We Study Billionaires - The Investor’s Podcast Network - TIP 021 : How to Invest in Real Estate (Investing Podcast)

Starting point is 00:00:00 This is episode 21 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. All right.

Starting point is 00:00:28 How's everybody doing this morning? This is Preston Pish, and I'm your host for The Investors podcast. And as usual, I am accompanied by my co-host, Stig Broderson. Today, we've got a pretty special episode for folks out there. I know that you probably just came off the Pat Flynn interview that we had last week, and you're probably all ramped up for the next guest that we have. And we had to search pretty far to find this person. And it was kind of hard for us to get them lined up. But we finally pulled this off. In addition to our special guest, we have Calling You

Starting point is 00:01:02 Blonsky, and maybe you remember him from a previous episode that we had where we were talking about the basics of value investing. We brought him back on the show, and he's from inbound interactive, which is an SEO company. And so Colin and I have had this relationship where we are constantly talking about different investments. He's helping me out with search engine optimization stuff with our company. And so we had this conversation, probably, what was it, Colin? How long ago? Like two weeks ago, three weeks ago, something like that? Yeah, about two weeks ago, Preston.

Starting point is 00:01:30 Okay. So we are having this conversation and he brought up a fantastic point. He says, so I have this money and I'm really wanting to put it in the market, put it to use. But the market's high. Everything's valued pretty high right now. And I think the one thing that kind of brought up the conversation was we were talking about this Ray Dalio video that we were watching on the internet where he describes how the economy works like a machine. And one of the things we were talking about is how inflation might be rising. And it's kind of a scary time because because interest rates are still very low. Up in Canada where Colin lives, the interest rate is even going lower. And here we are eight years post-2008, and the interest rates are still low and going lower. So it's kind of like, you know, we were talking about, well, what's the direction? How are things going to go in the future?

Starting point is 00:02:20 And he threw out the idea. He said, you know, what do you think about the idea of investing in real estate? You know, buying some property, maybe a couple apartment units or something like that. And I told Colin, I said, you know, I don't think that that's all that bad of an idea simply because you're able to kind of get in at a great price. And if you're taking out a loan to buy maybe a large piece of property, you're going to be able to get it at a great price because interest rates are so low. And so we had this conversation. I said, you know, Colin, I know this guy that is an expert in real estate. He's really good.

Starting point is 00:02:53 He owned a lot of different properties at one point in time. I don't remember how many units he had. Whenever we formally introduce him here, he can probably tell us. But I was, I told him, I'm going to try to get a hold of this guy. It's kind of hard, but I'll see if he's going to be able to respond to me. So I sent him off a couple emails, and he didn't respond. And that's pretty common. So I tried calling.

Starting point is 00:03:16 I had his phone number. I tried calling him a couple times and still didn't respond to the phone calls. And so I just got really frustrated and just tried to get this guy on the hook so that Colin and I and this gentleman could have this conversation. And I was like, you know what? let's just bring him on the podcast. And so I started maybe using that as leverage to try to get him to come on because he'd have a larger audience and maybe he'd be interested in communicating with us.

Starting point is 00:03:37 So that still didn't work. And so eventually I just had to get on the phone and call my mom and say, mom, you've got to get dad to come on the podcast. He's not answering any of my questions and he doesn't want to come on and talk. And she says, I'll take care of it, Preston. So finally, my mother was able to get my dad to come on my podcast and have this conversation. So, dad, thank you so much for your time to finally answer all those emails and all those missed phone calls to come on the podcast. And for anybody who knows me, they know that I'm actually joking here.

Starting point is 00:04:09 And he quickly and happily signed up. Well, Preston, I am a busy person playing tennis these days. So anyway, so if you haven't figured it out yet, our special guest is my father, Bill Pish is his name. and he lives down in Florida and he's retired. But before he moved down the Florida and was retired, he lived up in Pittsburgh, Pennsylvania, which is where I was raised. And he's really an accomplished person in the real estate line of business. And he's owned, Dad, how many units did you own at the peak?

Starting point is 00:04:45 Well, press, I had over 100 units, both multifamily and commercial units that we had. Okay. So you guys kind of have a general idea of what he was. is managing and how much he was responsible for during his peak. And now that he's retired, he's not really doing that anymore. But he has a lot of expertise and a lot of knowledge in this area. And it'll be perfect for Colin to ask these questions. So what we've done is Colin has developed a list of questions. He doesn't have any money in real estate. He hasn't done anything yet. And he's developed a list of questions that he's going to ask my father. And we're just going to

Starting point is 00:05:20 kind of go through this and Colin's going to run the show. So Colin, I'm going to hand it over to you. and you can go ahead and ask your first question and we'll just take it from there. Perfect. So first, let me say, I'm really excited for this bill. I've been looking forward to this all week. So I'm super stoked to have access to not only, you know, Stig, but Preston as well as yourself. So this is this is really great. So my first question for you, Bill, is should a first time investor purchase residential or commercial real estate?

Starting point is 00:05:52 Okay. The way I'm going to break this down for you. you call in is there's really three types. There's residential, multi-family, and commercial. The way you look at it is residential is like people buying like a home and speculating on, like here in Florida. A lot of people speculated on buying, say, a condo and they could get it for X amount of money and they were hoping that the economy would improve so they could then sell out. They weren't really looking at it as a rental unit to make rental income, but as a unit to make profits in that the real estate market would at sell. The other which I was involved

Starting point is 00:06:38 in was multifamily where I looked at buildings that were at least, and I would never even look at anything, at least if it was 10 units or larger, to purchase. Then the other, which I owned also, also is commercial real estate and commercial is very broad. And so, Colin, I'm just going to piggyback on his comment there. Whenever he first said that the people like down in Florida are speculating, the thing that's important to note is when you're dealing with a single occupancy house, you're really dependent on another person coming along and being and willing to pay a higher price for that one house.

Starting point is 00:07:16 That's how you're going to basically make a gain on it. But whenever you're dealing with multiple people, you're dealing more. more with an income generating property. And I think that's probably more of why he's saying that he dealt with units that were 10 units in large. Is that correct? Yeah. Okay.

