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BiggerNews April: How to Counter the Biggest Risk of 2022’s Real Estate Cycle w/Doug Lodmell

BiggerNews April: How to Counter the Biggest Risk of 2022’s Real Estate Cycle w/Doug Lodmell

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The way the housing market moves largely depends on the real estate cycle we’re currently in. We all saw this during the 2007 subprime mortgage crisis as overleveraged homeowners saw their properties foreclosed on and later sold to investors who had cash on hand. We’re currently experiencing dramatic demand coupled with low inventory, so are we at the end of the housing market cycle, ready for a recession to knock down this house of cards?

Whether we are or aren’t close to a housing bubble bursting, smart real estate investors are protecting their wealth regardless of what is to come. This is where today’s guest, Doug Lodmell, has gleaming insight. Doug and his team have worked for decades to protect the wealth of real estate investors. This is commonly known as asset protection but can be thought of as simple risk mitigation for the new real estate investor.

Doug has been through expansion, crashes, corrections, recoveries, and everything in between and has seen what a poor asset protection strategy can do to an investor’s portfolio. He drops some knowledge on today’s show around how real estate investors in 2022 can protect themselves from going through a repeat of 2008. His simple, yet undeniably valuable advice could save you not only money but years worth of work you’ve put into real estate investing.

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Listen to the Podcast Here

Read the Transcript Here

David Greene:
This is the BiggerPockets Podcast Show 592.

Doug Lodmell:
If you’re going to continue to keep high leverage because you want to lock in rates, that’s totally fine. Just offset with more cash, which means you might have to pass on the next deal. Don’t do it. Hold it. Reserve it. It’s hard for real estate people to do this, I swear. I know them really well. They just, “Oh, no, no, I mean, it’s in the bank. It’s not earning anything. I just can’t do it,” but sometimes you have to make that choice.

David Greene:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the best dang real estate podcasts in the world. If you are looking to find financial freedom through real estate, you, my friend, are in the right place. BiggerPockets is a community of over two million members that are all on the same journey as you, trying to find financial freedom and a better life through the power of real estate. We want to help you to do that.
We do that by bringing in guests that have taken the same journey that you’re on right now, people that have made mistakes that you can learn from, and guests like today who is in asset protection that will help you learn how to protect what you’ve already got and reduce the fear that is inherent with growing a big portfolio or taking action in general. Today’s guest is Doug Lodmell, and I had a fantastic time interviewing him with my good friend, Dave Meyer. Dave, who’s also the co-host of today’s show, welcome.

Dave Meyer:
Thanks, David. Thanks for having me back. It is always fun to be here.

David Greene:
Yeah. We need to come up with some clever Dave and Dave type thing. I mean, I’m sure we could maybe do better than Dave and Dave, but our names are both David, so that at some point needs to get incorporated into this. Let me ask you, what was your favorite part of our interview with Doug today?

Dave Meyer:
I think my favorite part was talking about understanding and being comfortable with risk and the way that you get comfortable with risk, because there is risk in real estate investing, just like there’s risk in any type of investing and there’s risk in not investing at all. But we had a really good conversation about how to plan for risk and how to accept it and be comfortable with it and how that leads to better decision making. I think that’s just really true.
Just being fearful and afraid of the worst case scenario is going to put you in a position where you can’t make good decisions. We had a really good conversation about how to protect yourself in a way that’s going to allow you to act aggressively and to pursue your financial goals in a way that is responsible and that you’re personally comfortable with.

David Greene:
Yeah, Doug made a really good point, that no one makes really good decisions when they’re afraid. I’ve been thinking about that, and it’s brought me to the purpose of fear. If you’re walking in the woods and you see a big, scary bear that’s charging you, fear is very helpful because it lets you know, “I need to do something. I need to take an action.” Okay? Typically, it works best when you have a limited number of options and they’re pretty simple, like run this way or run that way or climb a tree. That’s all I got to figure out. Once you’re running, it’s very difficult to think about anything else.
It’s not easy to think about where you’re running to, where you are on a map, how long that bear might be able to go before they get tired. Did I remember to turn off the coffee maker this morning? Your brain isn’t thinking about all of those things. And that’s what Doug was getting at, is when you’re in the state of fear, you don’t think very well. You don’t make good decisions because all of your efforts are focused on one thing, which is take this action really, really fast.
If you have a plan in place already, “If I come across a bear, I’m running that way to that tree, and I’m never too far away from that tree,” well, when you feel the fear, it never overwhelms you because you just work out the plan you had. And that’s what today’s show is about, is how you put a plan in place so when fear does come, it doesn’t paralyze you and keep you from taking action. It just spurs you to take the action that you’ve already planned ahead to take. Please listen all the way through this when we have a really good conversation about fear.
And then at the very end of the show, Dave and I have a really good conversation just about in general how there is risk in everything. There’s just as much risk in not doing something as there is in doing something, and we give some advice on how you can mitigate that. Now, in lieu of today’s quick tip, we are going to bring Dave in to do a tease on his brand new podcast that will be joining the BiggerPockets Podcast Network, On The Market. Dave, tell me about this show.

Dave Meyer:
Yeah. I mean, we’ve sort of been doing the concept here on BiggerNews a lot, but basically we recognize that the housing market and being an investor is the conditions are changing really rapidly. We’re in a very unusual economic time. And to be a great confident investor and sort of like what we’re talking about today to proceed without fear, to proceed with confidence, you really have to understand everything that’s going on. You need to understand the impact of government or Fed policy.
You need to understand what’s happening with inventory, and we’re also going to be looking at opportunities like investing in the metaverse or 3D printed houses. We’re going to just be looking at real estate from more of a current events, data and news standpoint, and it’s going to be super fun. I am the host, but we also are going to have more of a panel show. We have four regularly occurring panelists. We have Kathy Fettke, who is actually the first guest here on BiggerNews that we ever did. Kathy Fettke.
Henry, who’s also regularly on the show, Henry Washington, as well as Jamil Damji and James Dainard, who are all going to be coming in and bringing their expertise. We’ll also do shows similar to BiggerNews where we bring in an expert like Douglas or some of the other great guests that we’ve had here on BiggerNews and talk about everything going on in the housing market, the broader world of investing, and help you make sense of what’s going on. I’m super excited. It’s coming out on April 11th.
I hope that if you like BiggerNews, if you want to stay informed and be up to date on everything impacting your investing strategy, you check out the new show, On The Market.

David Greene:
Awesome. Make sure you check that out because Dave does a great job at everything he does, and I’m sure this podcast will be fantastic. I’m mostly saying that because I hope you bring me on your show, because it sounds really cool and I’d love to be able to help with it.

Dave Meyer:
Of course. Yeah, we would love to have you. Actually to give like a little teaser for the show, I was hoping we could do… Basically we’re going to start each show of On The Market going through the week’s top stories. We do that in different games. Actually a couple weeks ago when we did BiggerNews, we did news or noise. I was hoping you would do me the honor of doing another game. It’s not really a game, but we call it quick take.
I’m going to read you three different headlines, and I would love to just get your quick reaction to these headlines and help our listeners make sense of what this news means.

David Greene:
Okay. Is this quick like the first word that comes to mind, or am I giving a little bit of insight?

Dave Meyer:
No. Like give me 30 seconds to a minute on each of them. It’s not like association, although that would be pretty fun.

David Greene:
That would be funny. Who knows what will come out?

