How Hallmark Story Structure Reveals a Better Way to Evaluate Deals | Ep 105

James: What if the way you evaluate real estate deals could match the exact same story beats as the Christmas Prince or the Princess Switch, or literally any Hallmark Christmas mini small town movie romance type of thing. Wouldn't that be awesome? Well, that's what we're gonna talk about today on this Christmas episode of the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing even on Christmas.

You are welcome because our mission is to equip people to invest wisely in both properties and people so that together walking into the new year in this holiday season, we can build wealth while improving housing 'cause we're not Scrooges. I'm James, and this is my wife Jessi.

Jessi: Merry Christmas. Yeah.

James: Like your, uh, like your glasses there.

You got a mm-hmm. Little, little set of, got a new set of readers on you there. That's right. For those who are listening care to describe what it is that you're wearing. Um,

Jessi: these are very snazzy litter Christmas tree glasses with their bedazzled.

James: Oh yeah. I see the bedazzle and has

Jessi: some pompom ornaments.

Christmas trees on the top. I like it. I got some light. Light up.

James: Dang. You are extras

Jessi: just in case.

James: I'm ready. Nice. So what do you think, do you, uh, do you love Hallmark movies? Is that like yours? Is that your jam? Well,

Jessi: I, I dunno, I'd say that I love them, but I will watch them and they've become kind of a Christmas tradition.

Let's, for our family, let's

James: say hypothetically, I didn't love them a lot. Do you think you would watch them? Um, probably, I think I'm just, I'm just trying to guess how much I influenced you, or I would probably watch a

Jessi: couple.

James: Okay.

Jessi: Every year.

James: Gotcha. Yeah. Yeah. There's

Jessi: like the one or two that I'm like, oh yeah, that is a sweet story.

James: Mm. Yeah. Yeah.

Jessi: And I do, it's a nice, put it on in the background because they are very predictable. Many of them. Yeah. Yeah. Yeah. And so it's like, that sucks on my first point. I don't have to pay attention. Yeah. To, you know, to I'm sure you have multiple points in there, but it's like, different.

Scenes come up and you're like, oh, this is the scene where they blah, blah, blah. Yeah, yeah, yeah. You know, whatever. So where it's like

James: we're watching snowball scene, we, I was, I was just thinking that we were watching with our kids. I'm like, oh, look out. They're not the kids. Because you can just tell, we're like, look out for the snowball fight.

There it comes. Here it

Jessi: comes.

James: Yeah. Someone's gonna

Jessi: throw snow. Oh, classic.

James: And that is because they follow a consistent, proven structure. That's that deliverable, that deliver reliable outcomes. Yeah. And that's exactly how you want conservative real estate deals to be.

Jessi: I mean, that makes sense. You want Yeah.

You want it to be predictable. Yeah. You want, you want the same outcome.

James: And so every Hallmark, and I'm gonna say Hallmark style movie. Sure. 'cause clearly, like they're on Netflix. Oh yeah. There's on, I even Disney has 'em now. So like, yeah. What do

Jessi: you, what would you call that? You can't, I mean, it's like tissues and kleenex.

James: Yeah, yeah, yeah. No, I, it's not necessarily, it's a Hallmark movie, A Hallmark, it's, I would say Hallmark is synonymous with a style. At this point. At this point, yes. Yes. It was created by, originally it was the Hallmark channel. Hallmark yeah, yeah. Which, what was some, it was some snarky comment where it was like, yeah, we wrote like semi good one-liner cards, and so we decided to turn them into two hour movies.

I'm like, that's not nice. But every Hallmark hit does contain four repeatable patterns that map directly on to how Great. Interesting. How great investors evaluate deals. Okay, here we go. Yeah, that's right. I've thought about this and so predictably. Predictability, I should say, is why Hallmark movies work.

Mm-hmm. And predictability is why passive investing works really works well as, as well. I got this. Um, so you, great deals, they don't surprise you, right? Mm-hmm. And great sponsors don't surprise you. Yep. And the model works because, well just the overall structure works. Yeah. And so let's talk about. Act one, the meet cute, aw, first impressions of a deal.

Mm-hmm. So if you think about the princess switch, which I'm sure you're like, oh yes, I a hundred percent remember that one.

Do you, can you, can you, I remember the

Jessi: gist of it. I

James: think the name implies that, right? The big thing. Yeah. It's the

Jessi: classic like lookalike. One's a princess, one's not.