Starting point is 00:07:32 That makes sense. So back to the residential property, a lot of people do buy homes. And they also, in different market areas than Florida, say like where I grew up in Pennsylvania, and they'll buy a single home and rent it out, you know, is a second income. I prefer or I suggest that that is very speculative because really you don't know how to handle a tenant that would become bad unless you get a good long-term tenant. So really what you're saying is commercial sounds like it's the way to go or multi-unit for the first-time investor?

Starting point is 00:08:16 At the end of the day, you don't want to get caught with. a single occupancy, a house where the person moves out and then you're sitting on the property for four months waiting for somebody else to move in to rent it out. Because you're just eating that cost. If you're assuming you're not paying for the building outright, let's say you have 30% down and you're making an interest payment on that property, that person moves out and you can't find somebody else to fill it. That's a lot of risk. When you have a building of, let's say, 10 units, let's say you have a person that moves out. Let's say you have two people that move out per year based on those numbers. You are in a position where you have the other people that are

Starting point is 00:08:51 keeping that occupancy rate up. So you're still able to meet your mortgage payment and have a little bit leftover extra to cover things. So that's why he's referring to the fact that you're basically reducing your risk by having a larger property. Now, I think that's something key to highlight here is that if you're buying a property with 10 people in it and it's kind of like run down and probably not the best thing and then you have the potential. for somebody else to build a new property next to you that could maybe take some of your, you know, some of your business away, well, then that might be actually a larger risk. But I think in general terms and real general terms, having something with more people in it

Starting point is 00:09:30 is going to help alleviate that risk for you. And I'm sure my dad agrees. I see him nod in his head. So, Bill, what would be a potential entry point then for a multi-unit residential property for a first-time investor? Are we talking 50,000, 100,000? thousand dollars to get into one of these investments? Well, before we get into the numbers, let me point out a couple things. A lot of people that are first time, they look at duplexes where you have two units. And the way those can work for you, say if you lived in one and rented out the other, that's a good start.

Starting point is 00:10:06 But say if you rented out both units, most of the time with those, people sell them at a premium, and that's what you have to be aware of, is that you don't pay more for those. And those are very hard to resell because most people that are getting in for the first time, they're not willing to sacrifice living in one unit and renting out the other. They just want it as a complete business opportunity that it doesn't appreciate in time well enough. So what I would recommend for our first time person is to buy at least four units, the six units to start with. And what you have to look for is the neighborhood that it's in for number one. You don't want to buy in an area that is depressed.

Starting point is 00:10:56 You want to buy an area that is in good condition. And there's many of things that you have to look at. And that's where you use in that market, you look at as capitalization rate. That's how you determine the value. What you have to do is you take a percentage. You say, well, it's going to cost me so much to manage it. I'm going to have so much percentage of vacancy. You take the income minus the expenses and you look around the building.

Starting point is 00:11:28 Well, okay, I'm buying a fixed unit that has a bad roof. Well, you know the roof's going to be needed, replaced within a time period. that you're owning it. So you have to evaluate that on the initial purchase price. So to say how much money that you need down versus what the income and expenses are is determined by the capitalization rate. And I would always say that you need at least 15% down. And to throw another caveat into it, it depends on the age of the person purchasing it. Okay. Let's take two, scenarios, you're a 30 year old versus a 55 year old. The time frame is much different of owning that building. So it sounds like there are a lot of different qualitative factors that come into the

Starting point is 00:12:22 decision as well when looking at the building. So the condition of the building in addition to how much you're actually going to be paying for it. Now, you mentioned something really interesting there talking about the cap rate bill. One of the one of the fundamental components of investing in stocks is knowing your key ratios and being able to use those to value the company. In real estate investing, what are some of the key ratios or some of the most important key ratios that you use when analyzing and purchasing real estate? Great question, column. There's actually three approaches that you can go by. And the first one is the cost approach. Say if you had to rebuild that unit, say we're looking at a six unit.

Starting point is 00:13:08 We'll keep it simple. We're not going to talk about a 30 or 50 unit structure. So what would it cost to rebuild that six unit facility in today's dollar? That is the cost approach. The next approach, say in the area that you're looking at, right up the street, is another six unit, okay? And that is called the sale. And they have it for sell. That's the sales approach.

Starting point is 00:13:35 So you're comparing your unit. that you're looking at versus one up the street. Yeah, you see realtors do that a lot where you go and buy a house and you're like, oh, well, the same size house up the road, it sells for $250,000. So that's why yours is worth $250,000. So it's a parametric valuation approach. Correct. That's how most residential real estate is sold. Then the third approach is the cap rate approach, which is the income approach. And the income approach is the one I recommend because that's the one. that's not going to get you in trouble. Because you know that is the key ratios.

Starting point is 00:14:14 And once again, we just went over how you get to that. And each area of the country, say Canada versus United States per city, they have different cap rates of different areas. So I want to bring something up here because a lot of people might not understand the term cap rate. And so what a cap rate is, is all that is it's a discount rate. And so whenever we talk about stocks and you're figuring out what the free cash flow of a stock is and then you use a discount rate to take up all the future cash flows and you discount them back to

Starting point is 00:14:47 today's present value, the cap rate and the discount rate are the exact same thing. That's what people need to really kind of take away from this. So whenever he says a cap rate of 10%, what he's doing is he's taking the future cash flows that the business will bring in over the next however many years you want to use. and then you're taking all those future cash flows, you're discounting them back at a 10% return rate so that you can put a valuation on the building. So when you do that, you might come up with the valuation of a six unit building to call it 500,000 to a million dollars or whatever it is. If you buy it at that price point and all those future cash flows come to fruition, based on that price that you would have paid, you'll get a 10% annual return. That's the cap rate.

Starting point is 00:15:30 So that's what he's describing there. And Preston's exactly right. In areas have different cap rates. And it's all in, it's like Warren Buffett says about intrinsic value. There is no real set way to say, well, with the capitalization rate, this is what it is. But what you can do is you can go on different sites that do sell commercial properties for different areas. and you can look at their capitalization rate for those areas. And I can share some information I pulled up before the show on that.

Starting point is 00:16:08 Yeah, I had a, Bill, I had a general question because, you know, I'm used to look at the stock market. And it's really convenient for me to be looking at the earnings yield of, say, S&P 500, for instance. Because that's like the overall temperature for me to evaluate if it's overvalue or undervalued. And the earnings yield, that's just the opposite of the price to earnings. So if anyone was confused about that. But I was just thinking, just like I can see the earnings yield of SNP, right now it's probably around 5% or something like that. Do we have like a similar metric for the real estate market? I know that's, I mean, you probably won't talk about like all 50 states at one time.

