We're Not God - Managing $1B In Today's Economy With Scott Pinkerton

Mario (00:00:00) - Hey, guys. Welcome back. I am super pumped because I've got my friend Scott Pinkerton with forethought private wealth on with us today. And Scott's actually a friend of mine. We're in a mastermind together and have gotten to know each other and each other's businesses very well over the last couple of years. And I was talking to him and thought that he'd be a great person to come on and help educate all of the entrepreneurs and commercial real estate investors from a little bit different angle than the direction that we typically talk about this stuff. So first of all, thank you, Scott, for being on. I'm excited to be able to hang out with another friend here on a on this call here. So thank you.

Scott (00:00:38) - My pleasure. My pleasure. Mario. Welcome, Mario World.

Mario (00:00:41) - Yeah, really? So Scott actually runs a very successful firm, private wealth firm and asset management company. They are correct me if I'm wrong, you guys have over $1 billion under management, correct? Right.

Scott (00:00:56) - 1.2 billion.

Scott (00:00:57) - I've been in the business for 35 years, um, in Venice, Florida. But we have clients really worldwide, but primarily southwest Florida.

Mario (00:01:07) - Love it. And what I like about Scott is he's not just your typical, you know, sit down, let's make a plan. He actually understands what he's talking about. And when when I've I've heard Scott get into some pretty deep discussions about the economy, the direction of things, where the direction of things are going and overall financial knowledge. And he's super deep on it. So that's why I wanted to get him on. And he's got a great base that he comes from as well. Great foundation of faith, and I think that's super important. He's not an ego guy. He's he's a data and and data guy and he's got great foundation. So let's dive into this. Scott, let me ask you this, man. We've got entrepreneurs, we've got commercial real estate investors listening. There's a lot of kind of question marks in the economy right now, and I'm not going to have you do any major predictions on today's discussion.

Mario (00:02:05) - But what I want to ask is what kind of a mindset should we as investors, whether we're investing in real estate's public equities, bonds, whatever, what kind of a mindset should we have in this type of a market with so many question marks going on?

Scott (00:02:23) - Cautious. And then one word, I would be very cautious. This is a schematic that we use all the time. It's dated and it's basically you see the highway that you predict that you're going on, but then you also kind of define what we call the loser lane and negative Street, positive place, Best Boulevard. And one of the lessons that we learned from my faith, you know, lesson number one is that we're not gods. And so be very careful about predicting. And if I look at people who have blown up and that's the key to successful real estate investing is always be able to stay in the game. It's when they think, hey, I know exactly what's going to happen and it ends up going this way. So what we try to do is say, okay, this is our base case, but then what would be the street signs that would take us to the negative or to the positive? So our base case going into the year was that, you know, markets were fairly, if not overvalued, that corporate earnings, the analyst expectations were still very high.

Scott (00:03:25) - And if the Fed was raising interest rates and valuations were high. So, gosh, that doesn't sound very attractive place to invest. And yet here we are, the market. The Nasdaq is up like 30%. But what gives me caution, I just grabbed the statistic, the market through June 2nd. All right. It was up 12%. It's up more than that now. The largest seven stocks. So think about Apple, Microsoft, Nvidia, Netflix, Meta, They those seven stocks were up 53% this year. Yeah. So you have 500 companies. The biggest companies were up 53%. The remaining companies weren't up at all. Wow. So this is a market that we call very narrow in breadth. So if you were a commercial real estate investor, it would be like having a 99% of the statistic be based on one very narrow market, let's say Vegas real estate, which has nothing to do with Southwest Florida real estate. And so, you know, it is a psychological impact that's having on investors.

Scott (00:04:38) - And there's this fear of missing out that's happening with investors. But but the underlying market is not showing nearly the resilience of those top tier stocks. I'm reminded of that old cartoon from Bugs Bunny, you know, where the wily coyote runs off the cliff and his legs are moving and he looks down at that. Yikes. But but again, we're not God. So this thing has been surprising. It's been surprisingly strong. Thank goodness we we didn't, uh, you know, overly invest in our outlook. But but my, my advice would be cautious. There's a especially in the commercial real estate market and I know everybody knows that. But we can dive into the reasons for caution there.

Mario (00:05:20) - So let's. Yeah, that's a great point. And what I like is that Scott's looking at it from a macro level. He understands commercial real estate. He understands the equities, the bonds. He understands these the different worlds within investing. He's not just a public equities guy. And so he's very well rounded.

Mario (00:05:39) - Let me ask you this. With that whole we are not God, and I've heard you say that for the last couple of years, Right? That is that's like a super important phrase that I've heard you say. What does that mean, mean for like the average investor who's out there buying either real estate or any other investments? What does that mean to us? What should we be? How do we know if we think we're God or not?

