Helms & Gray: Real Estate Investing 101

How to build equity & income tangible with a tangible asset
Monday, July 9, 2018, 2:48 PM

We talk a lot on this site about the wisdom of owning tangible assets. And we've decided it's time to start focusing more intently on educating our readers how to invest in the largest tangible asset market of all: real estate.

The global real estate market currently stands at over $200 trillion. This dwarfs both the outstanding securitized debt and equity markets.

For centuries, ownership of land and property has been a direct indicator of wealth. That's still true today; the difference being nearly everyone can now gain access to this asset class, and the options for doing so are much more plentiful.

Real estate offers a path to build equity and income outside of the Wall Street casino, in ways that take advantages of tax incentives not available to stock and bond holders. It can also offer purchasing power protection during periods of currency devaluation.

But, education and timing are very important in this space. How can the novice investor get involved while reducing their risk of making costly mistakes? Real estate markets can enter price bubble territory (as many are in now) -- how can you determine when it's safe or too risky to invest?

We've invited Robert Helms and Russ Gray, better known as The Real Estate Guys, onto the podcast this week to provide a "Real Estate Investing 101" overview for the Peak Prosperity audience. In it, they cover the different ways to invest, how to identify which approach is best for you given your personal goals and risk appetite, and how to get started educating yourself towards becoming an active investor.

Despite the overvaluation of many real estate markets right now, we believe this sector has long term relevance and potential for most investors. So for those, like us, who are positioned defensively as we wait for the next major correction, now is the time to educate yourself. When the correction occurs, you want to be ready to deploy your dry powder swiftly and intelligently into this asset class once good values appear.

Expect more podcasts on this topic to come throughout the year, focused on specific steps in the real estate investment process (valuation, financing, property management, captial improvements, tax consideratons, etc). The more informed we all are, the more options we'll all have.


To learn more about or purchase "The Future of Money & Wealth" DVD set mentioned this podcast, click here.

Click the play button below to listen to Chris' interview with The Real Estate Guys (47m:15s).


Chris Martenson: Welcome everybody to this Peak Prosperity podcast. I am your host, Chris Martenson and it is Monday, July 2nd, 2018. Wow. I can't believe how much time has passed. Now in 2017, Adam and I were invited to the faculty of an event called the Summit at Sea, put on by Robert Helms and Russell Gray, the host of the Real Estate Radio guys, a real estate talk investing program for investors. It has been running since 1997. Now look, neither Adam or I knew what to expect but we were intrigued by the other faculty, whom we either already knew personally or knew of and really wanted to meet and get to know. Further, people who knew about the prior year summits raved about the experience.

Well, we were both blown away at the quality of the staff, the commitment to teaching and learning, the amazing tribe of people that were drawn to this all combined to make a truly remarkable experience. And one of my key take always, I have many. But one of my biggest ones that I wanted to share with you listeners today is the importance of real estate in one's portfolio both as a means of building and maintaining wealth. And I can't think of anybody better to take us through the basics, the ABCs of real estate investing than Robert Homes and Russell Gray, the real estate radio guys. Welcome gentleman.

Robert: Hey, Chris. Always great to talk to you my friend.

Russell: Hey, Chris.

Chris Martenson: Listen, I definitely wanted to get some of the amazing events that happened at this year's Summit at Sea on tape here with our listeners. And we will towards the back of the podcast along with a special offer for our listeners but first let's talk about real estate. Are you guys up for that?

Robert: I think we're usually ready to talk about real estate with very little notice. Sure.

Chris Martenson: Great. All right. Many of my listeners are struggling with where to invest these days. And truthfully, real estate may be expensive in certain or many locales right now but it is all true that the more experience one has with real estate the better. Robert, let's start at the beginning with Real Estate 101. You've been at it for a long time for somebody just starting out. What are some of the basic reasons that you got in to real estate investing and stayed with it?

Robert: Great question. You know, real estate is arguably different than any other type of investment; and here is what I mean by that -- you never have to invest in a share of stock or a barrel of oil or an ounce of gold. Those are 100% discretionary investments. But real estate is not like that. We cannot sit out the real estate market. We must interact in a financial way with real estate. Doesn't mean we have to buy any of it but we are going to rent a house, we are going to lease office space, we are going to go on vacation. And because of that it doesn't operate like other asset classes. We think it's the best investment on earth because it is the earth and they weren't making any more of it, as we like to say. But not all real estate is the same and it's not just about the real estate, it's about the person that invests in tit. Lots of different ways to invest in real estate. Lots of types of property.

But rather than make it overwhelming, we have kind of a framework we use and it's pretty simple, it goes like this -- at the top we picture what we call our personal investment philosophy. That is different for every person, and it is the thing that has them gravitating towards wanting to invest or own or hold property of some kind. And more probably time we have today but we have a pretty cool resource tool. Happy to share with your listeners about that before we are done. Kind of an exercise to go through to figure out your personal investment philosophy. Once you figure out who you are as an investor, the next thing is to find a real estate market or markets, property types, demographics that you want to serve that will fulfill the personal investment philosophy of yours. For example, fi your hands on real estate investing and you are looking for opportunities to buy stuff and add value and sell it at a profit. If your hands off real estate investment, then you are looking to come alongside a professional investor that can help you whether that is a syndication or a real estate investment trust or just a private placement or just a partnership.

Once you figure out a market or markets next thing is to find a team that can help. Real estate investing in a team sport and there's lots of folks on your team: your broker, your loan professional, your tax person, your attorney, your rehab guy; a lot of people you'll need on your team some of which are well versed at that, but if you're not those folks are going to be important. And once you've identified your team now the final piece is the property. And I would argue that the property is the least important and most interchangeable part of the whole thing.