Starting point is 00:16:47 You might only be talking about Florida or part of Florida. But do we have like one single metric that just evaluate the Oval timber throughout the market? Yeah, that's exactly the cap rate stig. So what he was just saying is there's a site and he's going to, Dad, what's the name of that site that you have? It is C, B, R.E. Okay. And what they do, they're a commercial realtor and there's other sites. I just don't want to, I'm not promoting their site.

Starting point is 00:17:23 It's just a, it's a site that works for me to look at what. properties in all areas of the United States, and then you can funnel that down to an area that you're interested in and also a market of commercial real estate. It varies from large complexes of hospital buildings to office buildings. Let me describe what the site's a little bit more about that. So when you pull up this site, you're able to pull up different regions. So let's say Colin wants to pull up in the Calgary region, and he wants to see what the capitalization rates are up there. So you pull that up and the capitalization rate might be 7%. Okay. So whenever you see that, that 7% cap rate, same thing as a discount rate. And if you were comparing it to like what

Starting point is 00:18:08 you were saying, Stig with the stock market being around a 5 or 6% return, if your cap rates at 7%, that's pretty much what your return is, is that cap rate. And something I want to talk about or say about a cap rate, the lower the cap rate, the more the value of the property is. The higher the cap rate, it's the opposite off. Well, so that's a matter of perspective. So as a seller, you want the cap rate to be as low as possible. So, you know, if you were getting ready to sell some property, you'd want the cap rate to be like below 5% or wherever the current market,

Starting point is 00:18:44 S&P 500 is at. You'd want it to try to be below that. Good luck trying to pull that off. But that's what you would want as a seller. Now, as a buyer, you'd want that cap rate to be as high as possible because, like, for Colin, If you were going to buy some property, you'd want the cap rate to be like 20% if you could get it there because that means if you could buy it at that price point, you get a 20% annual return on your money. Whenever you're looking at the fact that your interest rates are really low right now and that the cap rate is low as well, that's really advantageous for a seller because they're going to get a higher price because the cap rate's low. You can negotiate.

Starting point is 00:19:19 Well, no, this is my, yeah, but this is my point. So let's say that you were interested in selling the building five years from now. and let's say that there's a lot of inflation and interest rates are high and then the cap rate's going to be really high. You could potentially get hosed on the resale price if it's in a five-year time frame. But if you are buying it to own it forever and that you're going to pay it off, then you're golden. Where you could get hammered is on the resale. If you don't hold it through, it's like a bond. If you hold it just for a little bit because interest rates are low and you try to resell it whenever interest rates go up,

Starting point is 00:19:56 you're going to get hosed. But if you hold it through the duration and you're collecting all that income during that time, you're fine. And typically a cap rate will vary between seven and 12 percent, if that would give you a window of where most of them are. And believe it or not, interest rates really dictate the cap rate. If interest was very high at this time, the cap rate would be up. Being in interest rates are low at this time. The cap rates are down so people can get more value for the properties that they're selling because buyers are willing to pay that because the opportunity is there to borrow if a bank will lend you money. And now in this environment, banks are very stingy on giving commercial loans.

Starting point is 00:20:47 You have to be established. And that's the hard time for first time investors to get money. say, I got very fortunate in my life when I was in my 30s is when I was really knocking it dead because I knew I had the wind of opportunity because I had time on my side. And I got with a bank that was willing to take the risk with me, the risk reward with me, to buy more and more. And I had to then say to myself, sometimes you can't handle that much at once. So you can get in trouble by your.

Starting point is 00:21:23 getting with a bank that gives you too much versus not nothing at all. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum, Forum is entering its 18th year bringing together activists, technologists, journalists, investors,

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Starting point is 00:25:38 All right. Back to the show. So I want to throw something out there because I think that this is a really important highlight and this is something that's really important to me. So he was in the position whenever I was a kid growing up that he could have taken on a whole lot more. And this is how much respect I got for my dad. He didn't do that. And the reason he didn't do that is because he wanted to spend more time with me as I was growing up.

Starting point is 00:26:00 And I think that, you know, for people out there whenever they're trying to invest and really try to, you know, break through and have their breakthrough, it's really important to kind of keep that in mind. Like there's nothing more important than your family. And that's something that my dad has taught me. and that's something that I try to, you know, really think about a lot as I'm trying to create new assets and do things in my own life that I always put my family first. And that's something that he is always done for me. And that's something I want to highlight on the show. I paid him to say that, guys.

Starting point is 00:26:30 The checks in the mail, dad. So I think this is probably a good point for my next question, which is, can you give me a typical day in the life of being a landlord for? or these multi-unit buildings. Absolutely. So to say that you can do it alone is not true, but you have to become a lawyer in a sense. You have to know repairs and who to repair, who to hire, who not to hire.

Starting point is 00:27:02 And the biggest thing that I could give a person is a lease. A lease is so important to understand every part of the lease to be, just not the benefit of the person renting to you, but for you to understand how to handle people in a kind and mannerly way, because sometimes some renters, you sign a lease, and then they forget what's in the lease. And you have to point that back out to them what is in the lease at times in appropriate manner. I was very fortunate.

Starting point is 00:27:37 I had fabulous tenants throughout my whole career of business. doing this is because I was very picky on who I rented to. And I was able to, at the end of my career, I was actually charging two deposits by law. It was the Pennsylvania law that I could do that. And it really improved. That's one of the tips I'm going to say. That improved my tenant's lifestyle in my apartments that I actually asked for more money that I held throughout their point of running. And then I had commercial customers too that I had always, I was very fortunate to always have wonderful tenants on that end that had nice businesses.

Starting point is 00:28:24 So you're able to filter out your tenants a little bit more by having two deposits. And you're also accomplishing the fact that if somebody would leave you high and dry, which happened, you know, I was down there as a young kid helping my dad clean out apartment buildings because people just up and left. Like that's not something that is very fun. And that's something that I think a lot of people that are interested in this line of business has to be prepared for. But the point is, is by charging two deposits, he was able to kind of filter and get a higher quality tenant. And then also he was able to cover his own interest that if the person would leave him high and dry, he had funds to try to recuperate at least some of that, some of that cost of cleaning the place out, finding a new person, having the apartment vacant for a month.