Dave Meyer:
We’ll do that next month. The first headline is active listings, which is the number of homes listed for sale at any point during a given month, fell 24% year over year. They were already last year, which is crazy. Shopping to an all time low of 456,000 and listings were down 50% from the same period in 2020. Just to summarize that, listings at an all time low. Things just keep getting crazier. What are your thoughts on this?

David Greene:
Well, if houses are selling faster, then the number of active listings will be going down even if the number of homes that are selling remains the same. That’s how I would look at this is like the same number of houses could be coming on the market, but they sell quicker, so there’s not as many listings on the market at one time because they don’t last as long.

Dave Meyer:
Super great point. I think that’s something that people really misunderstand that they see active listings low and means that no one’s selling their house, but demand is a super important component of listings. You could put millions of houses on the market, but if you put a million houses on the market and there’s three million super motivated buyers, there’s not going to be a lot on the market any given week.

David Greene:
Absolutely true.

Dave Meyer:
For our second headline, mortgage rates are just absolutely skyrocketing right now. We started the year where the 30 year fixed rate was about 3.1%. As of this recording, which is late March, we are seeing interest rates at about four and a half. What do you think this means for real estate investors in the larger housing market?

David Greene:
I think a lot of people will see this and think, “Oh, there’s going to be a crash. I should wait.” I doubt that’s going to happen. Guys like me, whether it’s 3%, 4.5%, we’re going to buy it. I also don’t think it’s likely to lead to a drop in prices, and here’s why. The average seller who put their house on the market eight days ago and just heard interest rates went up is not going to say, “Let me drop the price by a hundred grand.” It just doesn’t work that way.
The only thing that makes sellers decide to lower their prices, either they have a fantastic negotiator, they have a real estate agent that convinces them, rarely ever the case, it’s more time on the market. When your house sits there for 60 days, 90 days, 120 days and you thought it was selling in 30 days, you finally say, “Okay, I’ll drop the price.” What has to happen is these increase in interest rates that can theoretically slow down a market have to have an impact for 90 to 120 days before sellers even decide to drop their price, and then slowly more sellers start to decide to do the same thing.
Usually we don’t see this sustained for that long. Typically, I think people hear news like this and they expect an immediate impact on the real estate market, but that’s not how real estate markets work. It’s based off of emotions that people have. That’s how they make decisions. Most sellers don’t decide to drop their price for a significant period of time. If we see rates keep climbing for another three to six months or so, at that point, you might see a slowdown. You’re not going to see a crash.
People are not going to lower the price of their house in half because of this. You’re just going to see that maybe they don’t get as many asking price offers or they don’t sell as quickly. Maybe that number you were describing of active listings could start to creep back up. But don’t expect the deal of the century. What I would expect is that you get a little window where there’s less competition than normal, which could be a really good time for people to move that have been getting outbid.

Dave Meyer:
That’s a great point. For everyone listening, if you want to keep tabs on what’s happening if prices are going to go down, a great lead indicator to look at, as David pointed out, is time on market. It’s why real estate professionals like David and real estate investors look at these types of things because there is that lag. But if you start to see time on market creeping up… And listen, if it creeps up a little bit, I wouldn’t be too concerned because we are at literally all time low. Even if it goes up a little bit, it’s not crazy.
But if we start seeing it go back to what is a more healthy housing market, that’s when you could start to see housing prices at least flat now and not see like the 15% year over year appreciation.

David Greene:
Absolutely.

Dave Meyer:
Our last headline is, I just read about this the other day, Lenders One Cooperative announced that they will be leasing retail space in Walmart to sell mortgages and products and service at Walmart. David, you’re hysterically laughing right now. Are you going to get a mortgage at Walmart?

David Greene:
Oh, this is too good. I got to know what the thought. Walmart is sort of like the base of all memes of undesirable customers. I’ve never understood that. Let me just say this. The Walmart where I grew at a city called Manteca is not that bad. I never really got the whole like Walmart stigma until I went to Walmarts in other states, and then I sort of were like, “Oh, I get it. There’s some mutants running around in this place.” But it’s not what you would think of for people that are going to be qualified to get a mortgage.
Does this company know something we don’t know? Like secretly they’ve done a study and found that millionaires are all shopping at Walmart? That wouldn’t be too surprising, right? Because the millionaire next door sort of does describe them being that way, or is this just how do we get in front of a lot of eyeballs? They know there’s a lot of foot traffic at a Walmart, so they’re going to stick a branch right there. I would love to see how this plays out.
I probably wouldn’t be surprised if they end up going out of business and being replaced by one of those things that you dump your coins into and it turns it into cash.

Dave Meyer:
Yeah, Coinstar machine.

David Greene:
Yeah.

Dave Meyer:
I wonder about this kind of model. I’ve never really heard of mortgage companies relying on foot traffic before, so it’s kind of interesting. I’m wondering with the refinance activity declining if a lot of these mortgage companies are just looking for new ways to market and to keep volume up. Because with interest rates going up, we saw this bonanza refinancing over the last two years and that obviously is going to slow down now. I just thought this was really funny. I thought you would appreciate it.

David Greene:
Well, they do have banks in grocery stores, but that kind of makes sense because you might need to go to your bank to just like make a withdrawal or a deposit. But if it’s a pure mortgage company, I mean, that might… If I go deeper, that might be a sign that the competition for mortgages is just getting fierce to where they’re like, “Let’s try anything to try to get customers.”

Dave Meyer:
Yeah, yeah, it’s a little strange. It’s not like you bring all your tax documents to Walmart so you could go get approved while you’re there. You’re like, “Oh, I’ll just casually go get a mortgage right now.”

David Greene:
Honey, I’m going to Walmart. Do you need anything? Get me some socks and see if you could get a 15 year quote on our house. We might want to refi.

Dave Meyer:
It’s like your shopping list is like toilet paper, hot dogs, mortgage. I don’t know. Well, if you guys like this type of news analysis, we’re going to be doing fun short segments where you get quick takes on the week’s biggest stories, just like this, but we’re also going to be doing deep dives into important trends. We’re going to be doing deep analysis into the things that impact your investing. If you’re interested, definitely come check out On The Market.
It is a really cool show. We have an incredible panel, and we really make it fun. We’re going to be talking about important topics, but we keep it lighthearted and make the information digestible. You’re going to have a good time listening to it.

David Greene:
All right. Let’s bring in our guest for today. Doug, welcome to the BiggerPockets Podcast. How are you?

Doug Lodmell:
Yeah. Great. Happy to be here.

David Greene:
Yeah, we are really glad you’re here. I know my cohost here, Dave Meyer, is totally geeking out because he loves talking about really exciting and sexy stuff like asset protection, right?

Dave Meyer:
Oh my god. Don’t even get me started.

David Greene:
Yeah, Dave, tell me like when it to protecting assets and learning how the legal process works, what exactly is it that gets your gears grinding just like it does?

Dave Meyer:
Me?

David Greene:
Yes. Well, I know you like this stuff.

Dave Meyer:
I do. I just think that it’s interesting and helpful for people to think about how they… We talk a lot about all the benefits of real estate investing, and there are many. It is to my knowledge the best thing that you could possibly invest in. But thinking of it as fail safe and that there aren’t risks is irresponsible. I think looking into the common sense ways that you can protect yourself is a good strategy for long term investing. When we’re in a good market cycle and things are going up, it’s easy.
But I think if you’re in this for the long run, as I am, and I think we advise most people to be, you’re going to go through market cycles, you’re going to go through changing conditions, and it’s people like Douglas who can help us and how to best protect yourself for the long run.

David Greene:
Awesome. Douglas, do you mind sharing a little bit, how did you get into this specific niche of real estate investing and why do you feel it’s really important?