Scott (00:06:04) - That's a great point. So you can get into the theological point, but it goes back to the Book of Genesis. And it's and if you're not a person of faith, just think about our ancestors. Thousands and thousands of years ago, we think 8000 years ago, and they had to pass down stories generation to generation. So they told it in story form, which tells us a lot about how we ought to be, you know, talking about our businesses and story for them. And one of the first things they wanted us to know is that we don't know what God knows.

Scott (00:06:34) - We we cannot eat from the tree of knowledge. And, you know, I've been doing this for 35 years and I have seen people make fortunes and lose fortunes. And what tends to happen, especially to successful people, they forget how much randomness is in the world and they attribute and these are conformational biases. They attribute their success to their own smarts and their own hard work. And no doubt, you know, our hard work, our smarts have a lot to do with our success. But we can never forget the impact of randomness. And so having that first and foremost in your mind, what could go wrong? What's the worst case scenario? So here's the dangerous thing that I'm sure you run into in commercial real estate. We run into it with stocks. We're managing $1.2 billion. We've got a group of six that meet weekly to discuss our different portfolios. And we'll have an analyst go out and they'll spend literally hours upon hours researching a company, I tell you. Nobody wants to go through that exercise and then come out and say, we don't want to do it.

Scott (00:07:45) - Yeah, there becomes an inlaid, but you almost want to do the deal just because you've spent so much time on the deal and saying no is so critical. And so, you know, being being God means that you you trust yourself more than you trust your eyes. Chico Marx said, Who are you going to believe, me or your own eyes? Well, the reality is, we fool ourselves more than anything. If we like a deal, we'll overlook street signs. So getting back to the street sign concept, I can talk about this stuff all the time, Mario. So please wave it. You're good. But. But, but. But what? I would. What I would recommend someone doing commercial real estate and analyzing deals and let's say, for example, in your space and the space you want, you want us to refer to this as. Park models. Is that is that the correct mobile home park?

Mario (00:08:31) - Yeah. Mobile home Park. Park. Commercial real estate. Yeah. You know.

Scott (00:08:34) - People get we got to be so.

Mario (00:08:36) - Careful. Parks trailer park. So you're trying to avoid you're good.

Scott (00:08:40) - It's all good as long as it does the green.

Mario (00:08:44) - You want to hurt my feelings? Yeah. So.

Scott (00:08:45) - So. So when you start to look at a park before you invest time right down, put it in writing. You know, what would be the things that would make you would encourage you and discourage you. And then read what you write and hold yourself accountable. Every mistake that I've made, it's when I've said, okay, if this doesn't work out, if this isn't the piece of the puzzle isn't there, I'm not doing the deal. But then I get so enamored about the story that forget that one piece of data and the deal blows up. So it's a mindset. One of the one of the great writers in my time has been the Seem to Leave. He wrote The Black Swan Fooled by randomness.

Mario (00:09:28) - Just wrote that down. Actually, when you were talking, I wrote down Black Swan.

Mario (00:09:32) - Keep going.

Scott (00:09:32) - And remember when we had a speaker one time we had a we had a person come in on healthcare in our in our mastermind group. And the woman said, Think, think about being antifragile in your healthcare. And that's another Nassim to lead book. But but the idea you know and his whole his whole wave of thinking is ancient. You know again acknowledging that we're not in control, we don't control all outcomes and we have to set up guardrails for ourself. And even if you understand that you're biased, you still fall victim to those biases. Yes, you do. It's amazing. Yeah.

Mario (00:10:07) - Well, well, and actually, the example that you've given is so real, because what happens is whether it's starting a business, whether it's buying real estate, you know, whatever, or you're researching a company to invest in, you put a lot of time and money and, you know, really energy into something that you start to marry yourself to it and you want that deal to happen.

Mario (00:10:34) - I can't tell you how many times I see investors get overly excited about a deal and they start making a bad deal. A good deal, right? They start tweaking things because they're so focused on getting the deal done that they forget all the guardrails that they put in, which is kind of what you're talking about guardrails. They put those they basically start knocking down all their guardrails because they want to finish the deal and they forget about the metrics. And so I love that. And I think that goes with any sort of business endeavor. You've got to put up your guardrails and know when to to to cut it loose. I mean, there's people who start businesses and they run in the in the red for a very long time, for years. And it's unsuccessful. But because they're so committed to being a success that they drive themselves into bankruptcy, where if they would have said, hey, look, if by this time we haven't gotten to this Mark, we need to either rethink it or shut it down and do something different.

Mario (00:11:31) - So I love what you're talking about there.

