The Hidden Debt In Every Investment Can Make It Impossible To Get Out | Ep 144

James
So throughout the year I've been listening to audiobooks that span all of US history in celebration of the US's 250th birthday. Woohoo. Except the book I just finished and that we're gonna talk about today was all about World War One.

So not exactly the most uplifting book ever, but I think there are some important lessons that we can pull out of there on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing and war and death and hatred. Uh yeah. But our mission is to equip people, to invest wisely in both properties and people, because we actually want to care about them and to not kill them.

so that we can build wealth and actually improve housing instead of destroying some housing. I'm James and this is my wife, Jessi.

Jessi
Oh boy.

James
That for a preamble.

Jessi
Yeah. Hmm. I you told me the topic ahead of time and I was just like, oh really? I uh

James
I'll be honest, I thought about just skipping it altogether. I mean this podcast.

Jessi
I get it. Like there's a reason why we have history classes and why we take that like we're meant to learn from history But it's just sad.

James
Yeah. Yeah. Cause it started in nineteen fourteen.

August first. Uh no, maybe not. It was nineteen fourteen, I know that.

It started with um some uh I guess terrorists for lack of a better word. Um who they wanted to create a revolution. Well they were Kurds, I think.

Oh, I'm so sorry. Tickerds if it wasn't you. That was the beginning part of the book.

That was hours ago. That was hours ago. And uh yeah, they murdered they murdered this prince.

Um and it kind of like it was kind of this weird indirect thing where it got people upset and it just 'cause they were there was like, well there's just other countries who want this to happen. And a lot of the bigger power countries in Europe kinda wanted a little bit more land and were kinda just looking for the excuse and This happened to be the flashpoint and yeah. So they just you know some other countries.

I think it was an Austrian prince, if I remember correctly. And so it was like then it was like let's get after this. Oh wow They teamed up with, I think it was Germany and that whole cohort.

But like one of the crazy things about it, let's see here. Um I'm trying to remember. Is that nobody wanted to do it?

That was the worst part.

Jessi
That's so sad.

James
I know. I've I got I got my notes here somewhere. I have a lot of notes.

Where is it? Um It was I'm gonna find it later and just know it. Um Yeah, it was like the Germany was like, dude, we just want to do something real quick.

We just want to show that we're tough and powerful. Like that's it. Uh we don't actually want to get into a massive war.

London was like, or Britain was like, nah, we like we're good. Like we don't want to fight anyone. France was like, no, like we're fine.

But it just like I have these notes. I'm going to find them as we are going through um through this. But it just turned out that There was no like halfway oh we'll just kind of get the armies ready.

Like it was like r Russia got involved and it was like when they started moving things, it was like We're moving everybody. Like this is how this works. We're not sophisticated enough to be like, we're just gonna put a little little set of troops out there.

Jessi
Is that just because of like the time frame of how war worked at that point? Yeah. Because I feel like it's more nuanced now, like You could just do a little.

James
Oh, a hundred percent.

Jessi
A little.

James
Now it is. Whatever. And by by the end of the four years, it got a lot more sophisticated.

Like one of the actual one of the later generals, I guess. Um He was like he was a big business industry industry industry kind of guy and he was like all right if we're going to take this spot over here he was one of the first ones to be like let's think about this as an entire uh supply chain, you know, system. Sure.

And how we move all this stuff. Because there would be things where like the guys would just go. I'm like, oh shoot, we can't get them food.

How do we like we didn't think that through and like there was just these thoughts. And so you would just part of what would happen is you'd see a push. But they didn't have any of the infrastructure ability to keep going.

Germany was actually one of the better ones that was at doing that kind of stuff, which is why they were so successful and eventually it became the world against them. Because they were really good at it. Get

Jessi
systems in place.

James
Yeah. And the only reason, I would say one of the big reasons that they did not win was there was just a preponderance of other people. And I mean communications were a lot slower back then too.

Like today we get real time. Right. We're watching it all happen.