Doug Lodmell:
It’s really an interesting story. My father was an attorney and did estate planning and business planning, but his real success came when he started syndicating real estate deals. Now, this was back in the ’80s in Arizona. You want to talk about a great place to be syndicating raw land deals in Chandler and all these places that today are huge blown up cities. What happened is, is that we had the S&L crisis. We had this external thing occur and a bunch of his investors, a lot of them doctors and professionals, were limited partners in these deals.
They had their own financial problems. Their lives blew up. When those creditors, mostly banks, came to my dad as the general partner of these syndications that said, “Hey, your investor here owes us a million dollars, and he’s got this limited partnership equity interest worth a million dollars. We’d like to have it.” My dad was able to say, “Sorry, you don’t get that. You don’t control it. That limited partner doesn’t have a control say whatsoever and I’m not distributing anything.”
That’s where this first concept of asset protection really dawned on him as a specific thing, because he helped dozens of his clients settle with banks for pennies on the dollars when they had the money to pay. But simply because the money wasn’t available to the bank, they couldn’t get it. This is 1986 or so. A little light bulb went off in his head and he said, “Wow! What worked incredibly well. What if we did that on purpose? What if we actually started creating legal structures specifically to protect assets?” Which wasn’t the point of those syndications.
Those were investments, but it worked. And that’s because of the way the charging order protection works and the limited nature of an investor in a limited partnership or in an LLC for that matter. That was kind of the start of it. I went to law school. I graduated in 1997, and I really didn’t plan on joining him. But as you know, serendipity works out, I did and I’ve been doing asset protection ever since.

David Greene:
If you had to sum up why that ended up working, why the investors in your father’s fund were not able to… They didn’t lose their share. What would be the principle in place that prevented that from happening?

Doug Lodmell:
Well, the principle is that a creditor of a partner in a partnership or a member in an LLC who is a non-controlling member doesn’t have any ability to take the place of that person, and the best they can get is what’s called a charging order. What the court says is, “Hey, we respect this judgment against this investor, and they can basically record a lien on that investor’s interest in the partnership, but they can’t force a foreclosure on the partnership interest. They can’t force a distribution. The general partner continues to control that.”
The general partner is friends with who? The investor, not the investor’s creditor. What are the chances that general partner is going to make a distribution to an investor when that they know that there’s a creditor standing there? Slim to none. Well, the creditors figure this out and go, “Okay, well, we’re not going to ever get anything out of here. We’re going to settle.” It just creates settlement. You can’t stop somebody from getting a judgment against you. There’s no way. Not anybody.
I mean, not Elon Musk, not Bill Gates, not you, not me. People can get judgements because our legal system is actually pretty open and easy to use to get judgements. But what we can do through asset protection is block their ability to get to our assets, which is highly of effective because your judgment isn’t worth a lot if you can’t actually collect on it.

David Greene:
I’ll tell you another thing that works really good for defense, a tenant used it against me one time when I got a judgment against them is being broke.

Doug Lodmell:
Well, exactly. No blood from a stone, right?

Dave Meyer:
I’m not sure you would recommend that as a good defensive option.

David Greene:
No, and that’s why we have Doug here, because this is for people who are trying to not be broke to protect what they have. You don’t have to use the broke defense. That guy still owes me like $8,000 from 12 years ago.

Doug Lodmell:
You’ll never get it. It won’t be worth for you to even try, even if you found out he had a couple of bucks.

David Greene:
Well, that’s exactly right. Dave, I know I haven’t pointed me to say this real quick. The reason is, very similar to what you just described, is you can’t stop people from coming after you but if you put enough hurdles in place, they will give up on their own. And that’s what he did by being broke is the work that it would take me to get to there to try to garnish his wages and collect $200 a month for God knows how long is not worth the effort that I would have to put into it. That principle, oddly enough, works in both scenarios.
That’s really In many cases in life I find all I’m ever trying to do. When I’m negotiating with somebody, I’m usually not trying to just go in and hammer them to death. I’m usually just trying to make them more uncomfortable than me for longer and see which one of us will quit. I’m a big proponent of what you’re saying, because this is something we use in everyday life all the time.

Doug Lodmell:
Every day. All the time.

Dave Meyer:
Douglas, for real estate investors, both new and experienced, who aren’t familiar with asset protection, can you give us a high level overview of some of the more common tools and strategies that you use to protect your clients?

Doug Lodmell:
Sure, sure. I know you guys had Brian Bradley on a few times and he talked about some of these things as well. He’s an affiliate of mine. I’ll just kind of recap what it is that are kind of the three main tools. The first is what we just talked about, a limited liability company or a limited partnership. It’s kind of that initial base layer tool where you’re going to put a piece of real estate in a limited liability company. You might have 10 limited liability companies because you have a lot of real estate and you want to separate out the bucket.
From there, we’re almost always going to use some type of holding company, and we’re going to typically use it in a specific state. Unlike at the LLC, which is really best used in a state where the real estate is, because that’s the law that’s going to get applied anyway, when you get to the holding company level, you get a little more freedom of choice. You can choose one of the states that has better laws, stronger charging order protection. The popular common ones are Nevada and Wyoming, Delaware.
I actually love Arizona. It’s just as good as those other states, but it has some other unique features. As long as you choose a state that has very strong and exclusive charging order protection, then you end up doubling up on that protection. You have an LLC which is charging order, and then you have a holding company which is charging order. On top of that, we use a final tool called an asset protection trust. The asset protection trust is really the big bazooka of asset protection.
It’s the thing that if it’s all fallen apart, it’s all going off the rails, we can actually do something about it. There’s three ways to do an asset protection trust. One is fully foreign in an offshore jurisdiction like the Cook Islands or Nevis or Belize. The other end of the spectrum is fully domestic in a jurisdiction like Nevada, Delaware, Alaska, Wyoming. And then the third way is in a hybrid form, which I call a bridge trust. I mean, just to keep it as simple as possible, the bridge trust is basically a foreign trust treated as a domestic trust for tax purposes.
You get all the protection of the foreign trust, if you ever need it, but you get the simplicity of a domestic trust, even simpler to manage, disregarded for tax purposes. Those are kind of the three basic tools. What a client needs will just depend on where they’re at in the cycle. They might just need an LLC, or they might need one or two LLCs in a holding company, or they might need all three. It really just depends on their level of asset and risk.

Dave Meyer:
Douglas, one of the most commonly debated topics on BiggerPockets is, do you need an LLC? I’ve worked here for six years, and I feel like once or twice a year, it just blows up on the forums. There’s huge debates about this. I’m an LLC guy, so I think I’m on your page. But do you advise this for everyone? Are there situations where if you’re just getting started or you’re new, you don’t need to think about this?
Or do you think regardless of your experience level or what your investments are, you should be thinking about these levels of asset protection?