Scott (00:11:33) - And another thing about risk when you're doing a deal evaluations is you got to remember that probability is not the same as consequence. So you have to separate those two in your mind. And it's really evident in in real estate. So you have the probability of a deal being success, a success. And let's say that you might have a 70% confidence ratio. And what I would do is I would tell your team and yourself to actually write down a number and the more granular the number, the better. And in defend it, you know, why, Mario, do you think this is a 76% probability and not a 78% and that's that that that crystallizes your thinking. So let's say hypothetically, I'm going to talk about the difference between probabilities and consequences. Let's say hypothetically that we had a gun and in that gun there was 100 chambers and we put a bullet in one chamber. And we said, you know, put it to your head. What's the probability of it being, you know, a bullet and you die? Well, the probability is 1 in 100.

Scott (00:12:43) - And let's say I told you, hey, Mario, I'll give you $10 million if you play that game. You know, Is it? What would you do? Well, I wouldn't do it. And I doubt you would either, because even though, you know, hey, it's a one in 100 or 99 times out of 100, I'm gonna have 10 million bucks. But that one time, you're gone. Yeah. Literally dead. And when you're evaluating a deal, people say, well, this thing has got to work. But then go through this mental exercise. You don't know whether today is September 10th, 2001. You know, 911 could be tomorrow. And I've seen it happen. So if you get yourself too far out on that diving board, you're diving in and there's no coming back. So, you know, when biblical principle is, you know, remember, you're not God. The other biblical principle is, remember the flood? You know, the flood happened in the world was turned upside down.

Scott (00:13:43) - And especially in real estate investing, the use of leverage can be damning. You got to use leverage. That's how you get your multiples and stuff. But be careful if you have 911 tomorrow, would you be able to thrive and survive? If you're not, you're not antifragile. So that's a that's a I've seen a lot of people blow up because of that.

Mario (00:14:04) - That's super true. I think the Black Swan event is something that we all completely underestimate and we think isn't going to happen again. But it happens every few years, if you think about it. I mean, we had 911. There's been other things that have happened that maybe weren't as catastrophic as 911. And then, you know, 2020, you've got Covid 19. And these major events that completely shift markets, they completely wipe businesses out. They completely changed the way we do things. We just think it's not going to happen again for some reason.

Scott (00:14:43) - One of the things I would warn you is to never use the words That's never happened before.

Scott (00:14:49) - Yeah, So the investors in Silicon Bank, you know, the guy made a speech like three months ago saying, you know, we've averaged 20% return on equity year after year, the most profitable bank. And then in one day it went to zero. And we saw that with long term capital in the late 90s. So so there's a there's a Naseem to leave saying never confuse the absence of evidence. Never confuse the absence of evidence with evidence of absence. And what that means is just because it hasn't happened doesn't mean it won't. People in Venice, for example. They say, well, our real estate price market's never going to go down because we've never been hit by a hurricane. Yeah. You know, and they and they get in their minds that there's some, you know, prehistoric structure out in the Gulf of Mexico that prevents this storm that's coming, you know, from from hitting Venice. You know, it always hits Port Charlotte. Maybe there is something to Charlotte Harbor pulling it in.

Scott (00:15:45) - But the point is, no, We know that there could easily be a hurricane that hits Venice. We're not protected that way. But how many times do investors do that? They say, well, that hasn't happened before. Or you've been saying that for a long time and it hasn't happened. So therefore, I dismiss it. You know, like on CNBC this morning, Joe Kernan was interviewing this person and he's talking about how he's been predicting the market to to go down. And of course, the market's gone up. So he's going, when are you going to give in? And he's like, well, I still think it's going to go down. So doesn't mean it won't happen.

Mario (00:16:20) - Yeah, for sure. And, you know, let's let's talk about this a little bit further. You know, if we're going to protect ourselves against potential downside risk, there's a few different ways to do that. Right. And I've heard it all different, all different ways. But the two main are go all in on one thing and be very, very good at it.

Mario (00:16:40) - Build your wealth that way. Then there's the other opposite end of the spectrum is be very, very diversified. And what I've typically said is you need to do what you're really good at to build the wealth, and then you need to become passive and bring in other people to help you diversify, which then allows you to, you know, bring in experts at what they're good at. So, for example, in my personal portfolio, I've invested the majority of my time, effort and resources into commercial real estate building my mobile home park portfolio. Right. Um, but I'm also diversifying both in commercial real estate by buying self-storage, but I don't manage that and I don't claim to be an expert. I have other people that manage that. I've also invested in some other things that I found experts, people I knew that put far more of their wealth into those things. And then they've guided me through investing in those other asset classes. Now you can go all the way and have an asset manager or a financial advisor wealth manager do it all for you, but generally speaking.

Mario (00:17:45) - Where do you fall in the spectrum of that? Do you fall, be all in one basket, be an expert at it, and build your wealth that way? Completely Have somebody else manage things for you or somewhere in the middle. What's your thoughts on all that?