Yeah, what most people do is they start with the property. They find a "good deal" and they buy a property. And if it's not in alignment with who they are and the kind of investor they are then there is a recipe for disaster. And you hear people say well, I tried real estate but it didn’t work. Real estate works if you do.

Russell: Hey, Chris, can I jump in on that? I have a bit to say.

Chris Martenson: Absolutely.

Russell: I think one of the things that people sometimes don’t understand is that real estate doesn't have a specific financial performance. It really is versatile. You can do a lot of different things with a real estate portfolio and so I came out of the mortgage business, I have a background in insurance and financial services. So I spent some time studying informally financial planning. And there are some really good things that come out of the paper asset world in terms of the way you structure a portfolio to handle good times and bad times. And what a lot of people don't understand is that pretty much anything you can do with a paper asset portfolio in terms of asset allocation and equity growth and cash flow generation and tax strategies and asset protection and estate planning, you can do with real estate. It takes a little bit of learning to do it because it's not as commonplace to be able to know how to do it. But it's worth the effort because you are building the portfolio that is really time tested.

Real estate is time proven. You know, you go back 50 years ago, 100 years ago, 1000 years ago the wealthiest people own and control real estate. They might make their wealth someplace else but lots of wealth gets stored for protective purposes in real estate. And so, and the thing is the units are so small that literally anybody can do it. Whether you start with a house somewhere or a piece of land or if you build a big portfolio with 10s of thousands of apartment buildings or hotels or whatever you want to put in it. Everything that you do or everything that you could do in terms of your financial planning you could do with real estate.

Chris Martenson: Well, that's interesting. I certainly had to get up to curve after my first Summit at Sea and had to learn some terms. Robert, you threw one out there I just want to make sure everybody is following along. You used a term, syndication. What does that mean?

Robert: Yeah, great question. Syndication is the ability to put people together to do a bigger deal. I might not have enough money to personally invest in a piece of property that I like but maybe if I got three or four of my buddies together and we each put in 50 or $100,000, now we can do it. That is a simple syndication. But may of the bigger real estate transactions today, things like Russ mentioned, hotels, big commercial office buildings are almost always done as a syndication, a group of investors that come together.

Chris Martenson: Now, there's some legal things you need to worry about there. Again, it's all learnable. For many of us we are busy doing whatever we do in life to live, thrive and survive and the idea of putting real estate in a portfolio is interesting. But we don't have the time to go to the seminars, to read the books, to go out and roll up our sleeves and get out the paint brushes and do it ourselves. The great part is in real estate you don't have to do that. Syndication is a vehicle where you can passively invest with a proven promoter, a proven operator of real estate that will let you come along side and benefit from the financial performance and sometimes even the tax benefits that real estate offers. So, one of the fundamental questions for people to ask themselves if they are invested in real estate is do I want to do it myself? Do I want to find a property and qualify for the loan and get the tenants and all that, which is great. We do a ton of that. Or am I more of a passive investor that would like to hand the football to someone who can make the play.

Russell: Chris, if you really think of it it's really just like a mutual fund except it's not publicly traded. A mutual fund is just a bunch of people pooling their money together, giving it to a fund manager who makes investment decisions to a financial results -- the income, the quiet growth, principal, tax advantages whatever it is. Again, going back to this notion that anything you can do within the paper asset world you can do with real estate, that's really all the syndication is.

And so it's very convenient for the passive investor, people who are just putting the money in, and the fund manager if you build a sponsor. The syndicator is the person responsible for finding the deal, vetting the deal, running the deal, just like when you turn your money over to a fund manager.

Chris Martenson: Great. Thank you so much for those explanations because I have to admit, I was very unsophisticated about real estate investing. I knew about the house I personally owned. I guess I sort of extrapolated well, I guess I would own two and rent one out. Maybe that is a logical first step somebody could conceive of, given their own personal experience.

But what I saw at the Summit at Sea was this whole universe of niches of real estate, commercial versus residential is two big buckets. And then within residential there might be even something more niche like residential assisted living and we had Gene Garino on in a prior podcast. People remember that -- we talked about how a house can be converted to create a place for people who are coming in for a little bit extra assistance and living towards end of life but not full assisted living can have a place for that. There are commercial syndicated deals. There are multifamily; there is the whole universe of things that people can invest in.

And of course, I think my listeners are intrigued by this because we talk about primary wealth and secondary wealth, tertiary wealth, real estate depending on the flavor you get is either primary or secondary. Primary might be farm land itself. Secondary would be the means of production commercial real estate or the rentable property. Things like that. I really like this as a model, and the more I have looked at it the more I have been slapping my forehead and saying duh, I should have looked at this earlier. Where were my parents, right? Because it really has some extraordinary ways that real estate, as I mentioned in the intro, to both build and maintain wealth.

One of the areas I was very unsophisticated or unknowledgeable about was the tax advantages of that. Robert, can you speak to that? What the tax advantages are of being a real estate investor?

Robert: Yeah, obviously we're not tax professional, but one of the things we've learned over the years is that if you study a nation's tax code you can tell where they would like to see you put your investment dollars. And it's pretty easy if you look at the US tax code in a lot of places around the world that there are tax benefits given to folks who will provide clean, safe affordable housing and office space and farm land to other folks. And the idea is that we have a multitude of benefits that we can derive from real estate. There is the income. There is the long term growth over time, there is amortization of the loan, which puts more of the real estate on your side of the balance sheet.

But the tax benefits can be immense. Sometimes, people actually choose the specific vehicle in real estate based on the tax result they are trying to figure out in life. If they have a lot of earned income and they want to offset that, there is ways to do that with real estate. There is credits, there is ways to take a property you own and then push all of the gain and equity forward and not pay tax today. That is, we will call it a tax deferred exchange, where you are exchanging for another property.