Doug Lodmell:
Dave, it’s a really good question. It’s not as simple as, yeah, you always have to have an LLC. There are certainly cases where it’s probably fine to not. However, if I’m going to make a general statement, I will say that you would be 90% plus of the time better off with an LLC. I’ll give you an example. I had a guy come to me from California. He started investing very young. He never used LLCs. I mean, he had tens of millions of dollars of California property, not a single one in an LLC, and he’d been doing it for 30 years.
When he came to us, he had a problem. We looked at this and I just was like, wow! I mean, I have never seen someone so exposed. The challenge for him was is that backing up and putting everything in an LLC was a massive deal. I mean, we were talking about incredible cost to create and to maintain and transfer. Ultimately that was too much and he ended up choosing not to put in everything in LLCs because he had just gotten so far behind. The downside of that, of course, is that he didn’t have the leverage he would’ve had in the current issue.
He had to settle for probably much more than he would’ve had he done it right. That’s the reason why if you’re going to become a real estate investor, you’re probably just better off starting on the right track. LLCs are not expensive to form. If you can’t afford an attorney to do it, it’s not the worst thing in the world to do it online yourself with one of these entities that can set them up for 99 bucks. It’s better than nothing. They don’t create a lot of complication. If they’re a single member, they’re disregarded, so they don’t need their own tax returns.
Do you absolutely need it every time? No. If you never get sued, you never need it. Is it best practice? It’s absolutely best practice.

David Greene:
The reason not everybody wants to is often not associated with the cost. It’s often associated with its difficult to get financing when it’s an LLC.

Doug Lodmell:
Correct.

David Greene:
Do you have like a line in the sand where you would say, “Hey, get this many properties in your name so you can get financing. And when you get to a certain point, it’s best to move it to an LLC?”

Doug Lodmell:
Well, actually I have a different way to handle that. It is correct that a lot of times it’s much easier to get financing in your own name. It is also true that once the bank records their mortgage and once they’re done with that file, they will not be reopening it. They have no incentive to reopen it. They don’t want to check and see anything about it. All they can do is create problems for their own compliance and their own ratios. In 25 years of advising clients, I have advised them always to go ahead.
If you need to get financing in your own name, get it in your own name, and then go ahead and transfer the property into the LLC. Don’t tell the bank. Now, this may sound a lit counterintuitive. Don’t tell the bank. Doesn’t that trigger the due-on-sale clause? Yes, it technically does trigger the due-on-sale clause. In most instances, we can assume it’s going to. However, does it actually trigger the due-on-sale clause? And the answer is in 25 years and I’m talking thousands of real estate transfers. In two instances only has the bank ever even noticed.
And in both those instances, they gave permission after the fact. It just kind of forced them to go, “Okay, we’re fine with it.” The better approach is just go ahead and do your financing personally. Make the transfer into the LLC. Don’t tell the bank. Keep current and just realize you’re running a very, very, very small risk that the bank, at some point, couldn’t come back to you and say, “Hey, you transferred this without our permission and it’s due. The mortgage is due.”

David Greene:
I would agree with you, and I’ve said the same thing. From a practical standpoint, it’s always that yes, it could happen, but is it going to happen? Who at the bank are they going to have that’s going through every single file and checking to see? And then they have a person who’s paying like they want and now they’re going to go mess with that. It doesn’t happen. I will add…

Doug Lodmell:
They don’t want the non-performing loan. They don’t want to convert a performing loan into non-performing by finding the technical flaw. They are not going to look. I promise. They don’t want to look.

David Greene:
The only thing that I’ve ever thought of that made me think what would make them look, what would motivate them is if interest rates skyrocketed and they’re looking at your loan where you have money borrowed at 3% and they could get it back from you and lend it at 15 or 20%, something like that. If you see a scenario, I would start to worry a little bit more about this. But we are light years away from that happening right now. It’s just something that in today’s environment, yeah, there’s no reason a bank is ever going to go do that.
There could be a situation where they might go, “Oh, we let this person borrow 600 grand. We could get that back and lend it at seven times the rate.” That may put them in that position. But I agree with you. It’s usually something people spend way too much time worrying about. Now, here’s something I do want to ask. What in your experience, Doug, are the things that you have seen go wrong for investors that have got them into legal trouble where they were then like, “Ah! Do I have an LLC? Do I have to do it?”
What are the common complaints that get brought against them that people should look out for?

Doug Lodmell:
Well, I mean, it’s funny. It’s typically the stuff that they know that they’re taking on the risk of. Other real estate deals and other banks are often the culprit. They get involved and they start doing a lot of things. They get really excited about what they’re doing. I’ve got one client. He got really excited about an area that he thought he had identified early, and he picked up a lot of real estate in an area. He kind of went on a buying spree and ultimately started finding money at higher costs because he’d run out of the normal bank financing.
He just leveraged himself. He was a little early in his assessment of how quickly that neighborhood was going to pop, and it cost him. Because all of a sudden, the creditor over here is looking at everything else. Banks are probably the biggest issue for real estate investors, which kind of gets into another conversation we should probably have about leverage. But over leverage on some deals can blow up your whole portfolio. That’s very important. The other thing that is probably the number one or two reason is partnerships.
People get into partnerships and usually they’re doing it because it’s two people that are new and they kind of want each other’s support and help, and so let’s just do this together. They get into partnerships. They do not take it seriously. They do not draft a good partnership agreement. They do not have clear rules around what’s going to happen when one partner decides they’re no longer into it and is going to go to Tahiti on vacation and just leave you with the work. These things blow up.
It happens when we have rough times they blow up and when times are good and the money is now there’s a bunch of equity. They don’t have the same perception about the amount of risk they took or the amount of work they put into it. It’s kind of what you hear about with people who get mugged. It’s always like two blocks from their home. It’s that kind of car accidents three blocks from your home. Lawsuits are almost always two blocks from your home. It’s somebody you know. It’s a bank you did business with.
It’s a partnership you got involved with. It’s a person you know that you did a favor for. And all of a sudden, you’re the bad guy because you don’t want to do the second favor. And all of a sudden, it just turns into a mess. Sometimes is outside stuff like car accidents. I mentioned car accidents because they’re surprisingly a big thing. I mean, I would say seven or eight times a year I get someone calling me with a car accident that is multimillion dollar claims and they don’t have enough insurance.
And all of a sudden, they’re just out of their league and just didn’t think about it. But nowadays, to run into the wrong person and get in a car accident and have a five or 10 million liability is not out the question and your little 300, 500 insurance policy is not going to cover it. It’s kind of everything, Dave. It’s across the board. I don’t want to misstate this or mislead. It’s still a very small percentage of the time. Many people can go their whole lives, never having a legal problem, a lawsuit, a challenge.
One of my first jobs out of college was with Nomura Securities on Wall Street in New York City. I was responsible for putting together this little report of our wins and losses. And every day, 97.4, 98.2 wins. I’m just like we win 98% of the time? I went to my boss in the risk management department, which is where I was, and said, “I don’t understand this. We win 98% of the time. Every day I’ve been seeing this report for six months. We’re always winning. I mean, how can we lose?” And he goes, “Oh, well, you don’t understand. The 2% of the time that we lose, we lose it all. The losses are outsized.”
And that’s a lawsuit. It might only happen 2% of the time to 2% of my clients. But when it happens, it’s catastrophic. You have to decide, do you want to protect against a catastrophic loss, or do you want to always take that risk? My experience has been that people want to accept the risk until they wake up one day and they realize, “Oh, I have something to lose, and I’m not a spring chicken anymore. I don’t have as much time to keep doing this.” There’s a tipping point that always happens. All of a sudden, they go from not really caring about asset protection to I need to do asset protection.