Yeah.

James: Prince and the Popper and Mickey Mouse. Yeah. Yeah. They

Jessi: wish that they could experience the other's life. Exactly. We got Stacey, they pull Switcheroo and

James: Margaret. There you go. I don't remember their names, but what? I had to look it up. So you're good. You know, so, so they meet and there's instant interest and what's going on.

But you don't know the full picture yet. Mm-hmm. And that's. That's the excitement that you have when you first find out deal. You're like, oh, this could be it. This is interesting. Yeah. What's gonna happen? Yeah. How many times have has have either I or or someone we know sent us a deal, like, check this one out.

Right? You're like,

Jessi: Ooh,

James: yeah, that's the meat new shiny thing. And so usually it's what investors, you know, they see first. Mm-hmm. And so it might be like the teaser email that they get, or it's the big headline numbers, or they see the cash on cash projections. I'm like, yeah. Or it's the photos of the property when it's snow covered in magical, you know, AKA, uh, proforma photography.

And so just like in the first five minutes of a Christmas romance, it's easy to get swept up in it to be like, this is it. But smart investors, they know you gotta pause and ask, is this attraction or is there some substance here? Mm. Right. And so true love. I know exactly. So you're gonna have an act one checklist, and we're gonna do checklist for each of 'em.

And so for this one, like you're gonna ask, does the sponsor have a track record? Mm-hmm. That something you care about? Are assumptions reasonable or are they aspirational? And are you drawn to the story or to the structure of the deal? Okay. So those are the kind of things that you're gonna do. Act one.

Mm-hmm. Be cute, which leads into act two. The conflict. Dun. Which is testing out the deal's. Real strength.

Jessi: Ooh. Yeah. Running the actual numbers.

James: The Christmas prince. Remember that one?

Jessi: No I mean, vaguely. There's a prince and he visits. Visits America.

James: Oh, you're thinking of, there's one. No, no, no.

This one's actually different. It's a newspaper reporter who is told to go. Figure out what's going on with this one Prince guy. They mistake her for the nanny, and so she starts watching. Have

Jessi: I not seen this?

James: I don't know. And we recently stopped our Netflix subscription. So you're not going to,

Jessi: no. All right.

Wow. Okay.

James: Yeah. So, uh, she's

Jessi: mistaken for the ne I think I've had seen, oh, it's a classic

James: mistaken identity type of thing. And you know, obviously like they get to know each other, but then eventually they find out that she's a reporter. Oh my gosh. Yeah. So, so everything does seem perfect. Perfect. I thought

Jessi: it was a full setup.

James: Yeah, yeah, yeah, exactly. Or falling for Christmas. How about that one? Listeners, anyone got this? Lindsay low hand on it. She has a little amnesia. It's classic, it's overboard the movie, but it's in Christmas time. And then she ends up at this little inn thing in our like hotel thing and she's like, and she's helping out.

And she was like, this. She's like an heiress to a rich hotelier person, right? Who ultimately wants to like buy this guy's land and he can't. And she ends up working there and like, falls in love with him. Of course, Uhhuh, she's got a boyfriend who's like super weird and like, intentionally over the top.

You don't like him Uhhuh and like, he's just like, whatever. And anyways, she has amnesia.

Jessi: I do, I do remember that one. There's a different one. You said falling for Christmas. Falling for Christmas.

James: Yeah.

Jessi: There was a different one where a girl falls and she does get at amnesia or, or like, it, it's a different type of like, she experiences life from a different perspective or something and then she goes back to her almost like the family.

The family man. The family

James: man with Nick Cage.

Jessi: Yeah. But different with, it's like with a girl.

James: Huh? I have to have seen it. Maybe

Jessi: I'm like. I think I'm combining,

James: I dunno if that's a Christmas movie, but three or

Jessi: four different Christmas.

James: I don't know. I don't know. I purposely went for like the mainstream ones to try to get more people.

I know what he's talking about.

Jessi: Okay,

James: so anyways, there's an investment lesson here, and this is where most investors fail. They don't lean into the conflict, but professionals want to find the cracks, right? You want figure out what's wrong with this place. What conflicts appear in deals? Uh, they might be the debt terms, right?

Mm-hmm. Like we only interest only versus fully amortized, or there's just CapEx assumption, CapEx assumptions. We're like, I don't know about these. Mm. Or the occupancy history is a problem. Current tenant qualities maybe not great. Mm-hmm. Maybe there's some sort of sensitivity to vacancy or rent growth that doesn't make sense.

