Surviving Unexpected Real Estate Challenges: How To Protect Your Investment | Ep 35

James: Welcome to the Furlo Capital Real Estate Podcast where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and people so that together we can do something so that together we can build wealth while improve housing.

Man, I almost had that. That's all right. Anyways, I'm James and this is my wife, Jessi.

Jessi: Hi.

James: Hey.

Jessi: Oh, my intro.

I, yeah, I was thinking of praying mantises because it's praying mantis season. And that

James: is,

Jessi: well, it's when they're, they're like, they hatch in the spring and then they like grow all summer long.

And then they, like now they mate and make more egg sacks. And

James: I just,

Jessi: praying mantises are my favorite bug and I watch them and collect them and have hatched them. Amen.

James: So today you just released, we just

Jessi: released, yeah, well, we released a bunch in the spring and we saved some to just watch and observe and feed and whatever.

Yeah. And we're going to camp. So I was like, all right, it's time to say goodbye.

James: Yeah. So we say goodbye. I get that. I get that. But we found another one. Is that hard to say goodbye? Yeah, well, it is. They're like little pets

Jessi: cause we give them names and we take, we have to take care of them and like feed them and give them water and yeah,

James: so it's hard to we watch them molt

Jessi: and.

James: Yeah.

Jessi: Right. When they go in the garden, it's like. I'm really trying to get you to say. I have no idea. Yes. It is hard. Oh, yeah. It's hard.

James: Yes. There we go. It's hard

Jessi: to say goodbye.

James: Yes. Good. Because today we're talking about challenges in real estate investing. And so it's similar how it can be hard or challenging to say goodbye to friends.

Sometimes. Sometimes. You're running the challenges in real estate investing. And we have had a couple of challenges in our career I've, I've kept a couple of notes, what we've had tenants destroy units and destroys kind of a weird word. Not like completely, not, not, not

Jessi: out of like, I mean, I

James: took it all the way down the studs and started all over.

It's more,

Jessi: more like they've mistreated.

James: Yeah, we're just like, yeah, broke stuff, weren't down, had to redo, paint, all that stuff. Yeah, yeah so we've had that. We had we once had a challenge where there were some fires that were happening around. Oh,

Jessi: yeah. We

James: had some tenants who were like, hey we're moving out.

And I was like, okay, when? They're like, tonight. I was like, oh, okay. And I loved it. They were like. And don't worry about reimbursing us for the rest of this month's rent. And I was like don't worry about me trying to collect from your 30 days notice. Like, what are you talking about? Yeah, it was pretty funny.

But but yeah, we've had that kind of challenge. Let's see. There's things with this interest rates going up higher has been a challenge. So we have some commercial property and it's fixed for a rate for about five years and then it resets. And we've had a couple of those reset at the higher levels.

Those have been challenges. Yep. We've had a couple. Unexpected repairs. One of them, I think if you remember at our apartment building. One day the wind blew really hard and one of the electrical line came loose and when the electric, when the power company went to hook it back up, they're like, Oh, your, your power thing's too old.

We're not going to do it.

Jessi: And then

James: it cascaded into this whole, well, we can't just replace that cause the box is too old. And like we ended up doing this entire thing. It was over 10, 000 worth of repairs that had to happen right away. And I had a bunch of tenants who were angry at me because their power was out.

I was like, dude, this isn't my fault, but okay. Yeah. So that was definitely a challenge and we've had some legal issues. So do I know, yeah, well, we had one, like, for example, I have an easement to access a water pump and my neighbor, I want to be like, sorry, easement canceled, I was like I don't think you get to do that, so I had to bring in a lawyer to help me resolve that issue, which ultimately they didn't have a choice, I get to keep using it.

And so that was a legal issue. We've dealt with, some poor property management at times where just communication isn't quite where we want it to be or things are being done. Not, we're not quite up to the standard that we want. And so having to deal through those challenging times and just the last one that I've, that I could think about saw my head was I remember again, it was the apartment building.

And it was a Thanksgiving weekend, and it was super cold, and we had some heaters go out. And I was just like, why does this always happen? And I'm like, oh, I know why, because everyone's home and using the heaters. So that's when they would naturally go out. And, like, obviously, like, the repair people were like, dude, we're not, it's Thanksgiving weekend.

You gotta wait. So I remember we went to Walmart, and we bought a bunch of space heaters, and just started, like, handing them out, and we're like, here you go, good luck. Like, we'll call them when, when it gets, you know. When it's the regular week. And they were like, yeah, no, totally get it. Grateful for it.

But yeah, so we've dealt with a couple of challenges throughout our years.

Jessi: Is that, you haven't, you didn't write on that list, like

James: Yeah, what do you remember?

Jessi: Like, cranky neighbors, that has been kind of an issue at different times. Yeah, it's like, you know, I'm thinking of the the sweet home property.

You're just like, oh my word. Yeah, okay, so. This is just, like, interpersonal type challenging. There was a water easement one.