Starting point is 00:29:06 And it's just, it kind of was a win-win for him to be able to do that. And then if the person panned out to be perfect and they move on, they get their deposits back and it's it's no big loss on either side of the table. So that was something that I think you learned what in your last 10 years, Dad, that was really kind of something that you probably wish you would have been able to implement from the beginning that really kind of helped you out a lot. Preston's probably right about the time frame. It was it was probably for 10 or 15 years that I did that. You just get smarter as a landlord to manage. And another thing that I can pass on that I thought was very good for me, I standardized each one of my buildings with same paint color.

Starting point is 00:29:50 I changed the carpet colors, but all the faucets, all the keys, everything you try to standardize to make it easy for maintenance. And, you know, we're talking a lot of units. It takes time. But that's another thing that you can do, to really increase your income level. I got, I'm sorry, Colin.

Starting point is 00:30:10 I got one point I want to throw out there for you as far as the valuation piece. So a lot of people, whenever they're looking at property like this, they're really quick to look at the top line and kind of, because they're optimists, you know, everyone out there wants to see the biggest return they can get. And so they look at the top line and they look at some of the expenses, but they neglect to really identify a lot of the capital, expenditure expenses that may be come every five years, every 10 years, like a new roof on the

Starting point is 00:30:41 building, or I got to repaint the whole outside of the building, which isn't something you're going to do every year. And those costs and those expenses might not be something that the person who's selling it to you might happily identify for you. And so I think that people that are really kind of getting interested in doing something like this, they need to be really honest with themselves and overestimate whatever their expenses are going to be. That way they can kind of come to a proper valuation of the free cash flow. So I just wanted to throw that out there while he was talking about standardizing the paint and standardizing the carpets and things like that. Those are all cost savings and it's also a maintenance time saving thing that he had learned

Starting point is 00:31:20 along the way that, you know, reduced that capital expenditure that he had on the on the buildings. Yeah. It also just seemed interesting, Bill, in some of the things that you had mentioned around building a team, so having professionals that you can work with and rely on, as well as having those processes in place, which coming from owning my own business, I know how critically they are and how critical they are and how important they are in just managing our day-to-day operations. So the next question that I had was, what are some of the common traps first-time investors fall into? So the common traps is not knowing what you're doing.

Starting point is 00:32:01 And I'll give a great scenario. I have a friend that just bought a foreclosure. It was a property in Pennsylvania that he went to an auction. And so he bid on this building to buy, and it was a former restaurant, a main chain. I'm not going to say what it was. And he bought the building, and most of the time you have to put up cash for when you do foreclosures at auction. So then he starts, and they announced it. You know, but when they say things, it's so fast and sometimes you don't hear.

Starting point is 00:32:35 But what they had on the building that it wasn't allowed to be another restaurant. Okay, so he buys this building for X amount of money, okay, thinking he got a good deal. Then he gets into the fine print and he's not allowed to put another restaurant in it for like 20 years. So now the building lies empty because he can't utilize it. It has to probably turn into the office building, which it's not set up for that. So probably you'll have to bulldoze it over and just sell the property is land. So foreclosures, you're going to probably be hit or miss with a lot of people with foreclosures. You're going to have, for every good story, you'll probably have one bad story.

Starting point is 00:33:17 And the thing that I think about with foreclosures is the time element. Do you really have the time to invest in order to turn it around, the time to identify all the risks? And a lot of the times there's risks that kind of pop up that you maybe didn't anticipate. So you've got to kind of set some more money aside for that. But it does take a lot of time to get it back in there, get all the different people involved in order to reestablish it. Then you got to worry about the branding piece of it because if the building's been in a small community and a lot of people know that that building was a foreclosure, then you got that stigmatism with it that's persisting. There's a lot to it. So I think a lot of people here foreclosure are automatically thinking, oh, there's a huge discount.

Starting point is 00:33:58 I'm going to make a lot of money. And they just kind of jump right into it really fast. And I think that you need to have maybe a little bit more of a thoughtful approach to it. I'm not saying don't do it. I'm just saying that you have to really balance out all the risks and the reward before you jump feet first into something like that. Go ahead, Dad. I see you have something. Also, let's talk about, we mentioned commercial foreclosures. Let's talk about residential foreclosures. For our residential, let's look at a single dwelling. The perfect scenario is if you're a contractor and you have the resources like what we talked about, Colin, you said, hey, have people in place, that is a great opportunity for you. If you know the marketplace, you have the people to go in, you buy a property that you know what you're getting into.

Starting point is 00:34:47 And especially like down here in Florida, there's mold. And that's the thing that a normal person wouldn't know how to look for, but a person that does it every day that's in that business. He knows exactly where to go to look at saying, hey, this property, I can refurbish, I can put X amount of money back into it. I know the area is booming right now. I can sell it. Here's an opportunity.

Starting point is 00:35:12 But for the normal person that is not in that business, they're going to miss those caveats of, hey, you have to pay. put more money in that I need. Go ahead, Colin. I see you have another question. Yes. For somebody like me, to be completely honest, I'm not very handy. I'm not great in the kitchen.

Starting point is 00:35:32 I, you know, I had my dad up here yesterday and we were installing my, my dishwasher. And I swear I was just the person handing him the tools. You know, I was the person holding the flashlight. That was, that was my contribution to the project. So how did you get into it in the first place? did you have some of those skills or was it something that you you learned as you went along? As a young man, I lost both of my parents young and I had to figure out a way of what I wanted to do in life. And I realized I bought a business very young, did very well, made some good money, sell in that business.

Starting point is 00:36:14 And then I said, what can I do with this money in a smart way? and that's how I got into the real estate business of buying buildings. And then I just kept on proceeding. I then realized it was a great way to go for me as working full time that I could manage both and raise a family. So through time, you learn that you cannot pay for everything to be done in the units. And so you like picking, choose what you want to do and what you don't want to do.