Back then it was like data. No, 'cause that was there was another it was like a miscommunication thing, which is another reason why the war went on. 'Cause someone was like, I don't wanna do this, but by the time the note got read it was like Oh, we already just started and we can't undo it easily.

Jessi
Like word.

James
Just so in some ways super sad. Um, but again, I think That there's some lessons there, which is that every deal carries two balances. Okay.

So you have your financial, right? You've got Um how much money you've put into this thing. It's visible, it's monthly, it's serviceable, like you've got that financial commitment.

But then there's I I would say like there's there's that other commitment of um and I wrote not what I was thinking. Um It's like more that invisible. Like we're I'm committed.

I'm if I'm saying yes to this, there's other things I can't say yes to. If I'm buying this, I'm buying the whole thing. I'm all in on this investment.

I can't just Uh you know, I'll I'll send I'll make a little bit of a loan. Yeah.

Jessi
There's like opportunity cost of if my money's here, yeah, it's not going elsewhere.

James
Yeah. Yeah, yeah. Exactly.

And And so the question so a question to ask, because normally the question is, can I survive this? You know, that's usually the question, right? If everything goes south and we have a bad deal, like will I still be financially good?

But we never really stop and ask, well can I just stop? Is that an option?

Jessi
Mm-hmm.

James
To which the answer is usually

Jessi
no. No.

James
Which is what happened in this situation. It's like once you got started, you're like

Jessi
Yeah.

James
Okay, we're going. And then you obviously get egos and other stuff that's in there. But you know, we're talking like tens of millions of people.

Jessi
Well, and if you if you're like you were describing some of these early war military type uh organizations not being fully like functional, vetted, with systems in place and with infrastructure. So it's like, yeah, that's even harder. Because it's like, okay, yeah, you started this, but you didn't really have a plan going into it. And Well, now, you know, you you don't really have a plan for how to dial it back or I d I don't know. It's it's just complicated at that point.

James
Which honestly I think was part of the problem, right? There was no hey, here's our plan to just straight up win. Right.

It was a just let's go. Uh one of my first points was there was the Sheffield, I can't whatever plan, which was just optimized for speed, which is kind of what I was talking about. It wasn't for longevity, it was Flash go, let's do it.

Um you have uh yeah, there was no reverse gear. And that was on purpose, right? They're like, let's happen.

Um again, I was talking about Russia. Here's where my note was They had no partial mobilization option. It was like we go in, we're all.

And so when you pick a plan, you're also also inherently adopting all of its constraints as well. Um yeah, and so I think that there's there's and you see examples of that. Like maybe you have a rate lock that happens, or there's a 1031 that has a clock that's associated with it.

Um or there's some sort of bridge debt which really has a clock associated with it. Um I think those are things. Or on the on the construction side, right?

There's draw schedules and there's prepayment penalties and there's refi windows. There's all these things that get adopted when you're When you make that small decision, we're like, okay.

Jessi
Yeah. Set of papers, and all of these implications happen.

James
Yeah, it's something I've talked about in the past where like I well, there's no such thing as absolute freedom. It's just not a thing. Because the second you make a choice, you are inherently saying no to other stuff.

And and we'll talk about optionality at the very, very end of this. And but like and that's that recognition of that. I, you know, you nailed it with saying talking about that opportunity cost, I think is is really important.

And so what you want to do is you're trying to you want to understand what all those downstream effects are going to be. Man, if we start moving military, chances are the other guys are going to react to this as well. And they're gonna stand up and well what are we gonna do?

Like, oh don't worry, it's just an exercise. Like, no, that's not what we're gonna say. You know what I mean?

Yeah. And and so like that's part of the that's part of like how you do this. I think about us.

I've got a property right now that that I want to sell. It's our industrial buildings. If someone win, someone makes me an offer, man, that's going to set up a whole cascade.

Cause yeah, I got a 1031. Yeah. I'm committed to that, which means I got to look for financing.

And like there's a whole host of things that are gonna go with that. And I have a very strict timeline. And I've already kind of constrained my my area in which I want to buy because I now have property management business and I am very, very incentivized to do it in the area that my management company services to keep that vertical integration.