So there is a lot of great tools and you really start -- I have started a personal investment philosophy is, why am I interested in real estate investing? Just for the cash flow? Is it because I want to acquire a bigger balance sheet over time, or is it for tax breaks? And so based on what your answers are to those questions you are going to select real estate types and markets that are going to give you the best advantage you can.

Robert: So Chris, one of the greatest tax breaks in real estate is depreciation and the way depreciation works is you take the value of the structure, not the dirt because the dirt is already dirt but the building is deemed by the IRS to be deteriorating over time. Even in the real world it is going up in value, typically. For tax purposes it is going down in value and you are suffering a "loss." But it's a phantom loss because you are not really putting any money out and you are able to take that write off against money you have coming in, and so that creates a huge tax benefit for you.

And then inside of depreciation which is typically on the building, you know, you are going to do it over maybe 27.5 up to almost 40 years, depending on the type of property it is you have accelerated depreciation for certain components like the personal property or the fixtures. And so there are schedules you can work with on your CPA to do that. But it is a way to pull in a lot of capital by pulling tax breaks into the current and not having to pay current income tax against the money you are bringing in today. So, it's kind of complicated, but it's not super complicated. Any qualified CPA can help you understand how depreciation is one of the major tax breaks in real estate.

Chris Martenson: And I loved -- thank you for that. And to illustrate it, let's say the building was 275,000 at 27.5 years of depreciation, schedule $10,000 of write off would come across that. So if I had 10,000 in income on this building it would basically zero out with the depreciation. We would say oh, nothing happened here; my K1 or whatever looks like nothing happened here. Even though what I experienced was 10,000 in cash flow.

It was interesting in the last presidential debate cycle between Hillary and Trump, not a political statement here anybody, but Hillary was talking about how much she paid in taxes and was a little offended that Trump paid zero, but in fact, Trump is a real estate investor. And whether we think it is a good thing or a bad thing is a different discussion. What's true is what Robert, what you said is the nation has written its tax code to get certain behaviors out of people and we want houses, we want housing, we want real estate, we want productive farmland. And so the tax code benefits that. it also benefits oil wells and you name it. All sorts of things whether that is wright or wrong is a different discussion, but there is tax code and that is what I came away, getting a slightly better appreciation for is that hey, this is how the system is run and it wants me to do certain things. Maybe it would just be easier if I did those things. Is that a fair way to look at it?

Robert: I think that's exactly how you look at it. Now we like to say we don't want to let the tax tail wag the investment dog. We don't invest in real estate just for tax benefits. But based on what the rest of our economic life looks like we can certainly structure our real estate investments so that they have the most advantage for us.

Chris Martenson: Fantastic. Well, I think that's a great way of putting it. And Russell, you and Robert, you co-wrote a book entitled Equity Happens, which you were gracious enough to give me a copy that has now been read by my son, my eldest daughter, we are in conversation. So thank you for that. It's a fantastic book covering the basics and when more copies become available I encourage people listening if you're interested to get one. Russ, first when would more copies be available? Second, provocative title. What do you mean by “equity happens?”

Russell: It's really interesting. So I am going to defer the first question because we don’t' know. It's in the process of being re-edited. You know, the book is 14 years old. They are timeless truths and timeless financial principals. But the concept of “equity happens” was really written in the basis that we have a failing currency -- the US dollar has 115 year trend line that is down, which means that anything that is denominated in that currency over time is going to go up in dollar value.

Now that doesn't mean that it goes up in real world value, but it does mean that it holds its value. So, when you can use real estate to fix the debt and then you gain the benefit of the appreciation of the price because of the failing dollar, even though you still may own a three bedroom, two bath house that you bought for $50,000 with a $40,000 loan, when that property is worth 4 or $500,000 because of inflation you still only have a $30 or $40,000 loan, depending on how far you paid it down. And so that spread is equity.

And if you do nothing typically, but just own real estate and take care of it and make your payments you are going to experience equity. We call that passive equity. If you want to be a little bit more aggressive you can find a dilapidated house, fix it up and force the equity. And then that way you have some degree of control over it. It isn't necessarily just speculating on the direction of the market.

And then there is other forms, amortized equity, Robert eluded to earlier. We don’t think of the profit we get from paying down a loan or as profit to us because typically we are making our home payments with our own income. So, we are just putting money from our cash flow from our paycheck into paying down our loan. But when that money is coming in from the tenant and you are paying down the loan with the tenant's money, that is profit to you. And that's usually worth anywhere from 2 to 3 to 4% a year. When you add up all of the different things going on inside a piece of real estate, it's very easy to get a 20% gain on your money invested in a very, very conservative structure. Most of the time, people who do investing think, you know, I have got to have very risky investments. If I want to be safe I got to be down in the 5 or 6% range. But that's not true with real estate.

And so, the equity component of real estate whether it is from the pay down of the loan or whether it's from the long-term appreciation of inflation, is a great way to build wealth when you combine it with fixing debt. So real estate investors get rich with debt. And the spread between the debt and the value is equity, and that's really where the big money gets made in real estate.

Chris Martenson: Get rich with debt. Now this is a strange idea and I think a lot of people from the consumer side would understand that debt is a bad thing. If have student debt, credit card debt, auto debt. You know these things weigh me down. So let's talk about how debt works for the real estate investors.

I think it's a super important concept and it's one that took me a little while to begin to get my head around. Robert, let's start with you -- how does debt work for you in this example?

Robert: Yeah, well the first thing is you have to break the paradigm of debt being either good or bad. There is good debt and there is bad debt. That would be high interest credit card debt where you buy things that you are consuming and that you don't really need and then you pay for them for years. That's bad debt. Good debt is when you can control an asset like a piece of real estate and create long term either cash flow or equity growth or tax benefit or all of the above.