Scott (00:17:58) - Think. Think. You hit the nail on the head there, Mario, is is that when it's something that you can control? And you're competent and good and successful. Go ahead and concentrate your wealth. But if it's something that you don't control, you want to diversify.

Mario (00:18:15) - Yeah. So basically build your wealth with one thing, take that money and then diversify the cash that you've created into other things with other experts helping you do it.

Scott (00:18:25) - Correct. So so, you know, we have we have two businesses at forethought. We have our private wealth businesses, which is really the mass affluent. But you would think as as financial planning. And then we've got what we call our signature services, which is for those ultra high net worth families and of the families that we work with and there's probably 5 or 6 have net worths of more than $100 million.

Scott (00:18:53) - Uh, and without an exception, what we work with is, is entrepreneurs who are focused on their family and they're all they all own and are concentrated in a single business. And that business is hugely successful and then we're helping them in the next generation understand the values as they pass that business down to the generations and have family meetings to make sure everyone's in alignment and the family experiences joy from their success and not others. But but it get to the point which is real wealth often gets accumulated through the concentration in an individual business.

Mario (00:19:33) - So let's talk about this a little bit deeper because. I know that the majority of the listeners here want to build a lasting legacy for their families, right? That's why I mean, that's why we do it. We want to obviously build wealth and have fun, but a lot of us are thinking about the next generation and how we're going to do that. What have you seen from a mistake standpoint? Entrepreneurs make or investors would ever make when they're trying to transition what they've built to their family.

Scott (00:20:08) - Well, the first thing I mean, there's so much biblically about this. And, you know, Christ says that if you focus on worldly things, you'll end up unhappy. And there's a there's a thing called the hidden treadmill. Meghan, a complete tangent here, but one of my favorite stories is, um. Guy's name is Heller, who wrote Catch 22. Frederick Keller. Yeah. Anyway, he's friends with John Bogle, the founder of Vanguard Mutual Funds. And this is a true story. They go to this party in Cape Cod and there's a hedge fund guy, and the guy says and he's there for a fundraiser. Um. I think it is Fredrik Heller. Somebody can Google it for me. Anyway, long story short, um, Bogle turns to Heller and says, What do you think about this? This guy makes more in a day than you made off of your entire, you know, your entire life. And Heller says, Yeah, but I've got something he'll never get. And Bogle goes, What's that? And he goes, Enough.

Scott (00:21:12) - And so traditionally with families, there's been a cliche or an aphorism called shirt sleeves, the shirt sleeves in three generations. Yeah. And you see the hard driving entrepreneur, matriarch, patriarch of the family. And then you have the next generation. So the wealth gets divided a little bit. There's potentially some conflicts there. And then you have the generation after that. The wealth is really divided. And that third generation, they're used to that quality of life. They expect that quality of life and they can't afford that quality of life and they lose purpose. And there's a whole psychology and we have a whole division that works with families on that subject. But, you know, I think it's it's certainly fantastic to have as a long term desire to leave a lasting legacy and to and to let leave the next generation better off than than you were. But you also have to balance that with making sure that they've got the foundational tools and that they've got a healthy relationship with money and to enjoy the enjoy the journey with you and don't lose sight of what's really important.

Mario (00:22:25) - Yeah. I mean, the third generation was never there to see what it took to build it, so they just know it was there and they've always had it. So the expectation is, I deserve this, right? This is my lifestyle. And as they squander it, they don't know how to grow it back because they were never around that their parents were, you know, with grandma and grandpa, but they haven't actually been involved in building something. And so I think that's super valuable. So does that tell us that we should have education and passing on the knowledge along with the wealth or it's all going to disappear in three generations anyway?

Scott (00:23:07) - No. Think there's families that have that have shown the way of doing this properly. It starts with, you know, with young kids starting them on an allowance, uh, getting them involved with one of the challenges. So my, my girls are, are late 20s, early 30s. Two of them, two of my three girls are married and we just had our own first family meeting over Memorial Day.

Scott (00:23:27) - And it was funny to be on the other side of it. But the, the the that we started off our conversations with values. So so what used to happen going back again talking about ancients is that the whole clan lived together probably in Puglia, someplace like that. Are you Sicilian or.

Mario (00:23:48) - You know, my last name is Sicilian. Yeah. So. Okay. Yeah.

Scott (00:23:52) - So. So. So. So you were together and you thrived and survived together. And Uncle Bob and Aunt Joan, you knew them. You knew all about them. You knew their weaknesses, their strengths. You forgave them. And you work together. And you had this closeness that came through time. And today, you know, I sent my girls to these prominent schools. They came back different at the same time. I'm different. And you and you have to have really curated conscientious conversations and a commitment to communication and decision making within that family structure. It doesn't come naturally because we're so distant and our values are different, generally speaking.