David Greene:
Yeah, that tipping point happens in many different ways in our world. It goes from, “I want to grow. I want to expand. I want to own every single property in the world,” to, “I don’t want to lose what I have. I’m worried about a correction.” I call it going from offense to defense, right? Offense, offense, offense, offense. You’re Napoleon trying to take over the world, and then you get it all and you’re like, “How do I keep this?”
It’s actually kind of sad because when you’re in a defensive mindset, you are looking at the worst case scenario at everything that could happen in life. You’re like, how could this person take advantage of me? How could I lose something? What could we go to war about? It’s a lot less fun. I agree with you. If you set things up correctly, you don’t put as much pressure on yourself to have to anticipate things going wrong, because you’ve got natural things in order.
And then you also mentioned something else that frankly I had never really thought about. I always looked at it like a problem could happen in my rental property. And if I was sued, they could take things outside of the rental property. But you’re actually, if I’m hearing you right, saying you could get in a car accident completely unrelated to your rental property. And if they’re not in LLC, they could go take your rental properties as part of that judgment. Is that what you’re getting at?

Doug Lodmell:
Oh, absolutely. Yeah, that’s the point of an LLC. There’s two directions. It protects from the inside out and the outside in. We call it inside liability and outside liability. Inside liability is the fire on the property or something directly related to the property, and the LLC kind of attempts to shield that, put it in a Ziploc bag and say, “Okay, well, let’s just contain this risk.” The outside liability is the car accident, the partnership dispute, whatever judgment that comes. And now they’re just looking at your properties as an asset. And if they’re not in the LLC, they’re available.

David Greene:
Yeah, that should be catching some people’s attention, because there’s a lot of our listeners that are one drunken night away from a bad bar fight where they break someone’s nose.

Doug Lodmell:
You are right.

David Greene:
A big judgment comes, right? Normally they do everything smart in their business, but they make that one bad decision, or one text message when driving away from something terrible happening. You could go from thinking I’m totally safe to I’m not safe very quickly. Not that a lot of our listeners are getting in drunken bar fights. I’m not trying to say that, but just in general, people are one bad decision away from a lawsuit that could change their whole life.

Doug Lodmell:
That’s right.

Dave Meyer:
Douglas, I’d love to switch gears a little bit because this is our BiggerNews episode. I’d love to just pick your brain a little bit and learn how you’re seeing today’s market and how you’re assessing risk for your clients right now.

Doug Lodmell:
Yeah, it’s a really good question. I’m fortunate now. I’ve been practicing law for 25 years. I went through 2008. I got out and started in 1997. I have enough experience to have been through these cycles and seen it more than once with the dot com and the 2008 crash. Just purely fortunate. I’m very fortunate to have thousands and thousands of points of reference of incredibly successful, incredibly intelligent, incredibly great people that become my clients.
They’re the ones that teach me more than everyone everything else. They come and they have all these unique situations. They also have all these unique perspectives. I kind of spent the last 25 years synthesizing all of this information and coming up with what I feel is a fairly comprehensive, balanced understanding of the world of risk and investment and human psychology, which is an incredibly big part of it. I mean, the human psychology is probably the biggest part of it.
What I would say about real estate in particular is that it’s an incredibly attractive investment because it has something that other investments don’t have, which is depreciation. With real estate, you have this built in. It’s very attractive because you effectively… I mean, my real big real estate investors, they virtually do not pay taxes. I mean, they just keep investing. They keep accelerating depreciation through cost segregation analysis and kicking the can down the road.
And if you kick the can down the road enough, you eventually really never have to pay the piper. And that’s what a lot of them do. There’s also 1031 exchanges and other ways to just defer. This is just inherent. It’s our legal system and our tax system which allows for this. It’s what makes real estate so great. The other thing that real estate has that is completely an advantage is it just asks for leverage. Banks like lending on real estate. They can understand it. It’s much harder to get them to lend on other things.
When you use leverage, you end up with bigger returns because you’re using your bank’s money to create the returns. I’m prefacing all this with those two things, because what happens in the mind of the investor is it can’t really go wrong. There’s kind of this perception of real estate being the ultimate investment. They’re not making any more of it. Everybody’s always going to need a place to sleep. It’s always going to be good investment in the end, right? There’s this perception.
The challenge is, is that because of the depreciation, the acceleration of depreciation and the encouraged use of leverage, you can get behind the eight ball. For me, what I think is important is that you want to encourage your investors and your clients, my clients, in my case, you want to encourage them to start thinking about the cycle that we’re in and where we’re at in that cycle. It’s probably more important in real estate than anything else.
Because if you’re highly leveraged and we reach the end of the cycle, or it comes crashing down on us like it did in 2008, that can be the end of the game for everyone. Right now the question I would be asking is, where are we in the cycle? Where’s your perception of where we are in the real estate increasing value cycle? I have an idea of where I think we are, but everybody’s got to answer that for themselves. If you think we’re still in the middle of the cycle and we got 10 years more to go, then go for it.
Just keep it leveraged. Maximize your returns. However, if you think we’re two to three years away from a potential end to this cycle, which remember has a lot to do with macroeconomics, with interest rates, with the government’s appetite to continue to bolster the economy through quantitative easing and huge spending packages, then if you think it’s two to three years away, I would strongly be looking at my leverage. I’d be looking at three things. I’d be looking at decreasing my leverage.
I’d be looking at analyzing my rents, my income to make sure I’ve really got it as stable as possible, that I don’t have the wrong mix that’s going to be highly subjective to a crash or to a correction. And I’d be protecting my assets because you can’t always correct everything. By protecting the assets, you can at least compartmentalize. If you have a bad problem, we can potentially cut that one off and let it sink and save the rest. That’s kind of the current analysis portion is that I think if I were advising a real estate person I’d be asking them to think about.

David Greene:
Dave, what are your thoughts on that?

Dave Meyer:
Yeah, I do want to jump into the market cycle question. But just for our listeners, Douglas, could you explain a little bit about why being leveraged and for our users that basically means taking on debt to buy a property, why leverage is a particularly risky proposition in a downturn?

Doug Lodmell:
I mean, we can just go back to 2008 because we have real world examples of what happened. Leverage creates carrying cost. When you borrow money, you have to pay it back. You have a carrying costs. All real estate has a carrying cost even without leverage. But with leverage, you radically increase that carrying cost. If you borrow let’s say 90% of the value of your property, not only are your carrying costs higher, but if the value of the property decreases, you end up underwater. That’s exactly what happened in 2008.
You had a lot of people that used a lot of leverage. When the property prices crashed… If you weren’t around in 2008, you don’t remember that and you don’t think it’s possible, definitely it’s possible. It definitely happens. Real estate does go down. I remember having these conversations in 2006 and ’07 particularly with my California clients. It was a mantra that they were saying, “Oh, California real estate can never go down. California real estate can never go down.” They believed it. In 2008, it went down.
It absolutely went down. Now, if you’re not leveraged, you can probably withstand that. However, if you’re leveraged, what happens is if you can’t make up the cash flow discrepancy, then you’re going to end up foreclosed on. Since there’s no equity there, you’re going to end up underwater, which means the bank is going to be looking for other ways to be made whole, other properties. The other thing that happens during a downturn is banks turn from your best friend to your worst enemy.
They’re going to help you out. They’re on your side. They’re going to do everything for you when everything’s good and their perception of everything being good is true. The minute it’s not true, they’re not going to work anything out with you, and I watched it happens. Clients who absolutely could have made it through 2008 had they had help from their bank did not make it because they didn’t have help from their bank. The more leverage you have, you have the less ability to withstand that crisis.
Again, if you’re believing that we’re maybe two or three years away from the end of a cycle, I’d be deleveraging down maybe 50% or 60% LTV instead of 80 or 90.

Dave Meyer:
Just to summarize what you’re saying here, Douglas, basically having leverage, having debt against your property means that you have a fixed expense. So that even if rent goes down, for example, or you have increased vacancy due to a downturn or a recession, whatever, you still have to pay that back. The bank doesn’t care about your business. You’re paying it back one way or another. What you’re saying is that if you put 10% or 20% down, that cost is going to be very significant.
But it is less risky, in your opinion, if you only put 50% down, for example, because you’re keeping that fixed expense, the amount that you owe the bank, no matter what is going on is just going to be less.