And so the concept is pretty simple -- because the banks and the private lenders and all kinds of folks that have money to lend want security they recognize real estate and property as some of the best security there is. So they are happy to make a loan against property. If I bought $100,000 property and I have $100,000 I could buy it for cash, and there might be some reasons to do that. But if I use leverage, if I use debt imagine that I could put $120,000 down and get an $80,000 loan. Now here is the cool part -- the loan might be at 5% but if the real estate value and the increase Russ talked about to arbitrage 15, 18, 20% then I get to make the difference. I get to arbitrage the spread if you will.

And here is why -- the bank wants a predictable stream of income for their $80,000. They don’t' get any of the upside. Now in fair disclosure, they also don’t' take any of the downside risk unless something catastrophic happens. But, what we want as real estate investors is we want to control the asset, the appreciation, the increased rent over time, any improvements you make on the property to increase the value and/or the cash flow and all of that goes to the benefit of the $20,000 that is available -- the money that we put down up front. So debt lets us control more. If I had that other $100,000 to invest I could buy $100,000 property or I could buy five $100,000 properties by putting 20% down down and getting a loan for the rest. So I am able to control five times as much real estate and I control all the upside f that real estate by bringing a partner which is the financial institution.

I know Russell will have more to say about it because he is in the lending business for a long time.

Russell: It's the reason I got into the lending business because I really understand it in that arbitrage concept that Robert mentioned is probably the key. If you have a property that is going to generate cash flow at 10% and you can borrow money at 5% to purchase it, how much 5% money do you want to borrow? You want to borrow all you can and own as many of those properties as you possibly can because you are making a profit on the debt and that is just on the cash flow. Then you add the tax breaks and the amortization and the long term appreciation.

So, coming back to Robert's example, if you have a property in the marketplace where it is appreciating 5%, so a $100,000 property is growing equity at the rate of $5,000 a year. If you own one property your equity growth each year is $5,000 or 5%. But if you take that same $100,000 and you buy five properties and now you have a top line portfolio of $500,000 in the very same market delivering the very same 5%, you have a $25,000 gain on your $100,000 investment and that's a 25% equity growth rate. And then you add to that the cash flow and the amortization and now you are talking about having a portfolio that might be growing at 30 plus, 40% a year. And this is what people don’t understand about real estate. When people make the comparison to the stock market over long periods of time versus real estate over a long period of time, they are just saying if you had a house that is 100% paid for -- a stock portfolio that is 100% paid for. Over time the stock market is maybe one point or one and a half points better, whatever the number is.

But when you add leveraged debt into that real estate portfolio and tax and amortization stocks can't touch real estate. I have debated this twice with a whole panel of people. I did it once at Freedom Fest in 2013 and we did it on our investor Summit at Sea six months prior to that. Both times I won the debate. And I didn't win the debate because I'm smart. I won the debate because I was representing the winning investment. And it was just math and it was so easy when someone understood the concept, how easy it was to do. The problem is, there is no financial education out there. We get our financial education from the paper asset investing world who basically are sales people -- who are there to sell us stocks, bonds, real estate, teaches us to put our money in the banks and put us in high tax.

So our financial education system, which really doesn't exist, is a marketing system that feeds the government, feeds Wall Street and feeds the banks. If you want to get out of that system and stop feeding those institutions to keep more of your own money, real estate is the ideal investment vehicle to do it with. And it is easy to understand. You don't have to be a rocket scientist with a PhD to do real estate.

Chris Martenson: Very well said and this gets back to something I believe Robert said. I just want to make sure we tease this concept out because that holy trio of marketing arms of keeping us invested in Wall Street and all of that and the banking system -- they went out of their way to tell us in the last housing boom and bust in 2006 to 2008 to talk to us about the people who got burned flipping or the hairdresser who bought 19 homes in Las Vegas and got burned -- because these people were al hoping to make money because housing was going to go up in price. They got badly burned by that. What you are talking about is something completely different, which is around controlling the variables as best you can, which includes the amount of leverage you have got, the cash flows that these properties have. The other non cash benefits; this takes some context.

And that's why it begins with education, right? So that was really the subject I wanted to bring home is not to just alert people there is this wonderful thing called real estate out there but that what I have learned is there are ways to go about beginning to get involved in the complexity of it, such as it is, and to begin to get grounded in what is available out there. Because there are ways to be exceedingly prudent and careful and people have been doing this for a long time and there is a way to do it and there is a method. But to your point Russ, nobody goes out of their way in the banking Wall Street government system to educate us about that. So that's what we are trying to do were today is open people's eyes to that.

And so, Robert, if somebody wanted to begin you know, just start really peeling this back. What is the best way for them to get started, do you think?

Robert: Yes, I think obviously, the first thing to do is to understand. So you want to get educated about real estate investing. And there are a lot of great ways to do that. It doesn't have to go to real estate broker or salesperson who wants to sell you a house or a property -- there is great books and audio courses and podcasts. We have been doing our podcast for 20 years now. It was a radio show originally and then the podcast now is heard in 190 countries. We are still on the radio and there are lots of great resources to be able to start to get your mind around it.

I would say this though -- real estate is not a perfect market and that's actually a good thing. If I wanted to go today and buy a share of a publicly traded stock, there is nothing I can do that is going to influence the price. The price is the price because we have a very efficient stock market. Real estate is not like that. Real estate, we can actually benefit from things like insider trading. We don’t' call it that but when we learn something about a market or a particular property or a developer or a street corner where something is happening, we can decide to exploit that in a positive way and use that inside information. Can't do that in the stock market.

