The Best Passive Income Model Podcast With Mark Podolsky, AKA The Land Geek Mark Chats ...

15 Pages·2015·0.39 MB·English

The Best Passive Income Model Podcast
With Mark Podolsky, AKA The Land Geek

Mark Chats with David Campbell,
HassleFreeCashflowInvesting.com

Transcript

Mark: Hey, it’s Mark Podolsky The LandGeek with your favorite nichey real
estate website www.TheLandGeek.com and today guest probably forgot
more about real estate than I'll ever know, this guy is so big, the founder of
Hassle free cashflow investing. David Campbell started investing in real
estate part time while he was working as a full time high school band
director with zero net worth and within six years and before the age of 30
David had become a financially independent millionaire through the vehicle
of part time real estate investing. He has done over a billion dollars bid, a
billion dollars of transactions and advisory experience and he's very well
know within real estate circles. I'll just put on my anchor voice. David
Campbell you're a big deal, how are you.

David: Hey Mark I'm so happy to be here with you and your audience.

Mark: I'm thrilled to be here. So let's go back to the high school band
director days and how did you get the bug and the gumption and did like
okay I'm going to be big in real estate?

David: When I was first teaching I was working part-time in an income tax
office and my job was to put the stuff in the computer and then let the CPA
process it and at the end I would staple the return together and hand to the
guy and say you owe so much in taxes. I did a tax return for my middle
school science teacher came in, "I'm like you owe 32% of your income in
taxes." I'm like that's not very good and I could see in their pay stub he
didn't make very much money.

And then this guy came in and it took me a whole week to put his tax return
into the computer and he owned business, shopping centers and apartments
and grocery stores and at the end I put it was like a rim of paper his whole
tax return and I gave to the guy and said, "Your tax bill is zero." Wait
something is wrong here. I know that you make hundreds of thousands of
dollars this year and your tax is okay, zero and I asked my boss. I'm like,
"Eleanor how is that possible that this guy made so much money?" And she
said, "Well someday you'll figure out you know depreciation and the tax
shelter for business and the best advice I can give you is when you get your
first grown up paycheck go buy a two bedroom something and go rent out
the other bedroom." So I did.

I was teaching high school then, I got my very first paycheck and I went and
I applied for a loan and they said you got a credit score and a job so here
you go 100% financing to buy a two bedroomed, two bath condo. I think I
bought it for 140 grand in Southern California in 1999 and I rented out that
bedroom and it covered half my mortgage payment. I thought that's cool
and then I did a little bit of work on it and at the end of the year I looked
into my check in account and it said zero. You have $0 in your checking
account and I'm like oh that's not a surprise, I'm like I'm a high school band
teacher. I was making like $30,000 a year teaching a high school band in
1999 and then I looked at my balance sheet and I had my $140,000 condo
had gone up $170,000. I had $30,000 of equity that I didn't have before.

That was my entire paycheck earned as a schoolteacher now is equity on my
balance sheet and then the very next year, the same thing happened. The
$140,000 condo was worth $200,000, I was getting some great tax shelter
from the depreciation on half my condo and writing off half the utilities and
that turned out to be a good deal. I suddenly after two years of teaching
high school then I had 60 grand and I sold that condo.

I thought if it worked small it will work and I bought a five bedroom house.
The biggest I can afford and I rented out four bedrooms and there I was
now I had no housing payment. Those four roommates paid the entire PITI
on my mortgage, plus the utilities, plus the cleaning, and I was living there
free.

Mark: Yeah, but David you got four roommates.
David: Yeah, when you are young.

Mark: Yeah you're right. That's right I keep forgetting you’re not even 30
yet, okay.

David: Yeah. So here I am young, four roommates it’s not optimal, but now
I'm bankable. Because I got to my bank and I say look I have no housing
payment, check out my DTI. Give me a loan to go buy rental property and I
was able to do a cash-out, refinance and pull some money out of my primary
residence and I was bankable. I went out and bought a rental and that
rental went up in value and I took the money out of that and I bought three
more rentals and the rentals all went up in value. I sold those and I bought
eight more and those all went up in value. Then I bought an apartment
building and I was out of the rat race, bada bing it's pretty simple.

Mark: Wow. Okay so you’ve gone the whole gambit as far as real estate
investment. I mean you've done single-family homes, you've done
apartments, you've done retail, you've done offices, you've done medical,
you've done condo conversion, net lease properties, triple net lease, I love
triple net by the way, syndications land development which we'll talk about,
production homebuilding, private lending and a winery. If you could go back
in time are there any of those pieces that you’d be like yeah I could probably
do without the condo conversion or you know the production homebuilding. I
don’t know or is there's any that you'd have double down on? Like you know
what apartments are great or retail is great.