Doug Lodmell:
Well, it’s going to be less and you have a little headroom, right? Let’s say you have 10 properties and they’re all 85% leveraged. If the market goes down by 20%, all 10 properties are now underwater. You have no coverage. And unless you can cover the cash flow because you don’t lose any rents or COVID doesn’t allow your tenants to stop paying for two years because they’re in a certain county in California, then you’ll be okay. But that can’t be guaranteed.
If you have an average of 60% LTV on your properties, some may be almost paid for, some a little higher, you have headroom. If the market goes down by 20% and your cash flow is not good enough, you could sell a few properties, reduce your burn, reduce the amount of debt. Because when you sell them, you pay back the bank. And if you have equity, actually inject some more cash to save the rest of your portfolio. You’re creating a reserve. I mean, I’m a pilot. That’s my hobby in my spare time.
Planning a trip over water and planning to land with absolute minimum fuel is not safe, right? Because something can happen. You could be off course for 10 minutes and you add the winds could be higher than you expect. All of a sudden, you’ve got 30 more minutes of flying time and you didn’t plan for it, and now you’re down in the water. It’s like leverage. How much fuel do you have in your tank? How much reserve did you plan? My philosophy is I like leverage. I like the increased returns it gives you as a real estate investor.
When I feel really good about where things are going, I feel more comfortable to use more leverage. When I feel like I’m not 100% sure where things are going, I’m going to deleverage a little bit. But it’s just how much reserve do I want to have? I’ve got one client in particular. He uses no leverage. He just uses zero. He just doesn’t want. And now is he giving up a lot of opportunity because he didn’t use leverage and he could only use his cash and that means he can only do so many deals? Of course, he is.
Does he sleep every night like a baby no matter what happens? Of course, he does. And that’s just him. You have to find for yourself where that spot is. But I think the danger is for younger people and newer investors that haven’t seen the cycles, there’s a little bit of a tendency to have a perception that there’s no downside to this. It can’t go down. And we know that it can. I think being a little more conservative than maybe you are inclined to be, especially if you’re young, is going to serve you if we do have a downturn,

Dave Meyer:
I think that’s really interesting. And for everyone listening to this, it sounds like there’s really a spectrum of how much leverage you should use. Because I can imagine that if you found a killer deal where you had a lot of cashflow, so that even if rents went down 10 or 20%, even at 80% leverage, you might still be okay. I think it’s up to you to sort of assess your risk on every single deal. If you’re in an area that doesn’t have a strong economic engine and might be particularly hard during recession, then that’s a lot greater risk.
If you’re in a place where employment is typically strong even during recession, that’s less risk. You have to think about each of these for yourself and assess how you want to use your strategy. Douglas, I want to ask you about one of my strategies and something I’ve thought a lot about, which is that in historical context, interest rates are close to as low as they’ve ever been, even as they’re rising. Media is saying it’s going up and it really is going up pretty quickly, much faster than I was expecting.
But the average rate on a 30 year fixed right now is still around four, low fours, which prior to the Great Recession in the history of data I’ve seen, it was never below five. We’re really low. One of the things as an investor I want to do is take advantage of that leverage and to lock in those low interest rates. How do you square the opportunity of having super low interest rates with the need to mitigate risk?

Doug Lodmell:
Yeah. You said it, Dave. I mean, you really said it. Every deal needs to stand on its own. I don’t think this lends itself to just a blanket rule of, “I only do 50% leverage no matter what.” I don’t think that would serve you and be accurate enough for every deal. Some deals are just home runs and you can feel more comfortable. Some deals are a little bit tighter and you probably want to be a little more conservative. Interest rates are low. They are still low.
And if you can lock in bank rate level low like you’re talking about, a 30 year fixed under 4%, there’s very little reason not to do it. The question is, do you continue to do it at the absolute max level all the way across the board just because interest rates are low, and therefore I’m just going to take advantage of it? If you’re going to do that and you say, “Look, I’m going to borrow as much as I possibly can because the rates are so low,” then what I would do is I would hedge on the other side by keeping some cash, so that you could pay down or you could handle a little bit of fluctuation.
Just because you’re going to use 90% leverage because you can get it and the rate is fantastic doesn’t mean you have to be cash poor all the time. This is another challenge with real estate investors that is unique to them. They’re almost always cash poor, because they’re constantly putting every piece of cash they have into the next deal. If you’re going to continue to keep high leverage because you want to lock in rates, that’s totally fine. Just offset with more cash, which means you might have to pass on the next deal.
Don’t do it. Hold it. Reserve it. It’s hard for real estate people to do this. I swear. I know them really well. They just, “Oh, no, no. I mean, it’s in the bank. It’s not earning anything. I just can’t do it.” But sometimes you have to make that choice. That’s the way I would do it, Dave I’d lock it in and get as much as you can, but just reserve the cash. Don’t spend every penny on the next deal.

Dave Meyer:
I think that’s great advice. Typically, what I think about is trying to have that cash across my entire portfolio. Even if I don’t hold it in cash, I look at the cash flow that I have from maybe some deals that I’ve held for a long time that are now producing really good cash. And that to me provides a cushion for future deals. I personally don’t put less than 25% down on most deals, but I think people can start looking at it sort of as a holistic basis.
It’s not just any individual deal, but look at the liquidity you have across your portfolio and across all of your assets to make sure that if something goes wrong, you have protection. That’s just basic advice in any market condition. My opinion, you should always have some cash reserves to whether a storm.

Doug Lodmell:
Yeah. If you feel like you’re at the end of the cycle, a little bit more, right?