Yeah. 'Cause that's way more efficient for me to do than to go somewhere else.

Jessi
Yeah, there's all these different outside factors that

James
more often

Jessi
change and You know, it affects the decisions that you're gonna make moving forward.

James
Yeah.

Jessi
Mm-hmm. Do you think that like in the back of my mind I've been thinking Because this was quote unquote earlier in history, there hadn't been any major wars. like world war types of things. There had been other wars and yeah and like

James
civil war was pretty big.

Jessi
Internal wars. Yeah. But on a much smaller level. Mm-hmm. Do you think that was part of the pro problem or issue of like not having Like the smaller, more more nuanced being able to attack but not and pull back and shift and

James
Yeah, like they talked about one of the things was like machine guns were suddenly a thing. Yeah. Like they talk about how in like for example in the Civil War, that's when rifles were invented during that, but they were still using the tactics of The days of the, you know, burn the thing, the muskets.

Jessi
The muskets, yeah.

James
And so there was this whole wait until you see the whites of their eyes, right? That was revolutionary By the time we got the Civil War, like they were still waiting until the whites, but like you did not have to. You were way more accurate, and so it was very bloody.

And then you hit World War One where it's like, dude, we got machine guns now. Yeah. And and so they were like, at first, they're like, all right, we're gonna get in lines and we're gonna march.

And they're like perfect. Like, oh shoot, don't do that. And so they had to learn, like, okay, new tactics.

And there was a ton of inventing that had to happen in terms of like, all right, how do we how do we actually handle this? Um how about this? I didn't know this, but um uh oh gosh, famous prime minister of Britain.

Um Churchill. He was like, you know it'd be really cool to have land boats. I want a boat that goes on land with like wheels and everything.

Cause he's like, boats are awesome because they're big, they metal, they got armor, they got big ships, or not ships, they got big guns, they hold a lot of people. He's like I want one of those things for land. And so he like he was the spearhead of the development for these vehicles that could drive and they ultimately were like, well wheels don't necessarily make sense, but we can do them on tracks.

And here's what's fun about all of this. During the development they tried to keep it all a secret. They didn't want anyone to know about it.

So they had them all covered up But people would ask like what's what's uh what's under the cover there? And so what they told people is like, oh there's like water tanks. That's it.

Just tanks of stuff. And that's what they told people. And so they kept trying to come up with like it was like a almost like a land cruiser or a land boat or whatever, like how these names.

But because everyone just called oh it's just tanks. That's how the name got there. So crazy hilarious.

I thought it like stood for something. Yeah. And I'm sure like they backdated with like, oh yeah.

It's uh Military tank tankinator. Dude, I don't know.

Jessi
Technical armory.

James
But no, it was because at the very beginning they were pretending they were water tanks so that people wouldn't look under the covers and figure out what they were. So funny. And so they called them tanks But like that was invented during World War One.

That's and that was a thing. And so all of a sudden Germany was like, okay, we gotta figure out how to stop these things. And so they learned, well, we just gotta make the trenches a lot wider.

Jessi
Right.

James
And or deeper, whatever. Yeah. And so they can't go through them.

And then they were like Those are pretty cool. We'll develop our own. Same thing happened.

Remember, we talked about this on a podcast a few weeks ago. The Wright brothers had invented airplanes in what is it, nineteen oh three? And this is nineteen fourteen.

And so we're talking like a decade later. They had just started like taking and they were mostly used for reconnaissance. And then they actually had to learn.

Like they were like they put guns on them. And then they found out the hard way, like you can't shoot through the propellers. Oh my word.

And so they learned to put plating on the propellers and do some other things so that then the actual like they could shoot on them. Like they had they were inventing all of this stuff, which is pretty wild actually. It's crazy.

And um, so yeah, so part of it, part of the reason why it was so bloody. was the tactics weren't able to keep up with the new technology. And so they were constantly like it just felt like they were constantly behind the eight ball on that.