Or there's just the sponsors operating margins are super lean. Mm. And so the checklist for this one, you're gonna ask what are the downside scenarios? Really good to ask. Yes. What happens if interest rates rise or fall, usually just rise. Mm-hmm. You know, another 50 to a hundred basis points. Something like that.

Sure. What's the sponsor's plan of renovations run long or rents lag. And then what are the weak points that aren't obvious? Mm-hmm. Those are the kind of questions like, we got the conflict, then we got act three. The moment of clarity, seeing the deal for what it really is.

Jessi: Mm-hmm.

James: So. I love these ones. So there's the night k night before Christmas. Yes. Yeah. Classic. Oh, I know that one. Right? There's that moment when Brooke realizes that the night is legitimate and you're like, Brooke. I'm like, yeah, I had to look these things up. Um, and everything just snaps into place.

She's like, you really are. Oh my gosh. So there's like, so there's that or the Noel

Jessi: diary.

James: Do you know that one?

Jessi: Yeah. I. Don't remember. I'm trying to remember that part of the movie where it all falls into place. That, but there's something about a, a diary that was left on a, at a property and somehow they get connected.

Yeah. Guy's,

James: dad passes away. Right. And her mom was like his cleaner. Yeah. And through that they, yeah. They find her the mom's diary. Sure. And they're connected into his dad and it's got. Green Arrow from Smallville. Jason Hartley, Justin Hartley. Wow. Anyways, green Arrow in my buddy every time I see him like.

Green arrow. That's green arrow. That's, that's who you are. And but anyways, yeah, yeah, yeah. It comes when yeah. Just those long berry truth surface and, you know, on blah, blah, blah. Yeah. Um, so the investment lesson is, this is where the story reveals the truth. Right. Does the deal actually pencil after all the underwriting scrutiny?

Mm-hmm. Or does the sponsor demonstrate operational mastery, or is the plan realistic given the market and the asset itself? Uh, this is where the pros, they'll decide a few things. Like, they're gonna be like, is this cash? Is it a cash flow play? Mm-hmm. Or an depreciation play. Very important.

What's the tax efficiency? If you're not sure what that means, go listen to Last week's episode, we went deep on tax efficiency, tax benefits, depreciation, highly entertaining, all that fun, jazz. Um, is the timeline aligned with what your goals are? Mm-hmm. You know, maybe you don't have the money in place, or maybe it's a short term or they want a long term and that's just not what your goals are.

And does the sponsor communicate in a way that builds confidence? Mm-hmm. Are all great questions. So the checklist for this one, what's the margin of safety on it? Always really good to know does the operator have the team to execute and does the business plan match the actual property, not the PowerPoint version.

Um, which I've had once, where I've looked at it, where I'm like, man, this does sound great on paper, but given where this place is located, like I wouldn't do this at all. Like they've got a BAC class asset that they wanna fix up to be a class in like a B minus neighborhood. Mm-hmm. Ah, it's just too much.

But, um,

Jessi: which sometimes you get those hallmark stories too that don't work out.

James: There. You don't. How about this one? So the final act, so you're gonna appreciate this. So the final act is the resolution, right? Which is legacy and long-term payoff, which I wrote literally every Hallmark ending, the small town is saved, holiday festival is restored, the family farm is preserved, especially the family.

Christmas tree Farm. That's right. Is saved. Relationships are stabilized and the future secured. That's right, dude.

Jessi: Happily ever

James: after. Happily ever after. Man. Welcome

Jessi: to Christmas.

James: Here we are.

Jessi: Always ends well. Yeah.

James: So great deals. They also end the same way. With clarity and confidence and long-term outcomes.

Yep. And so there's a bunch of long-term payoff elements, like you get the wealth building cash flow, which is like what we're here for. You get sometimes a forced appreciation by doing value ideals, making it better. You have refinance opportunities, which is another tax efficient way or tax benefit in addition to just other tax efficiency things like the depreciation.

You get a potential step up in basis if you're doing like a 10 31. You can get passive loss, carry forward opportunities. Man, this is like a recap of last week. Seriously. And, and you get hands off wealth that compounds over decades. Mm-hmm. You know, it's funny, we were doing a deal early this year or last month.