David Greene:
Well, that’s part of what’s tricky about right now because… I always use the example of, if you just let economies operate how they naturally should, you go with the whole Adam Smith the invisible hand, you can kind of tell what is natural. Like, we’ve had a big run. We’re due for a recession. Everything’s going to sort of slow down. The bad businesses will die. Better businesses will start. We’ll have another run. It’s very similar to like the sleep cycle of a human being. You are not productive 24 hours a day.
You actually have to stop and sleep and let everything rebuild. And during that time, you’re not productive. It’s like a recession. But what we’ve figured out how to do in our country is inject drugs into us every time we get tired. When we should be sleeping, we go shoot up with a bunch of drugs and we work all night. And it’s like, “Wow! Look how productive I am. I’m being so productive,” as if there’s not going to be any downside to that.
When we’re having these discussions, what we’re trying to do is figure out, is the market going to keep going up or is it going to go down? Well, if everything was left alone, you would know, it’s 10:30, 11:00, this person out to go to sleep. They fall asleep every night at around that time. We can predict what’s going to happen so we can make smart decisions with our money. But when someone’s on drugs, you don’t know what they’re going to do sometimes.
That’s part of what they’re doing by raising interest rates is it’s a form of injecting downers to slow things down. We’re going too fast. Now we’re trying to put an opiate into someone because they’ve been going hard for too long. What it causes is this problem of all of us trying to figure out, is this person going to stay up all night working, or are they going to crash and go to sleep, because I don’t know what to do with my money if I don’t know what they’re going to do?
What I like about your advice, Doug, is, well, you have to hedge, but there’s different ways to hedge. Some people hedge by saying, “I’m going to not buying. I’m going to wait for the market to crash, and then I’m going to get in.” Those people have kind of been kicked in the teeth, because that hasn’t happened. Then there’s people like me that say, “Yeah, I have to keep buying because I think we’re going to keep printing money, and I think that we’re going to keep creating stimulus, and that’s going to cause assets to go up and value and inflation to happen.
But I don’t know that for sure. While I’m going to be very aggressive with what I’m investing in, I’m also going to be very conservative with what I spend my money on.” I’m an advocate of telling people now is not the time to quit your job. This is not the time to go all in in real estate investing, buy a couple duplexes and say, “I’m going to go live on the beach.” That made more sense when we had a stable asset class that we understood what was going to happen.
You could sort of quit your job and go do something and live off the rent, because you basically understood at what time someone’s going to fall asleep and what time they’re going to wake up. With all this uncertainty, you kind of have to play the game more aggressively because everyone else wants these assets. There’s a lot of demand for them. You got to pay more than what you would want to pay. It’s not going to be on what your ideal terms would be.
To balance that, I have to keep working, I have to keep saving money, and I have to keep more money in reserves. Really I got to be aggressive on saving money and I got to be aggressive on buying property. That’s the way that I’m playing the game with the uncertainty. I really like that you highlighted there’s different ways to be conservative. You can keep buying property. You could just put more money down on it, if that’s one way, and borrow less, or you could be like David Greene, borrow more, but put more money in reserves, because I prefer to keep my money in the bank.
I can’t control if the economy drops. If I have 50% equity in a property and then the market tanks and it drops down to 10% equity, there is nothing I could do to stop the equity from dropping, but they can’t take the money that I have set aside in the bank. I can make my debt service payments for a very long time, even if I do lose equity. But it’s sort of a principle that you’re advocating for with your asset protection is yeah, don’t not by assets because you’re afraid of what could happen. Aggressively buy them, but aggressively protect them, right?
Take more. When I say aggressive, I just mean be more purposeful about what you’re doing, so that as your exposure grows and your risk grows, your protection sort of grows in proportion. Is that more or less the principle you’re applying here?

Doug Lodmell:
Yeah. You just really brought up the point that I think is the most important, which is if you’re acting out of fear, you can be pretty sure you’re not doing the right thing. If you’re just afraid of a market crash and you quit buying because of fear… You might be appearing to do the right thing. But if it’s motivated by fear, it’s probably going to backfire on you. It’s much better to be creating a situation where you’re doing it consciously and you’re saying, “Okay, I’m scaling back. I’m going to do this.”
In your case, if you’re keeping more cash, well, how do I protect that cash? How do I make sure that is not at risk from the banks? Let’s say one of my properties does go underwater, that’s where asset protection comes in. You’re creating a safe space to keep the cash, as well as all the real estate. It’s just being intentional. What I’ve learned is that asset protection lowers fear. And when it lowers fear, it allows people to make better decisions. They’ve done studies. People in fight or flight are literally stupider.
They literally test lower on an IQ test, because you bypass the thinking part of your brain. You just don’t make good analytical decisions when you’re acting from fear. You want to use your tools to allow you to make good decisions. I’m a huge fan of, if you can do it consciously, if you understand the impact of it not working out and you’re willing to handle it, you should do it. For some of my clients, oh my God! I mean, I have some hyper aggressive people and it’s pretty awesome to watch. Because I mean, when they hit it out of the park, they hit it out of the park.
When they crash and burn, they crash and burn, but they can handle it. They’re conscious about it. Understanding yourself and where you fall on that risk scale is very important. Because as long as you’re good with it and your spouse, I mean, you got to have buy in there, otherwise, that’s a recipe for divorce, as long as you’ve got that handle on it, I think that you’re fine.
The challenge is, just like young scorpions don’t know how much venom they’re released, it’s much more dangerous to be bit by a young or stung by a young scorpion than an old one, because you’re going to get all the venom and it’s going to be bad. Same with young investors. They don’t yet know and they’re more aggressive than they will be in the future and that can get them in trouble.
When I talk to younger people, I’m always encouraging them to listen to the wisdom in the room, which I think probably is why they’re listening to this podcast and to you guys, because that’s your perspective, right? You’re bringing that. You’re bringing that dose of wisdom to them so that they don’t make and repeat the mistakes that we all made.

David Greene:
I was doing an interview the other day for someone on I think Bloomberg News, and they were asking me about the BRRRR Method. They said, “Well, isn’t that really risky because you’re going to keep getting your money and keep putting it in more real estate, and you keep growing your exposure? And I said, “No, it’s actually a fail safe.” If you buy one bad deal, you can’t get your money out of it, and it stops you from buying the next property until you learn how to not buy bad deals.
You can’t keep going, if you’re using the BRRRR Method, if you’re relying on that initial seed money to get it back out and put it in the next deal and you buy wrong or you don’t manage the construction well. Your skills are not where they need to be. It automatically slows you down. You could only scale faster as you get better. It made me think real estate in general is kind of like that. You’ve got a bank that’s looking at your ability to repay debt and the assets you have that has to approve it before they’re going to give you a loan, right?
Unless you go borrow money from someone else, but most people are not giving their money to a brand new person. It tends to build wealth, I mean, outside the last three, four years or so, relatively slowly and boring, right? It’s a lot of work. It’s not like stocks where you just click a button and bam, you’ve made your trade. It takes a lot of elbow grease to get this thing up and running. While it is risky, I feel like real estate has natural boundaries that make it harder to just explode out there and make a lot of moves.
Like a lot of the young people you’re talking about, they’ve only seen the market do well. What scares me is that people that are making money in crypto trading, in Forex trading, in NFT trading, even stocks to a degree day trading, because as there are no barriers that stop you from losing everything. It’s clicking buttons on a computer. You could put all your money into it. There’s nobody that has to oversee what you’re doing. You don’t have to collect bank statements and have someone overview your financials and show that you’ve had steady income for two years.
None of that happens. When that money comes so quick, Doug, you made such a good point, it’s easy to think it’s always going to be coming that quick. While this is inherent in all of investing and it does happen in real estate investing, it happens less, I think, in real estate investing than in other asset classes because of the headaches that’s involved in buying real estate. I mean, those of us that do it all the time will still tell you it gets easier, but it never gets easy. There’s always a lot of hurdles you got to jump through.
And maybe that’s one of the lessons from today’s show, is that the more hurdles that there are between the person trying to take what you have and what you have, the safer you are. And the more hurdles that there are between you taking risk and growing wealth and where you are right now, the safer that you are. Any last words on that thought?

Doug Lodmell:
Yeah, I think it’s a great point. And you’re right. The bank is your partner in this real estate. When the banks lose their objectivity like they did in 2008 and they start going off the walls, well, they brought everybody down with them. I mean, that was very bank induced. The banks are not like that today for good. I mean, that’s good for everybody. It’s hard to get a real estate loan. They still need to document it. It’s a much different process and that’s good. Because if they do give you the money, it’s a vote of confidence in the deal that you’re doing.
Again, they’ll tell you, “Hey, yeah, we’ll give you money, but we’re going to need 40% down on this deal.” They’re perceiving that risk in helping you. The more hurdles… Hurdles are good. You can use them to your advantage. When it comes to asset protection, you want to use them to your advantage. You want to put the hurdles in front of that potential creditor and your assets.