When I find a seller that really wants out, I can negotiate a great deal for them and for me that I couldn't do in other types of markets. So the thing about real estate is that you don’t want to be overwhelmed by it. It can be as simple as buying the house next door. My mentor Jim Rhone said that kids should have a bike to ride and a bike to rent. And it's the same thing with real estate. If all you did was buy one more home and rent it out that's a great start. But there are so many other ways that what we would encourage people to do is we say get in touch with your inner investor. Figure out what it is that really pulls at you. What's interesting to you?

If it's just a financial performance -- okay, real estate can do that for you. If it's just a tax benefit. Okay. There is a way to get involved with real estate that speaks to you whether it is providing clean, affordable housing for folks that can't own their own property. Whether it is getting them involved in agriculture and seeing why the calorie crunch is coming and how we can benefit from that. Whether it is figuring out how I can do something with real estate that feeds my passion. You start there and you start to get your mind around these concepts. And the great news is there is no hurry. Twenty years from now, what will be 20 years from now whether you do anything or not -- so you don't want to just wait but you don't have to jump in tomorrow. We meet people that they find our podcast and they are like I invested in real estate and now I want to go completely all in.

Well, we would say hold on a minute. Let's do a little research. Let's do a little study. Let's figure it out, and then take meaningful steps, right? You can get from where you are now to where you want to be if you will just devote some time to learning about real estate, getting around people that are doing it. We love to get around people that are doing real estate because it expands our mind. You know it as you have been on the summit, there are so many people that come from all over the world who do drastically different things. It all falls under the matter of real estate, but it's different. So you have to figure out what is going to appeal to you and what is kind of a logical next step.

Chris Martenson: Yeah, and I want to talk about this timing bit a little bit because putting on both the Summit at Sea and the conference that happened on land the two days prior, The Future of Money and Wealth, a really wide diverse set of opinions. So Russ, question to you -- when I came away from that fantastic panel of people you put together and all of the faculty and talking with the, honestly, most of the people in the audience you could put them on stage and be you know, flip the whole thing around. Would have been great. Tons of experience in the room.

And really, I came away with a sense of a lot of people have a sense that things might be a little bit expensive. I know you just said, Robert, that a lot of asymmetry in the real estate market certainly we can see maybe some properties and some areas might be overpriced all that. But Russ, for you, I really came away with this idea that a lot of people shared my concern -- maybe the concern that my tribe of people listening to this share that this is a really difficult time to figure out what to do with your money to be safe, given what the federal reserve and the other central banks have done, Wall Street, all of that. So when you talk about that sense of timing -- where do you see us in this particular story and how would you counsel somebody to begin to approach this face of real estate? Is it time to just be learning? Is it time to be learning and investing or does that answer to that really matter or is it too vague to answer?

Russell: It's not too vague to answer at all. It's a great question. And it is kind of one of my pet peeves is that because people think in terms of asset classes they think in terms of commodities. And I don't mean like commodities like oil and metals and pork bellies and things like that. This notion that something in an investment world is universal. It's always the same. In real estate it's not that as Robert said, at the top. So you can always find a good deal. That is even true in the stock market. You can say oh the stock market is overvalued. There is always going to be companies that aren't. If you are really good and you know how to find value, you have a chance. But the problem with the stock market in my opinion is most people do not know how to really underwrite a company. They are not Warren Buffett. They can't look at a company's financials and really understand if this company is fairly valued or not. You have to be really sophisticated to buy stocks as a value investor in a hot market.

A lot less so with real estate. The idea is that you can go into a neighborhood and even in the very same neighborhood you can find two houses that look exactly the same but because they have a different ownership structure, because they are in different condition. -- maybe one is facing one side of the street, one school district and a different school district -- they are very different properties and you can negotiate the deal. You don't get really to negotiate the deal when you go to buy stock, almost anything else. So again, because of the nature of real estate you can always find a good deal. You have to work harder in a hot market, absolutely. The advantage right now is that interest rates are still fairly low even though they are rising.

And so if the interest rates are going to continue to rise then the quicker you lock in that debt we talked about earlier actually the better off you are. The other thing people are afraid of is the asset value. There is no margin calls in real estate. If I go buy today a property with $100,000 and I put $20,000 down and then it goes down to $50,000. Nobody is going to call the loan even though I have an $80,.000 loan. As long as the rents come in and I can make that payment that you go back historically and look at the asset values in real estate. Even in the financial crisis they sell maybe 40, 50% at the worst -- in the worst markets at the worst time of the crisis. But the rents did all that.

So real estate and controlling real estate over the long term is about cash flow. And so if you fix the cost of your debt, if you have conservative cash flows in rents, then even if they property were to drop there is no margin involved. And think about it -- even if the price never came back, what do you think are the odds of that? If it never came back the price dropped from 100,000 down to 50 and never, ever came back, how much of your money do you have in? 20. And then the tenants are going to pay of the other 30. At the end of that rainbow you are going to have a house that is paid for. And no matter what the pricing structure is like in the world a home that is paid for is a home that is paid for its value. Doesn't matter if it's worth a million dollars or whether it is $20, a home that is paid for by its utility to human beings.

I go back to what is aid at the top of the show we have an exchange of value providing housing to someone and they will typically spend 25, 30% of their income to live in your home and so that was worth something doesn't matter what you denominate it in. This is by inflation and deflation really don't hedge the benefit from inflation, hedge against deflation.

Chris Martenson: Gentleman, I would really like to turn now both to the Summit at Sea itself that Adam and I attended this past year, as well as the onshore production the future of money and wealth that we attended that met fantastic people there. Some of the people who have been following me for years managed to find me there and I got to meet a bunch of amazing people. I had from the total experience, I had three obvious standouts, which really work great for me.