Wait, what month are we in? Earlier this month, so December. And, uh, it was just the ending of it was super messy. There was a whole bunch of back and forth and a bunch of changing in terms and, and honestly there was one point where I'm like, I don't even know if we're gonna close this thing. We're gonna have to take it back on the market like this is.

It's weird. We ultimately closed and it was done, but I sent an email to our investors just kind of outlining the craziness behind everything that went on. And part of the point, I wrote it and I was like, Hey, here's what you don't hear about on HDTV. Mm-hmm. And, and part of it was like, you don't have to worry about this.

Mm-hmm. You just collect interest, you're all good. Like, I got this for you. And I think that's part of what being a passive investors is about. It's just that hands off. Wealth creation. So the ending you want most as a high net worth investor is simple. You want predictable, sustainable wealth.

You don't want drama, you don't want surprises, and hallmark endings are memorable because they're stable, and that's exactly what you want from a deal. So I had some other random thoughts, um, to go with it, even though that felt like a really natural concluding, um, place. It's just what the amateurs miss versus what the pros understand.

Hmm. So amateurs, they're the big city fiance. Trope.

Dude. Which is like the falling for Christmas guy. Oh my gosh.

Jessi: Yeah.

James: They're super annoying. They're too distracted, they're too rushed or just too self-involved. Yep. To make it happen. So they fall for the flashy projects. These are, amateurs?

Mm-hmm. Uh, they don't read the operating agreement. They ignore the debt structure. They assume everything will go smoothly. Yeah. Or they don't pressure test the plan.

Jessi: Mm-hmm. Or they force things to happen. I feel like that, right? That attitude that they have is just like, my gosh, she's so red. No, no, no.

This is good. Let's go. Let's do this. And it's just like, oh my gosh. Just, just stop. Yeah, just stop being you and that in real estate. Yeah, yeah. Yeah. That could be bad too. Like No, it's totally pushing, pushing forward.

James: Whereas you get the professionals who are the, the small town wisdom. That's

Jessi: right.

James: Guys.

The guy who like, he is running a Christmas tree farm or No, he's doing the, um, what is it? He's running? Like a, like A, B and B or something like a, b and B. No, I was thinking like a wood shop is the one I was specifically thinking of.

Jessi: Oh

James: no, I remember there was some story, I can't remember now, but he was making like these lightning would strike the ground and it would create these structures.

Jessi: Oh, sweet Home, Alabama.

James: Is that what it was? Yeah, yeah, yeah, yeah. Which is another classic Hallmark movie. But it turned out like he went to business school and had all this like he was highly accomplished. Yeah. And she just like totally like dismissed him. Yeah. Like, because wasn't dude, whatever. Yeah. And it was like, no, he went back and did all this stuff, but just didn't talk about it, brag about it, and it was like actually super smart at it.

Like, yeah, that's what I'm talking about. He's the girl with the glasses who turns out to be beautiful at the end. Yes. Love it. Um,

Jessi: the humble genius, is that like a good. Characteristic. Sure.

James: I'll take it. Yeah. I like that humble genius. Um, so they notice the small stuff that actually matters. Mm-hmm. Uh, like they look at the downside risk first, they evaluate the sponsor and its communication habits.

They align returns with the tax strategy, they assess the operational engine behind the deal, and they trust conservative assumptions not to holiday magic. That's right. Uh, some action takeaways just to to round this thing out. I got five of 'em. So it's the narrative structure of to evaluate deals, right?

It's, do you remember what the first one was? Predictability? No, the narrative. Act one.

Jessi: Oh, meet

James: Cute. The Meet Cute. There you go. Number two was the conflict. Conflict. Number three,

Jessi: resolution,

James: clarity. And number four is resolution. Resolution. There you go. Wait,

Jessi: clarity.

James: Yeah.

Jessi: Oh,

James: remember, that's where she realizes the night.

I remember you calling that. The night is the, that is what I called it.

Jessi: Recall that. Recall it, that, I don't know. Probably,

James: um, probably I just missed it. The moment of clarity that was like, oh,

Jessi: the mo... yeah. Okay. Yeah. I remember like a moment happening of just like a moment. Yes. Oh, like everything is revealed.

Mm-hmm. Yeah. Yes. It becomes clear, the reveal and then the resolution

James: moment. Yeah. I got that. MCCR, that's not really an acronym. Whatever. If I were smart, I would've figured out how to make it like HALL or something. Anyways. And then you can expect act two tension. I think that's an important takeaway.