Scott (00:24:37) - And so it really takes conscientious work. It doesn't happen as naturally as it as it always has historically. It's a fundamental change in our society.

Mario (00:24:47) - In, you know, when I started my first business, in my mind, I wanted my future kids to not have to work and to not have to, you know, do what I had to do in order to get that lifestyle. Over time, as I've grown and become more mature and had to go through things, I actually think the opposite now. You know, if if I'm able to have children in the future, if we if my wife and I have kids, I almost would go the opposite direction and give them the feeling that they're not getting it and they have to build it for themselves. And then that way over time, if they're, you know, if I decide to give it to them, then I'm able to educate them. But they come in with grit. They come in with the understanding that, hey, if you want this lifestyle, you're going to have to work for it too.

Mario (00:25:37) - And maybe they get a little bit bigger inheritance than they ever expected, but at least they're mentally prepared to do it on their own. And as you said, we're not God. We don't know what's going to happen. I don't know at the end of my life if that wealth is going to be there for them. So if they're positioned to build it themselves, then if something does happen and I do get wiped out, then at least I know that they're there. They're strong enough to make it back on their own. And so I love what you're saying in that whole staying as a clan and staying together and making sure that you're both on the same page and growing together, even as they get older and become individuals themselves, they're able to grow and know how to handle it. So I've seen some very spoiled kids that I would never want my kids to be like. And so I think that comes with hair. You're expecting, you know, this lifestyle, right?

Scott (00:26:33) - You know, as I tickle the ultra, ultra, ultra high net worth mean we don't work with multi-generational.

Scott (00:26:40) - I've got a friend who works for a family office in Raleigh, and their family has 400 people. That's supported by $1 billion family family office. And so it's the when you're dealing with the psychology at that level, you know, it's about finding purpose. And kind of one of the the the the cliches that I always think about is was said by the the guy blank. I'm not drawing a blank. His name is blank. That was one of the CEOs of Home Depot once upon a time. And he said something to the effect of I want my kids to know that they can do anything they want except for nothing. Yeah. In other words, if you want to be a teacher, be a teacher, you know? And so there's ways in which you can inoculate your kids against kind of the excesses and encourage them. But it's all about it's all about, again, finding joy. I mean, we could talk for a long time about it, but I've had the experience. One time I was I was asked to give a message at church and it happened to be the weekend, uh, the week of the weekend of the week where I think it was back in 2019 when Kate Spade committed suicide.

Scott (00:27:58) - Anthony Bourdain committed suicide. And there was a singer from a gospel band called The Blind Boys of Alabama. And he passed away that week, too. And one of his biggest one of their biggest hits was a song called The Satisfied Mind. I remember the chorus was something like, uh, how many have said that if I had his money, I do things my way. Uh, but how little they know how hard it is to find one rich man in ten with a satisfied mind. Yeah. So don't. Don't mean to pretend to know what was going on with Spade and Bourdain, and don't want to belittle the need for. For counseling and help. But there is a thing called the hedonic treadmill. And if you get caught on that, you know, there's always somebody with a bigger boat. And we always look up the ladder and say, Oh, I envy that person on Facebook. They've got a better life than me. You never really looked down the ladder and be thankful and grateful for what you have, Right?

Mario (00:28:57) - That's so true.

Scott (00:28:58) - And when you when you have a family of wealth and that and that and that whole component is taken away and also the way people see you, especially when they know and just going to someone and saying, hey, just be the best you can be as a teacher, that puts an enormous amount of pressure on it because they've got this matriarch or patriarch that is a uniquely gifted person and randomly was in the right place at the right time. And so it's complicated. This is the point. I can tell you a person, yeah, Personally, I had two son in law and none of my daughters were interested in the business. I'm 60 and I've got a transition plan that doesn't include my family. Um, and I went to my one son in law and I said, Hey, what do you think about, you know, coming and exploring that? And he came in and we talked about it a little bit. He's an Army Ranger. And he said, Do I get to jump out of airplanes? I said, no and shoot people.

Scott (00:29:53) - Yeah. So maybe this isn't a fit for you. Yeah.

Mario (00:29:56) - Yeah. And that makes sense. I mean, forcing your family into what you're excited about can also be catastrophic, too. I mean, if just because I'm interested in trailer parks doesn't mean that, right? You know, my kids are going to be. And so forcing them into that can also become catastrophic to. Let's let's talk about something else here. Um, you know, interest rates are quirky right? The Fed's playing a lot of games. They're they're basically playing the puppetmaster they're trying to get it just right. Just recently, um, they decided not to raise rates. Can we just briefly talk about what that does to the mentality of the economy, the mentality of the markets, mentality of businesses when the Fed kind of plays God with the economy? Or attempts. Yeah. Bad. Yeah.