One, the Summit at Sea was this brilliant presentation by Simon Black, just really caught me and made me think in new ways just as one stand out. There were many. Second was being exposed to the idea of a self directed 401k, which I am going to be breaking down and allowing other people who follow me to learn more about that because that really opened my eyes. And the third was real estate, obviously, is an important asset class to be exposed to. So with that, Robert, now that the dust has settled and you put on this most extraordinary, absolutely extraordinary event with Russell. It's just an amazing experience both for the content, but I think even more importantly for the camaraderie is you look back on it. What really stood out for you this year?

Robert: Yeah, you know, this was our 16th year of doing our investor summit. It is the highest level of event we do. It brings people from all over the world. We spend a couple of days in a hotel then we get on a cruise ship for a week and really have a chance to break bread and spend time and such; learn from the front of the room in the conversations. And as you mentioned, could have put the audience on stage and that's what we did for a full week after the days on land. And that was really the thing was to watch people take a new idea, kind of process it, think about it and then at dinner discuss it around their table. And that just really solidifies whether you agree with the speaker or not -- whether it is something you are familiar with or not when you get around other people that are in the same boat, literally, digesting the information and maybe come from a different background or a different country or different currency that is really the magic of it.

And many of these speakers are amazing on their own, but getting them together are and when you can have a panel where these folks discuss between each other that is really the exciting thing for us. We have always been thrilled to get this group of people together and it just gets better and better and when you and Adam came the first year with us, two years ago, it was a great way to expose our audience to your message, which, of course, is not a message that a lot of people are paying attention to. And we wanted to fix that in our world.

And then, when you came back this year it was you know, now you got friends and they recognize it and you guys were able to bring more value, but the interaction -- the panels between the different speakers, to me that is the most interesting and unique thing of the summit.

Russell: Hey, Chris, I want to jump in with one thing. I got something that I think is really relevant that you will appreciate. And that's our young adult program. For the last couple of years now we have created a program where we give a big discount, basically just a little bit below cost. We have a scholarship program for young adults ages 18 to 25. And Robert and I have become convinced that it is going to be really, really important is this millennial generation matures and they vote and they have influence on the type of world we are going to live in that they have a good economic education. And we want to show them that investing is fun. It doesn't have to be boring. You were there. You know we have a really, really good time. The conversations are intellectual but they are also stimulating and fun. And of course it is very social. You talk all the time about social capital being one of the eight forms of capital that help people prepare to go through difficult times. And that is a big part of what we are doing.

How important is it to get a young people involved in that? Integrating the boomer generation, which we are, with the millennial generation, is a big part of what we are doing on the summit. And this last year we had a tremendous group of young people, about 35 of them that were all under 30 years old. And they kind of formed their own little tribe and they are out there staying connected to each other and they are learning and studying together. Some of them are actually investing together. So that is one thing. And then the only other thing I would say is that for someone who is sitting out there who maybe this is their first entree and they are beginning to consider real estate and really want to understand it you asked earlier about getting educated.

You can learn a little bit reading books, listening to podcasts and all that kind of stuff. Just like you would if you wanted to learn a foreign language. You could learn by doing that. But if you really want to learn that language and get immersed in the culture the best thing you can do is take a road trip. If you wanted to learn Spanish let's say and you could go live in Mexico for a week or two you are going to go pick it up really quick when you are immersed in the environment around a bunch of people that speak the language in the context of the culture.

Well, that's what the investor Summit at Sea is. You come into this environment and you spend 10 days with some of the smartest minds in economics and investing and all the different niches that we have and then you are having real world conversations with real world investors processing high level stuff. No question is too stupid to ask. You get a chance to ask. But you learn not only what people think but you learn their attitudes towards how they approach risk, how they approach investing, what they are trying to accomplish.

Sometimes, you don't even know what you don't know until you are in the environment. If you think about how you learn to speak your native language you learned it not by reading a book -- you learned it by being in an environment around people who actually spoke it in context. If you want to learn real estate investing fast, best thing you can do is spend 10 days with us on investor Summit at Sea.

Chris Martenson: Well absolutely, and I can speak first hand to the extraordinary value that comes out of that -- the magic of it. I don't know. Is it osmosis? I just happen to get the right random sets of conversations two years in a row that clicked things for me. I don’t quite know how to put my finger on it. Yet, this isn't for everybody, obviously, because it takes a week or 10 days of our time and maybe it is too expensive for some folks -- certainly sensitive to that. Or people think, like I did, maybe I'm not a real estate person, which is a wrong though. Which you guys corrected for me.

So as I looked at that though you have done something brand new this year, which is that, you actually recorded the whole thing. I saw the cameras. I was there. Tell us about that and what you have got, what you are now going to make available for people -- I think it is a fantastic thing you have done here.

Robert: Well, we had so many amazing people Peter Schiff, Robert Kim Kiasaki, Brian London, of course, you and Adam were there, G. Edward Griffin, Simon Black -- on and on and on that we said you know, this year for the first time we are going to create a stand alone event which we call the future of money and wealth. First two days of the Summit, that was our theme the whole Summit, but to your point not everybody can mange the time or the expense to get on the ship for a week. So we opened it up and we had a lot more people that came to the first couple of days with the panels and great presentations like Simon's that you mentioned and that thing we recorded the whole thing. And we are happy to say that it is finally ready to go, and Russ is going to tell you all about it.

Robert: Yes, it is 20 presentations and panels, and we cover all of the basic topics. We talked about what is money. We talked about what is going on with the dollar. Dr. Doug Duncan, from Fannie Mae talked about where he thinks the economy is at, and when he thinks the next recession is coming. You mentioned Simon Black's presentation, which this was an absolute mind blower and it goes on and on and on.

Anyways, it's 20 videos, presentations, panels. We have it on an online platform so you can watch it anywhere, anytime. Just log in and watch it. I think Chris, when we get done with this, maybe what we can do is just give your listeners the opportunity -- we will send them an email and give them a list of how we can find the Real Estate Guys podcast, how they can find out more about the investor summit at sea, other resources that we have, and of course how they can get their hands on the Future of Money and Wealth video series.