Like there's always going to be something wrong Yep. With it. So just expect it. Just be ready for that. Be looking for it. Yep. If you don't find it, you haven't been looking yet, um, you can re you reward clarity over charisma. So you want someone who operates like a well run small town bakery. You want consistent, competent, grounded man.

There's a lot of like bakery related. There

Jessi: are bakery lots, bakery movies where it's just

James: like they're baking cupcakes and whatever and Right. So good. What's the one where like they do the 25 days of Christmas and, and each day it's like, she's like making, there's a different food, different or something or something.

The whole town gets into it and, and it turns out like. It's like some dude who she's competing with or something. I don't remember.

Jessi: I don't remember what the review is on that one. I don't

James: remember. I've seen too many of these things. Um, you wanna look for that legacy ending, right? With the tax benefits?

Mm-hmm. The stable cash flow, your favorite and this long-term holds. Mm-hmm. It all equals generational wealth, man. There you go. That's good. And you wanna apply the hallmark rule. If the ending feels predictable and boring, that's usually the right investment. So fun fact, fun fact. I, I, I read this somewhere.

No, I heard it. Someone else talking about how they read it, they were talking about the types of people who like Hallmark movies versus not. These are totally stereotypes. So like, this may not be true.

Jessi: James Furlo,

James: yes,

Jessi: he's, he is the one who likes that is true Hallmark movies. But what they said

James: was that it's people whose daily life.

Is exciting or unpredictable? Typically like Hallmark movies because Oh, it is, it's like a mental respite from Yeah. The craziness of your normal life. Okay. It's like

Jessi: grounded. It's this. Yeah. And so it's, it's, you know what's coming

James: Exactly. Like knowing what's coming is the benefit. That's

Jessi: interesting.

James: Yes. Whereas they say if your job is. Predictable slash boring, you tend to not be interested in Hallmark movies. Again, stereotypes are hundred percent true, but typically That's interesting. That tends to be true. Yeah. Um, but I also think there's something there. I think this is interesting. Our daughter and I we're totally cool with rewatching movies.

Jessi: Mm-hmm.

James: But you and our son,

Jessi: we like new are

James: not,

Jessi: yeah, we want something new, which

James: I would argue our son's average day and our daughter's average day is similar levels of. Chaos and Sure. Boringness. Mm-hmm. But maybe it's just your perception of how it is.

Jessi: Yeah, maybe so. You

James: know I guess like someone like me, I mean, I thoroughly enjoyed working at Arby's.

It was super fun. Because that's who I am. But maybe that was like, yeah. 'cause I always found the interesting and whatever about it, even though some people would be like, oh my gosh, that's the worst. Like repetitive job ever. Yeah. So boring. Everyone was different every time. And so, but anyways, so maybe I could see that where like our daughter, she's like, every day to her is unique and special and d and interesting works with our son.

It's like, eh, it's just another day. It's the same. So wants, wants uniqueness. Anyways, I thought it was just kind of an interesting deal. It made me feel good. I was like, all right, I guess there's rationale behind Hallmark movies and I do like the predictable nature of it. Mm-hmm. I mean, we've had it, so there's sometimes like, I'll have lunch 'cause these are like.

An hour and a half long movies. Mm-hmm. So I'll go, yeah, I'll have an hour and a half long lunch. I know. Perks of Running Your Own company. I'll watch a Hallmark movie at lunchtime. 'cause typically Jessi's not into it, but I'll come across a good one. What I think is a good one, or one that I think she would like.

Mm-hmm. And we'll watch it that night.

Jessi: And

James: I'll be just as enthralled that second time round. I will tear up just as much.

Jessi: It's so true. The second time round you're like, I'll verify that. What is wrong

James: with you? I'm like, dude, I love it. What did I say? Yep.

Jessi: It's so good.

James: So anyways, so there it is. There you go.

Merry Christmas. Thanks for watching. Or Merry post Christmas. I guess like ideally you're not actually listening to this podcast on Christmas Day. You're hanging out with family, I guess, but whatever. That's what we're doing. We actually are headed on an airplane. We're outta here, so we're gonna record a couple shows ahead of time so I don't have to worry about it.

Sweet. But. But yeah. With that, we are gonna head into the new year. I'm super excited about things that are coming up. It's gonna be fun. And so if you are interested in investing with us in the new year, love to check us out at furlo.com. And with that, thanks for listening. Have a great day.