James: But yeah, oh, just like the tenants themselves. Yeah, just tenants. Not liking each other. Yeah,

Jessi: kind of not getting along. And it's like, okay. Stuff like that. Like, how much do we get involved in this?

Yeah. That's a thing. Oh, totally. Yeah, stuff breaking, for sure.

James: Yeah. Yeah, so so what I have is, like, so what do you do? In those unexpected times during those challenging times. And the very first thing I started coming up with, we're all like preventative stuff. And so here's how, here's how you want to think about this.

If you're a passive investor, these are the kind of thing, what I'm about to talk about for preventative and eventually for like, okay, when it happens, what do we do? These are the kinds of things that you want to listen to or potentially ask your sponsor, how do you handle these types of things? Because you just want to know, like, are they going to handle it well?

Are they going to handle this in a way that is responsible and respectful? Yeah. Or not. Yeah. It's kind of like,

Jessi: are they thinking through these challenges?

James: Yeah. Yeah. There's a fantastic series of books by Jim Collins probably his most famous one is Good to Great, but he also wrote Built to Last, Great by Choice, and How the Mighty Have Fallen.

Mm. And those four books are fantastic, just the series of them. And in Great by Choice, I think it's that one. It could be good to gray or built the last, whatever. And one of them, I know I've read them all multiple times. He talks about this idea of productive paranoia. And the example he uses is Bill Gates.

And there's this time when Microsoft was like top of the world doing awesome. And Bill wrote this email that was essentially like, we're under attack. We need to double down, like, Things are about to get crazy and everyone's like, what are you talking about? Like you're the most valuable company in the world and you're growing double digits.

Things are awesome. Like everyone uses windows. And he was practicing what's called productive paranoia, which what Jim describes it as you obsessively ask the question, what if? What if this happens? What if a tenant does destroy a place? What if there is a flood or earthquake? What if we do have legal issues, that kind of stuff.

And then what you do is you prepare ahead of time by building reserves, by preserving a safety margin, by bounding that risk, and by, I like this one, honing your discipline during good times.

Jessi: Oh, right. Like training or saving up or

James: yeah, yeah. Things like that. And so that's the kind of things that. Bill Gates was doing.

And and so the thing that I have prevented it, they kind of fall underneath that umbrella of like, how do you practice productive paranoia? For example, have an emergency fund. I know crazy idea, but you should just have it. You should also do accurate budgeting. This is something that like almost zero landlords do look ahead of the year and say, how much money do I think I make?

What do I think my expenses will be? And actually like compare and contrast. Here's what I said. Here's what I did.

Jessi: I think there's. There's very few people who do that. Just in general. There's very few business people who do that.

James: But that's one of those productive paranoias, right? Like here's what I think, blah, blah, blah.

Jessi: Yeah.

James: I think like thorough tenant screening is an example of preventative get ahead of it.

Jessi: Yep.

James: Staying just informed on regulations and being part of groups that tell you what you're doing. And again, as a passive investor, you don't necessarily need to be that person, but like who does that?

But you want to know, is your sponsor doing those kinds of things? What groups are they a part of? How are they learning about things? Legal counsel, right? Just having that person lined up. Who can you go to having insurance and the right type of insurance in place? Apparently I wrote thorough tenant screening twice.

I must really, I must really think that's important. Keeping up on regular maintenance, I think is an important one. And then making sure that you're hiring professional property management to do things. So I think those all fall under the like, They, they minimize the challenging times by practicing productive paranoia.

Jessi: I like that, that you, you kind of briefly mentioned it there in passing, but it's like you focus on those areas during good times. Right. That way you're not in emergency mode, like, because challenges are going to come up. Right. Like, it's not a, it's not If it's a, when, and so it's like, let's prepare when things are good.

Like, let's think ahead and practice this. What if scenario and run through all the.

James: Yeah. One of the observations I've had over the years is like, they all come in groups. Like we'll go a couple of months, nothing, everything's fine. Then all of a sudden like three to seven things will break and you're like, what is going on?

Yeah. It's just super frustrating. You're like, why am I doing this? And then you fix all those. Then it's fine again. But but yeah, no. Yeah. 100%. So, now the thing happens, right? The challenge is here, we're in the middle of it, we're in the thick of it, now what do you do? And these are the things that as a sponsor, you, no, as a passive investor, you want to make sure your sponsor is doing.

Does that make sense? Yep. Alright, so a lot of these I like to think are pretty, um, easy I actually, I think the book. Extreme ownership does a good job of addressing a lot of those kind of ideas. And this is a book that he pulls principles, their business principles, but he shares a lot of stories of his time serving in Ramada under fire, under attack in what one would call challenging times.

And so he talks about stuff like you know, like number one, when it happens, like Breathe, stay calm, assist the situation. And identify risks and where you're able to seek professional advice. So you kind of, you start with this informational gathering type of of phase. Right? Don't

Jessi: just react. Pause.

Right.