Chris Martenson: Well, fantastic. Well, let's do that because I definitely think some people are going to be very interested in that, and they should be. It was fantastic information and I am really glad you made it available. I know what a big piece of work that is to just capture the video; second -- clip through it and figure out how to present it; and then edit it so that you know the audio and the slides sort of merge and all that. I am sure you guys have done just an absolute bank up job with that, of course.

So let's talk about how people can do that and follow both of you more closely, and explore the idea of maybe coming to Summit at Sea next year, and maybe get their hands on a copy of the 2018 experience we were just talking about.

Robert: Yeah, we will make it real easy -- all they need to do is send an email to [email protected] -- [email protected]. We will send you an email with links to resources and everything you want to know about us, and you can just take it from there.

And since you have folks Chris, in your audience that are maybe just going down this road and exploring real estate, we talked about kind of the four ways we look at how you get involved. The one people have a hard time figuring out is this personal investment philosophy. We have an audio workshop that spends about 30 minutes going over what personal investment philosophy is. It has got a one page PDF that you kind of go along with and we will make that available no costs to your listeners, as well so they can kind of figure out who they are as potential real estate investors.

Chris Martenson: Fantastic, and would they just send an email at the same email we just heard to get access to that?

Robert: Yes. We will have all of that in that email. [email protected]. We love to have the synergy between you guys and us. It is a great way for both of our organizations to be right there in mind: [email protected].

Chris Martenson: If that isn't the crossover event of the blog century. Great meeting you guys and I think our tribes do have a lot in common because we care about -- we're curious. My people and your people we are curious. We like to learn. We always know that we don’t know everything and we keep open minds and it has been fantastic meeting you. Just as importantly, the extraordinary people that you have managed to assemble around you because of the great work that you do; and your willingness and a passion for helping people, it just comes through and it has absolutely been my pleasure to meet both of you guys in person and to get to know you better over time.

Robert: Well, thank you, sir. And we absolutely appreciate the contribution you and Adam have made to our events. And it has been great getting to know you guys. And your message is so critical and so important for us to be able to bring it to your audience has been amazing, as well.

Russell: Absolutely. Absolutely. It's fun being part of a tribe of people that can see that even though we have an economy that seems like it is hitting on at least seven or eight cylinders the underlying financial system still has some foundational cracks and you know, if you are looking at the speedometer about how fast you are going down the road, that's interesting, but if you're not checking oil gage and your temperature light you might have an engine blow up on you when you think everything is going along fine. It happened at 2007; everything looked good right up until it wasn't. There is reasons to believe, well, we might have a breakdown here in the near future at some point, and better to be prepared and not have a crisis then have a crisis and not be prepared. That is what we are all about.

It's fun working with you and Adam. You guys do a great job and we really appreciate you giving us the chance to get to know your audience a little bit.

Chris Martenson: Thank you for that Russ and Robert. Russ, I couldn’t' have said any of that better myself. I just want to thank you both for this very wonderful podcast and for everybody listening we have been talking -- we have Robert Helms and Russell Gray: the Real Estate Radio Guys. Check them out in their podcast. Real Estate Radio Guys, you will find it no problem and with that, I hope that anybody listening to this please take this away -- real estate is a fantastic area to learn about. It's a wonderful investment opportunity you have to educate yourself and you have to start with -- as Robert told us you start with knowing yourself as an investor. You assemble your team then you find the deals and if you do it in that order you will be successful or at least will be putting the odds more heavily in your favor. With that, Robert and Russ, thank you so much for your time today. I really appreciate it.

Robert: Hey, thanks, Chris.

Russell: Thanks, Chris.

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macro2682's picture
Status: Platinum Member (Offline)
Joined: Sep 3 2009
Posts: 574

Some concerns about real estate (and a question at the end):


1.) Is the price of real estate indicative of value? Or is it just the result of low interest rates?  RE prices move inversely to rates (just like bonds... since most people aren’t actually buying RE [the bank is], they are just issuing bonds).  How much would RE prices be affected by a credit contraction?  How much would my house be worth if prospective buyers had to put 50% down?

2.) Isnt this a crowded trade?  Boomers loved real estate, and they still own a lot of it. As they croak over the next 30 years (forgive my insensitive style), and leave this stuff to milleneals, what will they do with it?  Sell perhaps? 

3.) Everyone needs a house, but does everyone need a big house?  SqFt per occupant is incredibly high in the USA... Shouldn’t we expect that number to come down (almost like P/Es for the stock market)?

4.) Property taxes... Does anyone REALLY own their house?? 

5.) The sharing economy... AirBnb and other sites have added lots of rental inventory, compressing prices.  Until now this is more of a short-term/vacation rental phenomenon that’s been eating the hotel chains’ lunch (when regulations/lobbyists allow).  This calls back to points 2 and 3.  Is this a crowded trade?  Is usage and efficiency compressing prices?  Is buying a rental property today similar to buying a taxi medallion 5 years ago?

I’m not anti-real estate.  But I’m a little bit worried about it’s correlation to Fixed Income.  Interest rates are at historic lows.  No question that there are pockets of value (international RE, medical office, tax niches like bond financed property, assisted living, etc...), but there are also some BIG whammys out there (rates, retail glut created by Amazon, property taxes, etc).  

Finally, a question... You said that anything I can do with equities, I should be able to do with real estate...  How can I buy a protective put on my 80% levered condo in bankrupt Chicago?  Assuming that renting in Chicago and owning elsewhere isn’t an option (due to logistical and marriage-related hurdles)... I would love it if Nasdaq made me a Chicago ETF that I could buy out-of-the-money puts on to hedge my RE risk.