David: That's a good question. So I’m very much a market cycle investor.
So when I look at my real estate resume it looks like I've got ADD and I just
don’t know what to invest in but I very much look at what the opportunity is
in the market, will find a way to add value, will look to see where there is a
gap in the marketplace to add value and then there's a little bit of do the
deal that's on your plate. When someone brings you a deal and it's a good
deal. You know, when I was early in my career I didn’t have a very clear
investment philosophy and so it was do every deal that makes sense.

Mark: Right but there's a big education piece to this. How are you learning
land development, syndications and triple net lease properties?

David: That is a great question and you find people who are experts in the
field and then you partner with them and you put together groups of people
and you sit back and you be the quarterback of your team so you don’t have
to know. Like when they interviewed Henry Ford and said, "Mr. Ford how
does a carburetor work?" And he says, "I have no idea but I know how to
use a telephone and I just call someone who works for me and they tell me
how a carburetor works. In fact they don't even tell me they just tell the guy
in the production line how to make a carburetor and then I just sit back and
run the whole thing." That’s what I view my role as an entrepreneur is to
pull the puppet strings. Find the opportunities, analyze them, pull the puppet
strings and let your team do what they’re good at.

Mark: Yeah. I love the model and the beauty of this is you're doing this all
part-time. You're still a high school teacher.

David: No no no. I retired from teaching 11 years ago.

Mark: No, I know but like then...

David: Oh at that time.

Mark: ...you were doing it. When you first started, you were doing this all
part-time you don't leave until 2005.

David: That's correct. Yeah, that’s correct, so you're right. In year one when
I was teaching high school band I was very fortunate that I had summers.
So you get the couple of months of summer vacation and when I was
teaching I'd spend my lunch hour, and before and after school time really
reading and immersing myself in real estate. So there I was in my office and
school was done at 3 o’clock and then band practice didn't start till seven so
I got four hours and I didn't want to go home. It was a long way to go for
just a short break to go around and then come back. So I would sit in my
office almost every day after school and just read and study real estate and
got my license and anyway it’s been a great great ride.

But your question earlier about what would you again and what would I not
do again and the crux of my current investing style is hassle free, cashflow,
investing it's got to be all three. It's got to be cash flow, it's got to be hassle
free and it has to be an investment and to me an investment is not a job. So
if I'm working it, if I have to put in my time, it might be lucrative, it might
be a very lucrative real estate business, but it’s not an investment. An
investment is something that I can put in money and my money makes
money and cashflow is obvious. It's got put more money in my pocket every
month, or every quarter, or every year, whatever that time period is it puts
money in my pocket rather than take money out and then hassle free.

There's a whole realm of things that go into making hassle free investment.
So when you’re looking at a lot of those things on my bio like land
development, production homebuilding and condo conversion those are not
hassle free and they're not cashflow. But it was certainly a great way for me
to make a bunch of equity in a real estate related business and then move
that equity over into hassle free investments like triple net lease properties
and mortgage investment.

Mark: Yeah I mean absolute. I remember having a talk with a big apartment
investor in California and he said Mark if I could do it all over again I
wouldn't have gone through the brain damage of apartment investing. I
would have only focused on triple net leases on like Jack-in-the-Box’s and
Taco Bell’s and these big single tenant leases with these franchises that
rarely go out and I thought was really interesting. He says at the end of the
day its 15% all day long. You know the rents go up every about 15 years or
something and they never leave. Is that your experience with triple net?

David: Yeah absolutely. So when I'm buying a triple net property I've got a
couple of rules. The first is I want the cap rate to be higher than the interest
rate. So if I can borrow money at five and I can buy a seven cap property
then I've got a 2% arbitrage spread, positive arbitrage and that makes my
yield really work. If you go out and borrow money at 5% and you go buy a
30 year triple net lease McDonald’s at the corner of Main and Main in San
Francisco it's going to be two maybe three cap and you're upside down.

Mark: Yeah exactly and that's the problem with getting triple net properties
is that the cap rates are so low.

David: Yeah. So I winded up buying triple net lease properties where I've
got a very strong national credit tenant, but I might be in a secondary
market. So I got to go to Georgia or South Dakota or somewhere where you
know Wall Street doesn't want to go buy that net lease to asset for some
giant hedge fund. It's more of a mom-and-pop style investment which gets
you those higher yields but still great locations, great land and great
tenants.

Mark: Yeah okay but let’s get back to the original question. If you could do
it all over again where do you think you'd put most of your focus? It's
because I love the model hassle free, cash flow and an investment because
my model eventually becomes an investment but it's really... It starts as a
land business and until you create your team, your systems and your
automation you don’t get out of it for a while.

David: That's right.