James: Pause. Say, what's really going on? Give me the big picture. Give me the little picture. Give me all the pictures. Let me talk to people who are good at looking at pictures. All that kind of stuff is super, super important. The second one is when that happens, you want someone who's going to create an action plan and set priorities because oftentimes you start off with a plan and I've had this like, okay, we're going to, we're going to go in this way.

This is what it is. And they start taking out the wall and you go, Oh, this just happened. Yeah. And so you can further bound that plan. And not make yourself a bottleneck by also setting priorities. The priority is we're going to fix anything and everything that is broken. The priority is to go fast. The priority is to fix this one thing and ignore everything else.

The priority is to minimize the expenses and make what we have work to the best that it can and only replace it something if we absolutely have no choice, like those are types of priorities that you can have often in challenging situations. That's another one. I wrote here just straight up, just take ownership and responsibility.

You want a sponsor who, when something goes wrong, they don't go, it's the economy, it's my property manager, it's not me, you know, you want, yeah, someone, which I would love for our kids to start to adopt that kind of mentality as well, but we're not there yet. They're still pretty young. This one should make a ton of sense.

You want someone who communicates, right? Communicates to all the stakeholders, which includes. You and they provide transparency about transparency on what's going on. I think is super important. For that you want someone like also, well, it's going on. They're going to monitor progress and you know, it's not just, I set the plan.

I told everyone the plan.

Jessi: Walk away. We're good.

James: Yeah. You don't want that. And yeah, they're going to follow up, keep it going. And that's part of the transparency piece as well, but they're monitoring it. And then the last one I think is just. It's less, how do I say it, it's still general, but it's more really business focused.

And that's just, honestly, like, they're keeping an eye on your cash and cash flow. That's something that I remember Dave Ramsey, he talks a lot about, like, he goes, when emergencies happen, cash is king. He's like, you just want to have a pile of cash because it gives you options and choices. I think with business, that's the exact same idea.

Cash and related to that, cash flow are king. During challenging times, you want to make sure you have enough and you have enough coming in so that you can handle and survive whatever's coming. As Jim Collins would say, you stay above the death line.

Jessi: Yeah. It's important.

James: I mean, there's, you know, like a challenging time would be back in 2008, 2009 when the real estate crash happened.

There were a bunch of people who those were like super challenging times and a lot of investors who just didn't survive because they didn't. And just have those couple of things. And they weren't practicing productive paranoia. They won't be conservative in assumptions and things like that. That would probably be another like preventative measure.

It's just super conservative underwriting.

Jessi: Yeah.

James: Which is me, makes it hard to win deals sometimes. Right. You have to be a lot more patient, less, but yeah, it's what it is. And I'm okay with that. So there you go. Those are my thoughts on what you can do in challenging times. I think I'm missing anything or any, if you had to like resonated with you,

Jessi: Boil it down into like a statement, you know what I mean?

Like as a passive investor, I'm looking for a sponsor who,

James: yeah, during a,

Jessi: during a crisis,

James: okay. I'm probably would do, it's a combination of those two books, right? It would be, I want someone ahead of time who practices productive paranoia in the sense that they are regularly asking what if it's part of the process.

And then during a crisis, I want someone who. is going to practice extreme ownership. They're going to say, I got this, I can influence the outcome, and I'm going to tell you about it, and, and I'm going to, I'm going to take control for it. I'm not just going to hide. I'm going to take this head on. Yeah.

That's probably what it is.

Jessi: So someone who plans ahead, but also stays cool under pressure and Yeah. Gets things done. Yeah.

James: Just want that unicorn of a person. That's all.

Jessi: I mean, easy. That's it. That's.

James: Yeah. And I get it. No one's going to be perfect at doing those things. Right. But what you want to look for are clues and those kind of tendencies.

The productive paranoia, the what if, that's going to be easier to identify because you can look at their assumptions in the underwriting. You can look at the risks they have identified and be like, yeah, do these seem reasonable? Are they all of them? Sure. Those kind of things. I think, too, you can get a sense for how they communicate ahead of time.

Like, when they're presenting the deal, do they say a lot? Do they try to hide stuff? Do they show you open books? That kind of thing. Because then they're going to be more apt to be more open up front when things are hard if they did it at the beginning.

Jessi: Yeah.

James: That's kind of Plus,

Jessi: you can, you can ask questions.

You know, your whole set of questions that when you're identifying a sponsor and getting to know them, like, There's a, I think there's a section in there that's like, how do you deal with challenges? Have you ever dealt with anything

James: better than all of them? But yeah, definitely. And it's specifically about, tell me about past times.

Like I rattled off those, whatever it was, the seven or eight situations. Like, yeah, tell me about them. What did you do? How did it go? Like they're your classic interview questions. Tell me about a time when you had a challenge. But yeah, they're good questions. And so yeah yeah, no, that's definitely how you approach it.

So there you go. Hopefully you found this helpful. And if you did, we would appreciate a rating wherever it is that you listen to podcasts. And if you would like to learn more about investing with us, you can check us out at furlo.com. So with that, have a great day. Thanks for listening.