Phew... That was a long one; really got out of hand fast!


Thanks for listening.

robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1242

We have bought productive farm land, as a course they often include a farm house. Where reasonable the house is restored and rented,,,these are revenue streams till they aren’t! We have used an intermediary RE agent cuz both Angie and I are acute “I’s” on Meyers-Briggs. The farm land is also a revenue stream. We have sold land recently as commodities are in a slump for a while and I am tired of seeing pts. Draft horses,gardening, and grass finished ruminants are the order till we find a good “Miller” and “tanner”.


debu's picture
Status: Silver Member (Offline)
Joined: Aug 17 2009
Posts: 241
BAU Continuing as a Premise for Investing

Interesting interview.  Quite a compelling case made for investment in real estate in one form or another.  Certainly more sensible than bonds or shares at this point but I can't help but feel that for real estate as an investment to be successful, some approximation of BAU continuing indefinitely is necessary.

Perhaps I am too in thrall to the collapse narrative, but if one has high confidence that 1) both GFC II and an energy crunch are highly likely within the next two years, and 2) the result will be a more less permanent depression then most real estate investments strike me as pretty risky propositions, especially if leverage is involved.

Certainly commercial real estate would be. Residential real estate will lose value too I expect but could still provide an income stream so is perhaps atttactive from a diversification standpoint. Farmland/woodland will also likely fall in value but will be a source of secondary wealth so again probably worth considering.

So, while intrigued by the idea of investment in real estate I am not sure it will be a better bet than PMs.

And of course, I may have the collapse thing all wrong and we will have another 10 years of BAU, and another...that's the reality we seem to be living in at the moment, anyway.

Would be curious to know what others make of the anticipated risk/reward trade-off in investing in real estate at this point.


Uncletommy's picture
Status: Platinum Member (Offline)
Joined: May 3 2014
Posts: 666
Cognitive dissonance or dynamic disequillbrium?

It was interesting in the last presidential debate cycle between Hillary and Trump, not a political statement here anybody, but Hillary was talking about how much she paid in taxes and was a little offended that Trump paid zero, but in fact, Trump is a real estate investor. And whether we think it is a good thing or a bad thing is a different discussion. 

As this interview with the Real Estate Guys clearly demonstrates, the system is rigged in favor of a speculative mind set; others will be forced to pay for the right to access certain assets. By leveraging acquistions with fiat wealth, an expanding economy is a necessary ingredient for this to continue. Couple this with controlling the supply of the commodity and you have a win-win strategy.

The real question, IMHO, is, who is adding the "real" productive wealth in these situations? For farmers, they can live on depreciation of farm equipment, but will eventually be required to replace worn out equipment. Not so, with real estate in an expanding economy where prices can continue to rise beyond the real intrinsic productive value of the asset. Also required is a certain stewardship of assets that does not always play out amongst certain players; slum-landlords vs. dirt-farmers. 

The Real Estate Guys may have a great strategy, but eventually somebody "gotta" pay. Is it any wonder that public, private and student debt continues to escalate. Regional governments continue to finance the corporate welfare state (how's your pension holding up) as the attached article highlights:


Entrophy is alive and well and the readjustment will not come without a struggle. In the meantime:

"Whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them." Matthew 13:12

killerhertz's picture
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Joined: Nov 4 2014
Posts: 17
Millenial impact on residential market

macro2682 - right on!

The rising cost of living, energy crisis, and other societal changes will also radically change the real estate market in the coming decades. If you can navigate the real estate market in the mean time and have the capital it's probably a good gig per aforementioned tax incentives.

Speaking of taxes, after moving out of Northern Virginia (DC beltway) to a more rural exurb, I've discovered that a lot of nice tracts (tens of thousands of acres suitable for self sufficient commuter homesteads) are owned by trusts and/or are in "land use". These people pay little in the way of taxes since they have conservation easements or are used as pasture for the occassional ruminant. Really, it's a way for the wealthy to shelter cash and maintain privacy buffer around their estates :) It only echoes the point that the "old" wealth, regardless how they obtained their capital, use real estate as a means for fixed income and wealth preservation. I think the ship has largely sailed for my generation.

gbell12's picture
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Joined: Mar 28 2010
Posts: 3
Not a fan

Only a passing mention of high valuations due to the (still) very low interest rates globally.  Sure there can't be a margin call on your properties, but when prices fall, people shift towards buying instead of renting, and then you're shouldering the mortgage for X number of unleased properties.

People can and do go bankrupt leveraging RE.

Also, the reason the tax code treats it as a depreciating asset is because it is.  The only reason a house lasts as long as it does is because of all the inputs - materials, paint, energy, maintenance, repairs, pest control (if you're into that).

It's not like it's an out-of-favor asset class, so I'd really be careful with this one.

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 3279

As several folks have asked for clarification: to learn more about and/or purchase "The Future of Money & Wealth" DVD discussed at the end of this podcast, click here

richcabot's picture
Status: Silver Member (Offline)
Joined: Apr 5 2011
Posts: 233
Rents change

It was said that you shouldn't care if the house price goes down and never comes back up because your cash flow will pay off the loan and you'll end up with a house that is still worth more than the cash you put in.

This ignores the fundamental point that rents drive the cash flow.  If the economy tanks rents will go down so your cash flow won't balance anymore.  At that point you will have to be putting cash in each month to cover the mortgage.  If you don't the house is reposessed by the bank and you are out your investment.  Either way you stand to lose significant sums.

The issue now is that in most areas housing is overvalued.  If you invest in a rental now and the market crashes you'll wish you had waited and bought that house after the crash instead.

Investing in real estate is just like investing in anything else.  You can get hurt, you need to think through all the issues.

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