Mark: So I like the start out with the investment part.
David: So there are certain things that I'd definitely do again and there are
certain things that I would recommend to a new investor and those aren't
necessarily the same thing. Things that have worked very well for me that I
would you again and again I really like production homebuilding, particularly
during the last market crash. We were very aggressive about buying finished
lots. We bought a lot of lots that were below replacement cost. For example,
maybe we paid $10,000 to buy a lot where if the dirt were free it would still
cost you $25,000 to put the roads and utilities and all of the improvements
to make that a buildable lot.

Mark: Oh yeah. I mean we had tones of that out here, tones of it.

David: Really?

Mark: Yeah.

David: So that was a no-brainer for me is to go heavy into developed
finished lot inventory in a down market and then the homebuilding company
is just a means to an end to realizing that equity. Because if you go buy that
distressed lot you could just sit on it and hope and pray and feed the
alligator of mowing, taxes, insurance and maybe your mortgage payment or
you could build your way out of that. You bought the land cheap, go put a
house on it and if it sells that's awesome you make your money, if it doesn't
sell you just built yourself a rental property at wholesale rather than retail.

Mark: Right. Yeah I love it. So is that what you'd have done from the very
beginning?

David: No.

Mark: If you can go back or how would you have started?

David: I think if I were to start I would do it at the same. I'd go buy a condo
and get a roommate and then leverage that into more and more single
family homes. I think I call it the low hanging fruit, when it's a buyers’
market you buy, when it's sellers’ market you sell and here we are in 2015 it
is a hard time to buy properties in this market so I go on the habit that
makes sense. So I think it's a good time to sell. In your stock market when
stocks are high you sell stocks and you buy bonds and then when the stock
market gets low you sell bonds and you buy real estate. So right now in this
market cycle I'm selling real estate and buying mortgage notes. I don't want
to be holding real property; I want to be holding paper. So if there's a
market correction then I'm insulated from that and then in the mean time I
can collect the income on my mortgage paper just wait for the next market
cycle to correct.

That makes a lot of sense for me because I have a lot of resources to play
with and a lot of education to work with and a big team to work with. So
that makes sense for me but for someone just starting out and investing I
would say go find some house that you could buy at a six or seven cap rate,
you put 30 or fixed debt on it at 5% get as much leverage on that as you
can and just sit and wait. It’s not a great vehicle for producing atomic cash
flow, but it’ll create equity for you. Right you just sit and let your tenant pay
that mortgage down for you and let that property appreciates due to
inflation and appreciation. It's a slow road to pass to 12 but you got to do
something to get your equity and then once you get your equity, convert
that equity into cash flow either through more cash flow investments like
triple net, commercial property or through mortgage notes.

Mark: Yeah I know. I mean I'm a big believer like let’s start slow and then
build your wealth gradually right and then you won’t end up making a huge
mistake I don’t think if you do it that way. Where if you were starting out
let's say in 2006 and things seem so easy, it's very easy to kind of crash and
burn I think. You know, not having any perspectives as far as what a real
estate cycle really looks like and the typical real estate cycle is 10 years,
correct?

David: Yeah.

Mark: So where do you think we are in our cycle.

David: It's hard say from like a national perspective because real estate is
local, local, local. So like the markets that I really keep my eye on are the
Bay Area. San Francisco, Bay Area because that’s where I live then and then
I keep my eye on the Dallas-Fort Worth market because that’s where the
majority of my investing is.

And I think here in California were in a bubble and I think the stock market
is in a bubble and I think real estate market is in a bubble and I see the next
move is either going to be kind of just sideways or slightly up and then 10 to
25% down. That’s my perspective, and I've got a great blog article that went
a little bit viral on how to predict real estate prices. So on the website at
HassleFreeCashflowInvesting.com there's a great article. Just Google
HassleFreeCashflowInvesting.com how to predict real estate prices and you'll
find a great blog article that you can apply your local market and say hey
me what's happening in my local market.
Dallas-Fort Worth I think has a lot of very strong fundamentals. I still think
that market is undervalued so it's still very bullish on Dallas-Fort Worth. It's
affordable, jobs are abundant, jobs are being created at a record pace,
people are moving in faster than people are building new housing and the
ratio between incomes and housing prices is affordable. So for example in
San Francisco just for a teaching point, and these numbers are not accurate
but just for an illustrative point.

Let's say the median home prices in San Francisco are $1,000,000 and the
medium income is $100,000 that’s 10 times. You're using 10 years of salary
to buy the median home or median income times 10 equals the median
home price. In Dallas and a lot areas where we're investing the median
[00:18:00] [Indiscernible] which is less obviously in San Francisco but the
median home price is only 150 which is three years of median income
divided by median home price which is very affordable. So that’s where I see
areas like San Francisco have to come down because there’s no greater fool,
there's no one left to come in the door to push the prices up.