David Greene:
Yeah, and that’s what I tell people to watch out for. When people say, “Are we going for a crash?” Man, the fundamentals are strong. Banks are still looking at debt to income ratios. They still only let you buy cash fund properties. But I do see a scenario, I’m just going to put in my little Nostradamus hat right now, where institutional investors, Wall Street money, hedge funds, people with big, big capital come together and say, “You know what?
The average person doesn’t want to go through the Fannie Mae, Freddie Mac process of having to go through a colonoscopy to get a loan. Why don’t we provide them with some options where we can do lending backed by real estate that’s a lot easier? And now you have people that don’t have as much experience with valuing the risk involved in this, making the process easy for people that haven’t done it before. We could see another slide into that environment that you just described, Doug, but just a different tunnel, right? The first one…

Doug Lodmell:
Add to that defi and the fact that I’ve already got clients calling me saying they want to turn their real estate into an NFT and then sell it out. This is coming. It is real. It can absolutely spur a whole nother irrational, exuberance around access to capital through defi. We’ve got an interesting time ahead of us in the next five, 10 years.

David Greene:
Wonderful point. Thank you for pointing that out. That really sums up. I think it’s based on fundamentals right now, so I’m still buying it, and I still think it’s going to go up. But I am not oblivious to the fact that what you just described could change everything to the point that I can no longer anticipate what is reasonably going to happen. And that’s when I get scared. I’m like, ah, there’s just so many options. I can’t see how things are going to work out.
At that point, I would definitely reign in or at least put a lot more money in reserves to play the long game. Dave, any last words on your behalf?

Dave Meyer:
No, this has been a great conversation. I’ve personally learned a lot, Douglas. Thank you.

Doug Lodmell:
Yeah, my pleasure, guys. You guys are definitely on the cutting edge, and this is a great conversation. Thanks for having me.

David Greene:
All right. Well, thank you, Doug. And that was our show with Doug Lodmell. Dave, what’d you think?

Dave Meyer:
I thought that was super helpful. We always talk about the opportunity of real estate investing and obviously we both believe in that. Otherwise, we wouldn’t be here. But I really think it’s important for people, especially as you grow your portfolio, you have more assets, to really think about long-term security and, like you said, how to of keep what you have. I think Doug provided some really common sense ways, easy ways to do it, to protect yourself and make sure that your assets are shielded from any sorts of lawsuits.
I also really enjoyed just the conversation about leverage, because I think a lot of people assume you want to put as little money down as possible, and for some people that might be the right strategy. But thinking about it as a continuum of leverage has great opportunity, but it also does carry risk, and just having to find the right sweet spot for your own risk tolerance, your own strategy in how to apply leverage.

David Greene:
That was a great point. What got my wheels turning about is this idea of risk in general. It is risky to invest in real estate, and many people will tell you that, but it is also risky to not invest in real estate, and fewer people will tell you that. And as inflation continues to rip through our money supply, it becomes more and more risky to not invest in real estate. But the squeeze happens where because more and more people are seeing the risk of not investing and they’re starting to invest, is that going to create a bubble that now makes it riskier to invest, right?
This whole risk thing, you just can’t get away from it. In any direction you go, there’s always risk. I started thinking about the other day at jujitsu, I got partnered up with a guy. It was his very, very first day ever rolling. I had a bad feeling when like three seconds before we started, he goes, “So what are we doing here? Are we just like trying to submit each other?” And I was like, “Oh boy. Don’t poke each other in the eye. Don’t kick each other in the head.” Right? I thought, this is his first dime.
He’s going to start off slow, so I kind of like gently went forward to grab him. He just torpedo me right in the chest, and I fell straight backwards at a very odd angle. Like my left leg folded up underneath me and I twisted my ankle. Thank goodness, I didn’t hurt my knee because I could have. But I ended up getting injured. After class, I was thinking about how that was extra risky because he didn’t know what he was doing, and then I found out later he was a really good wrestler in either high school or college.
He wasn’t playing it safe like I was expecting him to. He went the opposite way and he went like completely 100%. I started thinking how like, well, there’s some risk in doing this. You could get hurt. But then I started thinking about, well, there’s risk in not doing it because you don’t get exercise. And if you do get in a fight somewhere, you can’t take care of yourself. You could get hurt even more. There’s risk in both sides.
You can get hurt if you go to the gym and lift weights, but you can also have bad health consequences if you don’t exercise, if you don’t go to the gym and lift weights. I’ve sort of come to this conclusion that no matter what you do, there is risk. That you cannot win by avoiding risk. That the way you win is by having a plan for risk, right? I’m going to go to the gym. I’m going to lift weights, but I’m going to start off really slow. I’m not going to go heavy, and I’m going to have a spotter, right? The odds of you getting hurt become much less.
And now you’ve also mitigated the risk of just not putting on muscle mass so you have a slower metabolism. Whatever you’re going through in life, it’s just something that… Yes, if you get married, there’s a risk. You could get divorced. You could lose some of your assets. But if you don’t get married, what’s the risk in doing that, right? You may end up never having a family and having regret at the end of your life.
I just want to encourage everybody who hears these things and feels fear, that what Doug’s preaching, what we’re preaching here is that fear is never going to go away. There’s fear in doing something. There’s fear in not doing something. The key to overcoming it is to have a plan for if something goes wrong, what you’ll do. Any last words on that thought, Dave?

Dave Meyer:
No, I think that’s exactly right. I really liked when Doug was talking about being deliberate. I think that’s a really important thing in today’s market. You and I have talked a lot about what we think is going to happen to the housing market. Personally, I think at least through the end of the year we’re going to be seeing prices go up. But I continue to invest knowing and understanding and being comfortable with the fact that it could go down. I think there’s more risk in the market now than there has been in like a decade, right?
That said, I’m still investing. Because like you said, you can’t get the reward without taking a risk. If you want no risk, put your money in a savings account, but you’re not going to get the benefit. You have to understand that if you’re an investor for 10 or 20 or 30 years, you’re going to see the market go down at some point. Just prepare yourself both legally, like Douglas was saying, but also mentally. Be prepared that there are going to be days when things are tough and when it looks like you’ve lost a lot of money.
But if you prepare and you have liquidity and you protect yourself, you’re going to survive it and you’re going to be okay. I think that’s just a mental thing you need to get over if you’re going to be an investor.

David Greene:
That is a great point. All right. Well, thank you, Dave. As usual, it was a pleasure bringing value to the BiggerPockets masses and doing this podcast with you. I appreciate you as always.

Dave Meyer:
This was fun. I always like doing this show and looking forward to it next month.

David Greene:
All right. Well, if you liked today’s show, please go to the comments section. Let us know what you thought, what your favorite part was, what you wanted us to dive deeper into, and what questions remain unresolved. Also, please like, share, and subscribe to us on YouTube where you can actually watch our faces and our hands and the various gestures that we make. Yeah, look at that. That’s a really good expression, Dave.

Dave Meyer:
Also, wait, I also have to say before we go, stay tuned for the premier of On The Market, our newest podcast that’s going to be focused on news and data and trends. April 11th, it’s coming out.

David Greene:
There you go. BiggerPockets bringing more and more value. You really don’t need anything else to listen to at all between podcasts and YouTube. We can take up 100% of your education space, and I hope we do. This is David Greene for Dave “no risk, no reward” Meyer signing off.

 

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In This Episode We Cover:

  • Quick takes on today’s biggest stories surrounding the housing market
  • The tools asset protection lawyers use to protect and disguise their clients’ wealth
  • Whether or not new real estate investors need LLCs when buying properties 
  • The biggest mistakes real estate investors make that cost them their wealth
  • Leveraging debt to build your portfolio vs. cash hoarding for post-crash opportunities
  • BiggerPockets’ newest podcast show featuring our own Dave Meyer!
  • And So Much More!

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