Scott (00:30:50) - Think that that's an interesting perception. Um, let's talk about interest rates and would love to get your perspective on the impact and your in your niche.

Scott (00:30:59) - But I was talking to a company yesterday that does multifamily housing and they provided this graph and you can't see it obviously, but it's a research put out by the Federal Reserve Bank in Saint Louis and basically borrowing costs for the first time since the great financial crisis exceeds cap rates. Yeah. And. And the Reaper. I mean, this is. This is. This is when I think about Loser Lane in the economy. This is a big street sign for me. What's going to happen with commercial real estate writ large? I mean, we all know the the story about these hollow buildings in downtown Chicago and downtown New York and downtown San Francisco. And, you know, is that going to be permanent? Is it going to be, you know, what's how are they going to repurpose? And and so, you know, there's some shoes going to be falling. And then you have what's going on with Silicon Valley Bank and and the financing apparatus in America now and what that impacts. But your question about the Federal Reserve is.

Scott (00:32:08) - It's complicated. So one of the things that people I think, mistake that they make is that the Federal Reserve controls interest rates. They control the Fed funds rate. But the bond market is an auction. And every day people go out and the Fed's got to borrow a certain the government's got to borrow a certain amount of money. And people are competing to try to to to borrow that money or to provide that money with the highest interest possible in the Fed obviously wants to do the lowest interest. So, you know, bond rates will move based on market intention. So the Federal Reserve's got three things that they can do. You know, one is they can raise the Fed funds rate. Two. They've got this quantitative easing, which is an enormous thing. I don't have the graph with me, but we've talked about it, which, you know, you heard about these things two years ago where the government was basically printing money. And using that money to buy bonds. And forcing the competitive. So suddenly you had a bunch more demand.

Scott (00:33:12) - Half of it, more than half of it was artificial. Right. And the demand and the supply was steady. So what happened? Interest rates went down. So now the Federal Reserve is saying we can't do that anymore because if they keep printing money, the money will they really talk about the one bullet in the holster? Yeah. You know, you lose, you know, the United States as the global currency. You lose faith in the dollar. And that's where Bitcoin, you know, that's a bullet to the head, to the Federal Reserve's got to really manage that. And the third thing they have, of course, is their pulpit, you know, the managing the expectations. And so they really are trying to think of an analogy. They're held responsible and held accountable to the economy, which is so much more complex than the body. Yeah. And we think about a doctor and holding them responsible for something that's growing inside of you. You know, they can help cure it, but they can't necessarily fix everything.

Scott (00:34:15) - So it's complex. But but but what's happening now is just a confluence of events. So we just had the debt ceiling. Yay. You know, we avoided a crisis. But what that means is the Federal Reserve.

Mario (00:34:26) - By the way. Yeah.

Scott (00:34:27) - But talk about one bullet in the chamber if we didn't. So so that means is that the Federal Reserve is now going to go out and issue a bunch of bonds. The market knows it. So, you know, interest rates are kind of held higher right now because of that. Then the Fed pauses on raising rates now. So what does that do to the psychology of it? And then what's real for commercial real estate buyers, of course, is can you get money? And the answer is not a lot, and certainly not by the ratios that you use to have. So let me kick this back to you, Mara. Ask you a question. So in in a typical real estate deal that you work with in your space called mobile home parks.

Scott (00:35:11) - I know with multifamily housing, what typically happens is you you have a gradual phase in of the development of the project and then it's usually like a five year balloon. And the banks had traditionally given like an 80% loan to market. And now they're coming in at 60% low in the market. Yeah. So are you seeing that in your space, too?

Mario (00:35:38) - So really good. Really good topic. And you're a great interview by interviewer, by the way, Scott. So, um. What we saw in the apartment space is too hot for too long. Basically, we talked about this at the very beginning where investors find bad deals and they make them good deals. And you could do that through financial engineering, right? So you can you can use certain debt instruments that make the deal feel good, but it comes with a lot of extra risk. So what happened was you had these guys that and girls that couldn't buy apartment buildings without very aggressive debt with like floating rates, short term bridge, things like that, with very short wicks at the end.

Mario (00:36:26) - Right. And now you've got interest rates shooting up. So their rates are actually moving. They're adjusting on a monthly, quarterly or annual basis, which some were smart, I don't want to say smart, but cautious enough to put caps in, which cost money, right, for hedge?

Scott (00:36:45) - Yeah.

Mario (00:36:46) - And many did not get a cap on that rate. They didn't buy the cap. And so they're being put in a position where even if they followed their business plan, hit all the metrics that they thought they were going to hit, they didn't expect the interest rates to go up as much. And like you said, cap rates have went up, which creates an issue in value, right? The value comes down and they're not going to be able to refinance those properties even if everything is running really, really smooth. Their value has come down past that 80% mark. They're upside down on a property potentially due to no fault of their own except for picking bad debt and having to short of a timeline to recapitalize the deal.

