody that wants to increase your return, get some money that potentially comes in that you're not paying taxes on, well, maybe that's a different story for you.

SPEAKER_02 24:36

Monkey, the thing I love about the content you guys put out is that it clears the deck of the chaos. It's real. It's helpful. I do a lot of research before we record episodes and I've watched I think all of your uh content you put out there as much as possible even all of it last night listening and I found I'm just listening because I'm learning and you don't get a lot of that um when it comes to the the world of media nowadays a lot of it's opinions and trying to sell you something and what you're putting out there is is real and it's good and it's helpful. So can you tell our guests how they can interact with you, how they can view that content moving forward so this doesn't have to be the last conversation that they hear from you.

SPEAKER_00 25:18

Yeah I appreciate that. So I'm on all the platforms just search Mikey Taylor and I'll pop up and then we do have a podcast as well it's called Life with Mikey and you can watch that on YouTube or you can listen to it on all the podcast stations, Apple Podcasts, Spotify, etc And if you find me on one of the platforms, send me a message. I do my best to respond to everybody. The only thing I'm going to ask is give me some grace. There are a lot of people that are reaching out to us right now. So it might take a little bit for me to get back to you but I will try my best to do so.

SPEAKER_02 25:55

Mikey Taylor thank you so much. Thanks for having me my man was great seeing you. Hey thank you all so much for tuning in to today's episode of SmartPro Radio I hope you enjoyed it. And if you did please take a minute and subscribe and share this episode with friends. We really do appreciate it. And make sure that you don't miss any future episodes. We put them out on the first Monday of each month.

SPEAKER_01 26:16

We'll see you then discussions in this show are for entertainment and educational purposes only and should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Incorporated a broker dealer member FINRA SIPC advisory services through Cambridge Investment Research Advisors Incorporated a registered investment advisor Cambridge and SmartPro Financial are not affiliated