Starting point is 00:36:50 And that's through trial and error, I guess, is the best approach that I can tell you is how I've learned. Colin, I got a lot of time behind a flashlight, I'll tell you. Yes, he did. Because whenever I had a tenant, which happened to go sire now and then, I was very fortunate, not many or are having problems with some. something, you know, mechanically, I would always take Preston or my daughter with me that I felt was a good lesson to learn. You know, I wouldn't take them into bad situations. I'd take them into situations that I thought was going to work for them to become better

Starting point is 00:37:34 people when they became older. Go ahead, stick. Yeah, Bill, I don't know if it's just me that is really lazy because I'm used to do stock investing, but I'm just thinking, wow, you need to know a lot of things and you need to be handy. You also said earlier you need to be somewhat of a lawyer. You need to have a lot of different skills. Now, Bill, I am so happy that. I'm actually very pleased that I know you a bit, so I know that you both are good stock investor and your good real estate. So could you perhaps tell a bit about the different skills that you need? Is it true that it's easier just to be a stock

Starting point is 00:38:13 investor or do you think that it's just because I have my background in stock investing? I think it looks more, it looks easier to me. Well, this is, this is my approach that I've seen all good businessmen take. You have to have what I call the money press, some way to make your money each day. I call it the press. If it's a business, if it's real estate, if you're good in the stock market, you have to have some way to generate income that you, you. know that's coming in. What you do with that income is where you get smart. And with that income,

Starting point is 00:38:50 I would then take that income from the apartments that I knew that was like the press, okay, and then invest in stocks and bonds. When I was 30, I started out investing in stocks, not knowing the principles that what you two knew, it was more or less by what I had. would learn slowly. And I've truly, you know, being that I'm out of the real estate market, I loved it. In Florida here where I live now, I would never get in it because it's much too competitive plus time consuming. I love to read in the morning and I look at different, I'm a value investor. I go by the exact principles that you guys have. And I'm happy if I can make between 8 and 12% on my return.

Starting point is 00:39:43 So it depends on how greedy you want to be of what you're doing at a certain time and it depends on your age. Because when you're 30, you can take more risk and have more reward. But when you're 60, you have to then relook at things and say, hey, what can work and have fun with it

Starting point is 00:40:06 and still have fun in life? You know, if you work all your life, and don't have any fun, what's the sense of living? So, Stig, I got kind of a point to piggyback off of what he's talking about here. So whenever you're dealing with the commercial real estate, kind of knowing his business and, you know, the kind of the inner workings of it, and you're comparing that to stock investing. He was getting a better return owning this commercial real estate than what you would get in the typical stock market scenario where you're making, if you're doing real well in the stock market, you're doing 10% annually. He was doing better than that, and that's because he's dealing with a small business.

Starting point is 00:40:45 When I say he's doing better than that, that's based on the purchase price he paid versus the returns he was getting annually. He was doing better than, wouldn't you agree, Dad, probably better than 10%. Oh, absolutely. So the thing is, is you're investing a lot of time, and that's what you're not accounting for in that return versus the stock market where it's completely passive. You're not, you know, you're just investing it. So you're getting a higher.

Starting point is 00:41:09 return, but you're also putting a lot of man hours, a lot of goodwill. Yeah, a lot of sweat equity into it. And so that's the thing that you got to really kind of balance out is, do you have the time available to do it? Is this something that interests you? I mean, all those different variables. But I wanted to highlight that so people do understand that when you're dealing with a small business and something like this, you're probably going to get a better return

Starting point is 00:41:31 than the stock market. Go ahead, stick. Yeah, and Bill, I really like what you said about taking the proceeds that you had from real estate and deploying that in the stock market. Because I think, I mean, if you have like $12,000, $514, I mean, you can pretty much take the whole thing into the stock market, exactly. But you don't have that opportunity in real estate. I mean, if a unit is 20,000 or 200,000, whatever it is, it's not as liquid. It's not as easy to park your money in real estate, I guess, as it is in stock market.

Starting point is 00:42:01 And you also need to do more due diligence, for instance, on real estate than on, say, the S&P 500. Of course, clearly with real estate, Stig, you know, if you just run the cash cow until the cow's out of milk, that's where people get in trouble with real estate. You have to take a percentage of that earnings and put it back into those buildings every year to improve to then get better tenants because you have a nicer property than everybody around you, keep the price at the right. price point so that way you're competitive. Those are the key things that I always did is I always did an improvement in all my buildings every year because, and that's the part that gets people also with investing in equities. You have to be patient and you have to do the right thing over and over and over again. And, you know, I'm just going to highlight something. I think that that was one of his greatest strengths with managing the properties was that he would constantly take a lot of the

Starting point is 00:43:14 retained earnings from the business and he would put it back into the business. He'd keep the buildings looking clean. He'd put shrubbery up. He'd put a new roof on. And he would do that stuff consistently. He wouldn't wait until there was a hole in the roof before he was replacing the roof. And you see that with a lot of landlords that just really kind of have bad business sense and aren't there to take care of their customers or their tenants. They're more into how much money can I make and how much can I sock away, opposed to how can I make this environment that they're living in a better place? And because he had that approach, I really think that that was one of the main reasons to his success in that industry is because he was taking care of the people

Starting point is 00:43:52 that were putting food on our table every night. So just a real important highlight, very important highlight for anybody that's interested in getting into this. That's, I would say, one of the most important things you can do. Okay, Bill. The next question that I had is, is what are some of the best resources available for learning to become a real estate investor? And I do just want to say, it sounds like at the end of this show, President Stig, and Bill, you guys should be creating billsbooks.com because this has been awesome. So go ahead, Bill. I don't want to teap my horn, but I've helped one of my, I'm very proud of one of my friends.

Starting point is 00:44:30 He came to me years and years ago, and he says, Bill, how are you doing it? And I played platform tennis with them up in Pennsylvania. And we knew each other for years and years. And he's in a family business. And he said him and his brother wanted to get into the business that we're talking about. So I gave him my formulas that I do. And now he's over 200 units strong doing just fine. A couple of the things that you mentioned, the best resources.

Starting point is 00:45:03 there's renters clubs that you can join, like in Calgary, if you look it up, there's a renters club probably in your area that you could join. That's the first approach. And that way you get a feel of what people in your area are doing. You can, you know, there's always people buying and selling. That's one way. The next way is there's a website called loop dot commercial real estate. You can go on there and see what units are sell.