Mario (00:37:30) - And they're going to either have to do capital calls to their partners, they're going to have to come with cash to refinance, or they may end up having to lose some deals because they're so upside down. Now, to answer your question. Mobile home parks, for the most part, have not gotten as as hot and there's a lot less people chasing them. So we've been able to buy things with significantly higher cap rates going in. And most of the assets that I know for my group, but many of the other investors out there, the professionals are buying, is are really strong value add deals. So because the properties were underperforming so much and the previous owners were running a more like lifestyle businesses, they left a lot of room, a lot of meat on the bone to to pick up. And so we're able to create a lot of value. So we may be at a 50% loan to value just stabilizing the property. So even if cap rates do go up a little bit, there's still a ton of upside that we're able to to to eat, basically.

Mario (00:38:34) - And there's a lot of room for for error there. But there are industries like apartments and a few others that have gotten so aggressive on the debt side. I don't know anyone who is buying mobile home parks with short term adjustable rates. Um, there were some that probably bought with hard money but mostly smaller properties. So those guys might be in trouble. But the apartment space has a lot of risk and there's probably a an awakening coming, coming for even great operators.

Scott (00:39:09) - One of the things that is unique from my seat is I listen to Mario, I've got other friends in the industry and we invest in multifamily housing and projects like that. We also see the other side, which is, you know, we're putting together the financing for these deals. Yeah. Um, in certain ways. And the amount of business that's happening happening in the non-bank non-traditional areas is huge. But, but, but the circle back at your point, which is especially in multifamily housing again, so that the listeners know I'm repeating what you just said is that you have a deal that's worth $100 million, let's say, and you get a loan to value of 80, you know, 80,000 or 80 million, and then you got 20 million in equity.

Scott (00:39:56) - And then your expectation is that that you're going to do some value value improvements and that 100 million becomes worth 110 million. And so now you've just had a 50% return on your equity. It's working great. And now what's happening is they're revaluing that property so that you don't have that pop and they're going to you, Hey, it's five years. It's a good project. You know, all's well, but you got to come up with 20%, 20, 20 more million dollars on the same project. And you're like, don't have the cash or the cash flow to do that. And so what we're doing and some organizations are doing are putting together syndications that you have Fannie Mae that might do, you know, 50 to 60%. They're coming in with something called preferred equity, which is, you know, they recapitalize the deal. It's like a cash in refinance. How about that? That's exactly the opposite of what you want. You want to refinance and cash out, but you have to put money into the project and maybe you only have, you know, 5 million that you can put in or 10 million to get in the project.

Scott (00:41:03) - You're still short $20 million. You're willing to pay through the nose to get that financing right. And so you're able to, you know, from our perspective, you're able to demand 11, 12, 13% interest for a two year note or a three year note that's protected by that that that new, you know, reframe value. It's not it's not risk free, obviously, but it's sure. When you look at the risk reward, it's a huge reward and then some as a sweetener some are letting you roll the entire amount into the equity of the deal. Yes. At a revaluation. So it's from an investment perspective, uh, I would argue that you're better off doing the financing of the recapitalization of these deals rather than trying to go out and do a deal. Yeah. Mean the cost. And, and let's talk about insurance costs. Throw that into the equation.

Mario (00:42:01) - So on top of that, you got inflation hitting you from the the bottom coming up on you will the top might be staying strong your bottoms coming up and on top of that you've got a D-Day happening pretty soon where you've got to recapitalize the whole deal.

Mario (00:42:15) - And you said something that's really good, Scott. Basically what you said is there's opportunity in this and there is there's opportunity for investors coming in and buying these assets from people who need to get out. But there's also opportunity for groups that want to finance these deals out. And really what you're saying makes sense. You know, if you can bridge the gap to where interest rates basically come back down or the performance of the property continues to improve and you can create that value, you might be in a really good position. You said something else. Interest rates have exceeded cap rates. Why is that? Why would anybody buy something at a lower cap rate than the interest rate? And really, what I've gotten out of it talking to commercial lenders is that the sentiment is interest rates will come back down. And so we're buying this today at a five cap with a 7% interest rate or 6.5% interest rate, Well, they're upside down. But they know that with the expectation of when interest rates come back down to four.

Mario (00:43:19) - Okay. Or four and a half or five, then we're going to be in a really good position and we were still able to grow. Lastly, a lot of investors took a lot of blind capital into their blind pool funds and they've got to deploy that capital because it's got a cost, it's got it's got a preferred rate of return ticking on it and they've got to deploy it. So it's forced them to go out and buy assets that don't make 100% sense. But with that expectation that it'll all come back. And so they've taken money that they couldn't deploy fast enough and they have to continue to buy things. And so I think that's kind of forced people to over continue to overpay even with higher interest rates. Typically with interest rates coming up, the cap rates move along with it. In this case, there's some other factors that have caused that to be different.