Mark: Right but San Francisco is kind of an interesting market with all that
Silicon Valley money you know.

David: It is and a lot of the people who are always pushing the prices up are
not doing it with wages, they're doing it with stock options that they
received at their tech companies. So the stock market has done really well,
that stock market equity has found its way into the housing market, but if
the stock market goes down those buyers don’t have any equity to buy real
estate with or if the stock market just stays sideways everyone who bought
is going to buy and there's no one new coming in the door to have that
instant equity or the pop of equity that they earned in the stock market.

Mark: Right. So David, I’ve never heard a note buyer or a note investor or
note expert on the podcast you will be the first. So can you kind of just give
us at a high level what note investing is, why it’s hassle free and what the
benefits are?

David: That is a great question. When I'm looking at mortgage note
investing I want it to be profitable if I'm repaid which means I’m looking for
a strong interest rate or a discount on that mortgage to give me the yoke
that I'm looking for and I want to be profitable if I’m not repaid. If I can
answer those two fundamental questions will I be profitable because when
you're buying a note there's only two outcomes you're going to be paid or
you won't.
If I'm buying an unsecured note, like a credit card note or medical note
receivables or something like that, if they pay you're happy, if they don't pay
you well you just say please pay me and they'll say no. You say well please,
please, please pay and they’ll say no again and there's nothing you can do
about it and you're right it's not a good outcome. So part of investing in
mortgage paper is the collateral, that’s what makes the whole thing work. If
the borrower doesn't pay you, you get the property for pennies on the
dollar, which makes it worth the time and effort of making a loan and
foreclosing on the asset.

Mark: Right. So it's really underwriting game at the end of the day. Can you
get extra yield and is there enough equity in that property so worst case if I
got to go through the pain of foreclosure I've got an asset at unbelievable
discount.

David: That's right and you look at most mortgage lending the vast majority
of mortgage lending in the country is either purchased by Fannie Mae Fred
[00:20:58] [Indiscernible] government is manipulating interest rates there
to creating low yields or it's securitized and sold on Wall Street and investors
are so starved for yield and bond rates are so low that they push the yields
incredibly low. So the vast majority of paper is going be Fannie Mae, Freddie
Mac or securitized on Wall Street and they buy very sanitized things. They've
got a very clear box of what fits in those niches. If it doesn’t fit in that niche,
let me just take a step back. If it does fit in that niche your interest rate is
incredibly low.

Mark: Right so there’s no deal there for you.

David: That’s right. If it's an A-plus borrower, clean collateral and they fit in
that Fannie Mae, Freddie Mac box I can't compete there because Wells Fargo
is going to do the loan at 4% and I need to get a higher yield than 4%. So if
it doesn’t fit in that box there is no lender and so then the private investor
gets to step into that market and state Mr. Borrower I am the only lender
you have. I [00:22:08] [Indiscernible] and then the borrower [00:22:09]
[Indiscernible]

Mark: Oh David you're cutting in out on me.

David: Okay.

Mark: Can you say that one more time? I lost you there.

David: Sure.
Mark: Oh no. We're obviously having some audio issues here. I don't know
if it's Skype?

David: I can hear you perfectly clear. Can you hear when I talk?

Mark: Yeah now I can hear you.

David: Okay great. I took a pause when I was about to start so I think there
wasn't a big gap.

Mark: Okay go ahead.

David: Let me backup. So when I look for opportunities in the marketplace,
I'm looking in places where I can add value and not compete with the bank
but to provide this service that is absent from the marketplace. So I'm not
competing with Fannie Mae, Freddie Mac or Wall Street, I’m the only lender
that will do that loan so I get to dictate the interest rate and the borrower
can either accept that rate or not.

Mark: Yeah. In order to do that many deals you needed to move the
needle?

David: That’s right. One of the things about making a hassle free
investment is duplicate ability, being able to do the same thing over and
over again. In my business I look at say Starbucks and McDonald’s and
every single Starbucks and every single McDonald’s has the same systems
and the same products. If a big mac in Los Angeles is tasting the same as a
big mac in New York City as it will in Dallas and that’s what I want for my
business is systems where I can do the same thing over and over again.
Having been that kind of ADD market cycle investor doing [00:23:46]
[Indiscernible]. I realize if I can make something duplicate able and put a
system then I know the types of deals that I can and I can go to the market
place and create them.

Mark: Yeah I love the model, I love it. So how did you get into that?

David: I was running my home building company in 2009 is when we
started building houses in Dallas, Texas. It was great time to start a home
building company because land was cheap, everybody was looking for work
and so labor was cheap and materials were cheap because no one else was
building. So it was a great time to build except for there was no buyers and
there was no money. There's only a small problem so we specifically said
let’s go build now and build rental products because everyone has to have a
place to leave.