Starting point is 00:45:31 Now, it's a website they'll let you look at for. for a few times and you have to join it. The next one is the CBRE. But the best advice that I can give you of how to do this, this is a little trick that I'm telling whoever's listened to this podcast is what you do, wherever area that you love, that you want to own a building and one's in, you know what? You knock on the owner's door.

Starting point is 00:45:58 You find out who the owner of the building is. I don't care if it's a sixth unit to a 200. unit, you find out who the owner is, you knock on their door and you say, I'm an investor, I love your property, when are you going to sell it, I'm interested. It may take you five years. I've waited five years for properties to come up because you know what? I kept on knocking at their door and I says, I love it. I love what you do. I would like to own it someday. And I've had, in two occasions, they actually financed it for me. Okay.

Starting point is 00:46:36 Because they knew that I had potential of running what they did and not losing it. And the advantage of it is for a seller to do that is the capital gain. Because they're going to have to pay capital gain on that unit. And you convince them from you paying them through the years that that, that reduces their tax structure. It's almost like setting up an annuity for them. That is the best advice that I can give any person. And the second thing is how we're saying,

Starting point is 00:47:10 well, I don't have a lot of money. How can I get into this business? Well, here's another tip, is you ever see where they have these rows of condos that you can purchase one at a time? Now, that's a little offset that you can, you know, you might pay a little bit more, but if you get a unit that you can buy at a reasonable price,

Starting point is 00:47:31 it may be a little bit run down, that you can throw some paint and carpet in it, you can buy one of those, say they're structured into 10 units in one complex, buy one at a time until you own all 10, then you own the whole building. That's another way for first-time people, if you want to do a onesie, one-z-one-z-a-off approach

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Starting point is 00:51:22 So I think a lot of these people that own the larger buildings, their biggest concern is whenever I sell this, what is going to be the most advantageous way for me to sell it so that I get the right price and I don't have a lot of frictional cost dealing with a realtor and whatnot? So if you go and you approach, say, a person owns a building that you're interested in and maybe they're not in the market to try to sell it for another 10 years, you've just made an impression with them by your interaction. and they're going to take your name and they're going to remember you because you know how many people are out there doing that? I would argue not that many. None. Yeah, people don't. So what's nice, though, is whenever you do this, so they're going to remember you, they're going to take your contact information. And I think the most important thing that you can do is talk in terms of their interests, something that you'd learn by reading, you know, how to win friends and influence people.

Starting point is 00:52:10 So you would maybe start the conversation with, hey, so whenever you're going to sell these buildings, they're beautiful property. but you're going to want to sell them someday, and your biggest concern is probably going to be capital gains tax. So, you know, I'm a person that has a successful business on the side. I have, you know, a lot of collateral that I could offer up. And you and I could maybe come to an agreement with no realtor. We could put the realtor aside so they're not taking their 7% cut on, say, a million dollar building, which is 70K right there. Okay. So you throw that out there where you do not want to deal with a realtor.

Starting point is 00:52:45 and dad, you could get into the specifics of going down and signing the legal paperwork at, you know, under $1,000 for the entire transaction. But you throw that on the table for the person. You also throw that on the table that you have an interest in maintaining the property, keeping it accountable, you know, all those things. And that you would come to an agreement on the price as you kind of look at what the cost would be. You throw that all on the table for them. And I think that they're going to probably, you're going to make a good impression, you're going to over it. to open yourself up to a future opportunity. And I think if you just go around and do this to a couple different properties,

Starting point is 00:53:20 you're going to find somebody that's in the market that try to sell their building within a five-year time frame. And hopefully, you know, the conditions are in a good position for you and them. And it's a win-win. So. Yeah, it just, and, you know, to do that, you have to have money down and realize that you're going to have a lot of sweat equity invested in time, but it's well worth it if you're willing to sacrifice that, you know. But first, teach yourself how to, you know, be a good manager,

Starting point is 00:53:50 how to also approach people in a kind and loving way. You know, that all takes presidents when you're in that business. But that's a couple of things that I could pass on to share. And if you care about your tenants, you're going to be successful. If you don't care about your tenants, you're going to probably have a rough time with it. Go ahead, Stig. Exactly. money. So, Bill, you know, I think this real estate, I think is really, really interesting to discuss. And I actually want to continue on the question that we have in the very beginning.

Starting point is 00:54:21 And how much money would it take for me, for instance, as an investor to enter the market? And I know that it really depends on which type of assets you are buying. But could you just give us, you know, something on the ballpark? Well, you can't give specific numbers. You have to give percentages. You need at least 15%. before you come up with a number, you do the cap rate to see what it's worth with the expenses versus the income. What matters is what it's worth and what you can come up with. And you have to

Starting point is 00:54:55 then realize if it's in a great market area, which mine were, I never had vacancies. Now, commercial is a little bit different. Commercial, you're getting into a business movement. And so you really have to have a vacancy of a three-month window for a business to actually come in. And you may have to remodel to fit their structure, okay, and then charge them more rent. Because a lot of these business owners, they come in, and they're short on cash too, but you need them to come in because you can make it up on the other end by charging them more for the unit. When you charge more for the unit, guess what happens to your building?

Starting point is 00:55:37 it goes up in value. So raising rents is very important every year to be kind to the tenant. Be kind to yourself because when you raise rents, that makes your capitalization then go up, which makes your building worth more. So whenever you are ready to get out of it, all of a sudden your building's worth much more. And that is very important to know the marketplace of rents. So whenever he said that, there was like alarm bells going off. in my head. So whenever you're trying to value the property, I'm talking in terms of a buyer.

Starting point is 00:56:13 Whenever you're getting ready to buy a property, don't think for one second that that previous owner might have maybe pulled a little bit of that trick on you. By raising their rents, maybe the year prior before they're getting ready to sell it or two years prior, that they raise their rents in order to maybe elevate the price of the property. So the thing that you want to do is you want to look at the 10-year history of how have these buildings? And he's saying, my dad's saying five, he's holding up his hand for five, but five to 10 years, however much history you can get to see the trend line of the prices of the buildings and what they're charging for rent. Because let's say that the person just changed the rent in like the last three months. You might have a lot of people that are shuffling their stuff around in order to get out.