Scott (00:44:05) - It's amazing. Yeah. And think that that the opportunity is there and on to that side. The other thing that's happening in fill feature filers that's the way you name.

Mario (00:44:18) - Fill filer.

Scott (00:44:19) - Yep officially he's he's also a friend of ours and he provided us some statistics on the local real estate market. And I think what's what's really alarming and it's this this is housing, retail housing is the number of deals are drying up. I mean, you have people that they got this mindset where, okay, that's the high water mark. My piece of property is worth $2.5 million. Whether it's worth it or not. They got it in their mind. I've seen people hang on to a crappy investment because they had an offer of $800,000 for it and then they come back, you know, 15 years later and say, Hey, I finally got my $800,000. That would be like $5 million if you just put it in a T-bill or something, you know? But you made back your money. So so you have this mindset of that's what it's worth. And the. Offers aren't coming in that at that level. And so deals just aren't getting done.

Mario (00:45:14) - Yeah, it's it's a halt.

Mario (00:45:16) - There's this disconnect between the buyers and the seller sellers, especially on land trades and new development for new development projects. You're exactly right. Mean it's causing problems for sure There's definitely there's you know it's it's definitely going to be regional like what you were saying before. There's certain areas like southwest Florida that are still building because there's such high population growth in demand where other markets, many markets around the country, a lot of that has just come to a halt because there's no there's no demand for the for the product. And so they just have all the developers are stepping away like, whoa, whoa, whoa, I'm not going to pick up any more land right now because they don't know what the future looks like.

Scott (00:45:56) - And so the other issue that's hitting commercial real estate that just got to flush itself out as the insurance costs. Yes. Now, we had a great legislative action in December where in Florida at least we address some of the overhang like a sign ability and loser pay and some other things but doesn't help.

Scott (00:46:17) - Insurance costs are up 100, 200%. And that's like, geez, where do we do with that?

Mario (00:46:23) - I had one policy on a building of mine. It went from $22,000 a year to $110,000 is what we got quoted from that same carrier. We ultimately found a less sexy policy for about $43,000. So it more than doubled in one year and did not have as much coverage, but it was sufficient. And but can you imagine going from 22,000 to $100,000 year over year? I mean, it would have wiped us out. And so there's there's a lot of truth in that and a lot of cash flowing assets can go from cash flowing to negative with just one notice of, hey, we're dropping you, you need to go get other coverage or by the way, we're quadrupling your your premiums for the year. So yes, there is some risk. Yeah.

Scott (00:47:15) - So look at those line items on your pro forma because that's that's that's one that you're not going to be able to predict very easily.

Mario (00:47:22) - Exactly.

Mario (00:47:23) - Scott, this has been a super fun conversation. I think you've provided a lot of value and also gotten people to think maybe a little bit differently than what they're seeing in in, you know, online platforms and on the news and everything to to be definitely more conservative. Think through the big picture. Look at, you know, those potential black swan situations, be more diversified but use professionals to do it. Um, you've explained what your business is. Can you maybe tell people how they can get a hold of you and who should get a hold of you?

Scott (00:47:54) - Yeah, I always say that we exist to help people make better decisions and live with less stress. And so our team of planners and our whole team is focused on helping you with all of the decisions about your money. And we see you as a hero and not us. So we're positioning ourselves as expert guides, providing you just the information you need. But there's two two critical questions that we help you answer. The first one is, are you going to be okay? You know, So is your plan if it you know, if you stay on track, are you going to be able to accomplish your objectives? It's not such an easy question to answer.

Scott (00:48:30) - Yeah, because you got to define what okay means and then you have to have the tools and the discipline to track it. The second question is, do you have any blind spots and just will grab another helpful thing here. This is a graph of all of the biases that we have. So we the answer is do you have blind spots? The answer is yes. Yes. And we're trained to help people figure that out. So go on to our website. It's forethought as in the spelling of the of the number for forethought. You can learn more about us and we're happy to if you need help and you want to talk to somebody about big decisions, you know, feel free to give us a call for sure.

Mario (00:49:11) - Scott's company is great. I've gotten to know him and his company very well and highly recommend him. So, Scott, thank you so much for being on. This has been awesome. See you guys on the next one. Thanks for listening. Hope you got out of this as much as I did.

Mario (00:49:30) - I'd really appreciate it if you could leave a five star review so we can reach more people. Jump over to MarioDatillo.net and find out what else I got going on. Be sure to connect with me on all the socials and I'll see you on next week's show.