Starting point is 00:56:58 Okay. And next thing you know, you've got a building that's, you know, 70% occupancy. And you were calculating the value with 100% occupancy because they're. They had a previous rent structure. So some risks to highlight. And it just goes to highlight our point that you have to do your homework. You can't just dive, jump straight into this because you see some numbers that really make your eyeballs go, ka-ching, and you get all excited because you might find yourself in a horrible situation because you didn't do your homework. So, Stig, I know that's a roundabout way to answer your question.

Starting point is 00:57:32 You know, everybody wants a number. Yeah. And really, you don't need a number. what you need is what works for you. Sure. Here's the other thing, stick. So if you're going to like San Diego and you're comparing the prices for a room, a four unit there, your rent might be well over the $1,000 mark,

Starting point is 00:57:51 whereas if you go into another part of the USA or wherever, you might be at the $600 range per unit. And so whenever you have that, I mean, you're literally going to double the price of the entire building going from a $1,200 unit to $600 unit. And that's just why it's really kind of hard to put a price on it. But I think that, you know, I think we can safely say that if you're looking to buy something with over four units, you're probably talking a couple hundred thousand dollars here. So that's just something that if you're not in that ballpark or have that money set aside in order to put a down payment on it, then you probably need to maybe start looking somewhere else or a different medium of investing like stocks or bonds or something like that.

Starting point is 00:58:31 But just for a starter, I think if you have 100K, you can maybe start looking into this. type of stuff and getting more interested in it. Okay. And I want to throw, I'm sorry, one more thing. Just because you don't have that down payment right now doesn't mean you can't go and start doing the cold calling or the knocking on doors to set yourself up for whenever you do have the money. If you're doing a projection and say, hey, I want to be at this point where I have

Starting point is 00:58:54 a quarter of a million dollars in my pocket in five years from now, start knocking on those doors today. That way you have that opportunity. Preston has a great point. So you're knocking that door and you get the guy to say, yeah, I'm a man. arrested. I'm probably going to be three years out right then at that time, man, you should like you got a goal. You got a goal.

Starting point is 00:59:15 Hey, let's start evaluating what you have right now. So that way, when three years comes along, you know exactly what you need for that down payment and you have your bank structure in place for when that day happens that he says, I'm ready, you're ready. Because what he's going to do is if three years goes by and then you're start saying, oh, I'm not sure that I want to do this, then what do you think he's going to do? He's going to put you aside and go elsewhere. Plus, I think it puts a goal out there for you. You know, like, if you have like this preconceived notion that you're going to be buying the

Starting point is 00:59:52 buildings in three or four years or whatever the case would be, you're going to start saving and you're going to start putting yourself in a position where you're going to be able to action that. One of the points that I wanted to point out is sometimes smaller isn't always. better. I found by buying larger units, say 15 to 30 units, they were actually easier to manage. And the reason why is you have them under one roof, you have one property, you have them contained. And that is something to keep in mind, but it also takes you more to get in. So it isn't harder to take care of large buildings.

Starting point is 01:00:35 I feel it's harder to take care of multiple units. And when you're developing this to start out at six, sell that six unit and buy a larger one with those assets, you know, to step up to larger buildings. So I have one final highlight and then we're going to go to our question from the audience. But a lot of people whenever they, you know, are trying to apply that, they want to get as many units as they possibly can. And they sometimes put them in a position where they are over leveraging themselves with the loan and they don't have much of a wiggle room on their free cash flow to reinvest back into the building. And that's where you're going to get yourself in trouble. So where we were talking earlier about how my father had always put more money back into the building, kept them, you know, looking nice and all those things. It's because he never leveraged himself into a position where he didn't have the money to do it.

Starting point is 01:01:32 And I think that that's where, you know, it might not be by choice that people aren't investing back in their building simply because they over leveraged themselves. So I would tell you, take it slow, take it in steps for what you can afford and that you're putting that money aside and you're planning for that money to put aside to put it back into the building so you can take care of your people. And when you do that, you're going to have long-term success. But okay, so let's go ahead and go to our question from our person in the audience. And today, our question comes from Pranshu Kondalwal. And he has a fantastic question for us about share buybacks. Hey, guys, I have a question for you. There are many companies which say that they're returning money to the shareholder in form of share buyback.

Starting point is 01:02:15 There are a company which says that they use almost all their free cash flow to buy back their share. but when I see the number of share outstanding for the last few years, I don't see that is being reduced at all. So where is all the fee cash flow going? Does it mean that the company is giving a lot of stock options with their employee and all free cash flow is used to just buy back the same amount of stocks in the market? In that case, the shareholder will not get anything out of the free cash flow. It would be great if you can share your thoughts on this.

Starting point is 01:02:55 Thank you. Pranchu. So I love this question. It's because it's really kind of getting into the nuts and bolts of accounting. So that's probably why I get all excited whenever I hear questions like this. And I know I sound like a total geek when I say that, but it's true. So the first thing I want to do is I want to describe accounting to people when we're talking about share buybacks, just so everyone can kind of understand the top level view of this.

Starting point is 01:03:20 So whenever you're doing a share buyback, let's say that you have 100 shares that are out on the market. And the company actually has the ability to buy back those shares off of the market so that there's not as many shares out and owned by different owners. So let's say that the company has enough free cash flow to buy back 10 of those 100 shares back onto their company books. So that means there would only be 90 shares out on the market. So those 90 shares now become more valuable because there's less of them. If you can, if you just thought of the ability to continue to decrease the number of shares out there, let's just say you decreased it down to 10 shares. Those 10 shares became a lot more valuable because there's not a hundred of them out there. So that's what he's referring to in this question.

Starting point is 01:04:03 And what he's saying is when a company is taking all their free cash and they're buying all these shares back, you should see the stock price become more valuable. But what he's saying is he's seeing a lot of companies that that's not necessarily happening. So let's discuss this in more detail of what's happening. So when a company buys back their shares, those shares come back and they actually sit on the equity line of the balance sheet and what's called a treasury account. And the company has two choices that they can employ whenever they buy these shares back. They can either leave the shares on the company books as still being listed but owned by the company or the company can actually retire those shares so that they can never be reissued ever again. Now, what most companies do is they buy back the shares and they keep them on the company books and then they issue them to employees as incentives. And they use this to help retain the talent within the company.

Starting point is 01:04:58 So whenever the company has those shares and they issue them out to their employees, what they often do is they treat them as stock options. And let's say that the stock is trading for $60, they might actually give the person the option to exercise it at $40 or $50. So that person is not only being able to acquire the share itself, but they're actually making a gain on the fact that they were able to exercise it at a cheaper price. So this really gets very complicated. It's very hard for a person in accounting to account for all this stuff. Now, when you look at a company like IBM, they've been buying back a ton of shares. They've been basically using all their free cash flow in order to buy these shares back and

Starting point is 01:05:38 put them on their company balance sheet. And you're actually seeing that the earnings per share on the company, go up, even though the revenues are decreasing, they're able to see their earnings per share go up because those number of shares outstanding are being reduced. So that's a scenario where it's actually paying off for the shareholders. Most companies don't do that. Most companies are issuing the shares back to their employees at a stock option that's advantageous to the employees, and it's a form of payment. And you're not seeing that show up on the income statement, and that's where things get really tricky. So here's what my recommendation is. My recommendation,

Starting point is 01:06:14 to people that are on the board of directors whenever you're talking about this specific scenario. I think that share buybacks are good only if the chairman of the board and whoever's representing the shareholders has an agreement with the leadership of the company that the shares continue to sit on the company's balance sheet and that can be reissued for the benefit of the shareholders so that they don't have to go through the whole reissuing of shares because that costs a lot of money with the friction as you're going through banks and other things like that if you want to issue more shares of your company. So that's, I think there needs to be some type of memorandum or some type of agreement

Starting point is 01:06:51 between shareholders and management that those shares continue to sit on the company's balance sheet and that they're only reissued in the event that they need to raise more capital in the future. I know that sounded like a really long response. I might have lost some people there, but this is, like I said, I get really excited whenever I talk about that stuff. I see Stig, you got something that you want to go ahead and say. Yeah, because, Prant you, I'm completely.

Starting point is 01:07:14 even the same boat as Preston here. You know, when I heard about this question, I was just through the roof. And that probably just tells you that I'm just as an accounting geek as Preston. We are so geeky. Yeah. Yeah, I should have my dad on the podcast soon as well. Just kidding. No offense, dad.

Starting point is 01:07:32 No offense. No offense. No, I really like this question. And the reason is that really, really often you would hear that share buyback is a good thing. And the reason why is probably that the management is always telling when they have conducted the share buyback, that is a good thing because they have been returning capital to the shareholder. Now, you know, whether or not share buyback is a good thing or a bad thing, it all depends. Because in my opinion, you cannot say that the company is buyback shares and you can definitely not say the management is buying back shares. In reality, it's you because you are the owner.

Starting point is 01:08:09 So it's your money that is being spent for a share buyback. And logically, the implication for that is that unless you are getting the stock as a good price, they're not creating value for you, not at all. If the management is buying back shares for your money on your behalf at a really bad price and perhaps issuing to their own employees, that's a really bad business for you. So that's really just a general rule of thought. It's really, really hard to say that the management should just, you know, calculate a stock value to be, I don't know, $80 and then stop buying back shares because

Starting point is 01:08:43 that's just not how it works. But in general terms, if you see like a huge share buyback program for a company and you can't see why it's that expensive, it's probably bad business for you. And then just the final thing, because I can hear from your Christian that you are really a smart guy. So you probably know there's a lot of tax issue. For instance, if you want to have the capital paid out of dividend compared to share buyback, really in short, if it's paid out of its dividend, you have to pay tax, but if it's share buyback, you don't pay tax on that. But in reality, just think about they're spending your money. Don't think too much about tax. That's really just like the buy product. Think about is it a good price that they're paying for these stocks? I totally agree with what Stig's saying here. And that's the big point is whenever you see a company buying back shares, and let's just say that we think that there's a big premium on the stock price, that makes me very upset as a stock investor. Like,

Starting point is 01:09:37 Why in the world is this management buying back their own shares at a really high price? When you look at like IBM, I think that IBM's undervalued right now. And whenever I see them buying back shares, that makes me really excited because that has a compounding impact of the ones that I currently own. So I think the important thing here is that in most cases, a share buyback is actually not a good thing for shareholders. And it's really kind of comes to Sticks point because the management will be buying it back at the wrong time. And then the second thing is, is management usually buys it back and they're just, you know, they don't have a really good incentive program within their business. And they're just handing out the shares like candy to their leadership or their executive leadership. And it's not really actually creating long-term value.

Starting point is 01:10:21 I think that Charles Koch's book talks about that kind of stuff a lot more in detail. We won't go there because we're already like really long on this question. You can tell we're very excited about it. But anyway, we're going to go ahead and conclude that. I'd like to thank Colin Yablonski for coming on the show. If anybody has a search engine optimization problem that they need solved, his company, Inbound Interactive, is the place you need to go. And we'll have a link to his company on the bottom of our page.

Starting point is 01:10:47 He's helped us out tremendously. So I can't promote his company enough. I'd like to thank my dad for coming on. Dad, this couldn't have been more fun to bring you on the podcast and to talk about all your success in the real estate business. And I know that there's a lot of people that are listening. are going to gain a lot of information from this. And a lot of the stuff that my dad was talking about, we'll have that in the show notes so that you can reference it because I know there was a lot that's been put out there. You're welcome, Preston. Very proud of all three of you young men and what you're

Starting point is 01:11:15 trying to accomplish here to help people with just understanding good fundamentals. Well, thanks, Dad. Go ahead, Colin. And I just want to say thank you so much, Bill. I sincerely appreciate it. And Preston and Stig, you too as well. Thanks a lot for having me on the show again. It's always a lot of fun. I'll pleasure. All right, guys. Well, that's all we have for you this week. Next week we're going to be talking about the book influence.

Starting point is 01:11:39 And Colin's actually coming back on the show for that one because he's the one who literally sent that to me as a Christmas gift and said, Preston, you need to read this book. So I said, perfect. I absolutely loved it. It's probably one of my top five favorite books of all time. And so Colin's coming back on next week to talk about that. You guys are really going to like that episode. All right. So we'll see you guys next week.

Starting point is 01:11:59 Thanks for listening. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to the Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book.

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