Um which was yeah.

Jessi
I would imagine there's certain things like that that happened today with with AI or like drone technology. You know, it's like we're constantly experimenting and doing things like we're not in the middle of a world war. There are wars going on. There are. But It's not a world war, so it's not quite as

James
I 'm gonna hold off on the AI stuff until I finish my next book Because I have some really cool insights. There's a teaser. Yeah, so I moved on.

I am now in a currently in the middle of a book learning about um the the atomic bomb and the making of that. So it's World War II related, I decided not to just do another war book, but like a factor within it. Yep.

And I think there's actually some really applicable lessons to AI. Not to say that AI is gonna blow up the world, but uh just from uh where

Jessi
's like the atomic bomb, AI.

James
Because actually it's super interesting. So I I love the the whole book series been great because the war ends in nineteen eighteen and this new book that I read, it picks up with So the war ended. Here's what's going on.

I mean it was like seamless. It was very seamless. I had that a few times where I finished the George Washington book.

Yeah. And then it was like Lewis and Clark, which picked right up with So Jefferson became president and then they did their thing and you're like, oh dang. And so um it was really good.

And um And so there's it's pre-actually making the bomb stuff. There's some there's some lessons in physics actually that I think are applicable to AI. So I'm gonna hold off on AI comments for now.

For now. Instead, what I want to tell you is I want to talk about our $1 house because I think that is a perfect case study for this idea of commitment and opportunity cost and how things can just kind of Escalate on you and get out of control. Okay.

So we bought a house, a manufactured home in Lebanon, Oregon for One dollar. I made a whole video about it. I was super proud of myself.

I was like, I am the man. And I made even wrote and talked about how it was so goofy to write a check for a dollar. Because they can't just can't have cash.

I don't have a paper trail. It felt ridiculous at the time. But here's the deal.

Lot rent was twelve hundred dollars a month. Okay. And that started Not quite day one because we got the first month free, but then it was like, here we go.

So we set a rehab timeline of getting everything done in 30 days. I mean, it's a small manufactured home. It was already in pretty good shape.

We're gonna be like, hey, we're gonna paint, we're gonna redo some flooring, we're gonna just wash the outside. We're not even painting, we're gonna do some yard stuff, you know, we're gonna do some fix-ups. Not a big deal.

Replace appliances. Shine and polish. There was some bathroom stuff that we had to take care of.

Jessi
Like

James
nothing crazy.

Jessi
Nothing crazy. What could go wrong?

James
Right? Well, so here's what happened. It was a fairly small job, but so as a result, the contractor never prioritized it. So they didn't get out there.

Jessi
Mm-hmm.

James
So we closed in October. The re youtu the property was not ready until March. That was four months.

Thirty days, and it was like they spent a grand total of like two weeks, like you know, total work time was like two weeks. Oh my word. It just it killed me.

But you can kind of see how that mirror was running the entire time. Yep. And I'm committed to this thing, right?

And I'm like, okay, like What am I gonna do? Just drop this thing? I've already paid.

You know, you get into month three and you're like, oh my gosh. And it feels like just a little bit more. We're like, we're almost done.

We'll get it ready. Just keep pushing. No one's gonna Buy it from you.

They're gonna be in the same situation. So that was the exact same problem that all the leaders were in uh in the war. They kept telling themselves, Oh, with this one offensive, we will get a breakthrough and we'll start dominating and it'll be great.

Just a little bit more. Look, we've already lost these many guys. We can't just turn around at this point.

Like no one will ever take us. Like we'll be done. Another problem is that it was a 55 plus park.

And so we couldn't just rent it out. Like that wasn't an option to be like, okay, we've got a backup plan. Like we were fully committed to this idea, and that was something I didn't fully um appreciate when we bought it and then the la rent like I said was twelve hundred dollars which is a lot which kept scaring away buyers.

Like they would do the math and like, well I'm not gonna buy it for this amount and then I have to pay this on top of it. Right. It was a significant chunk of money.

And so this the total cost of ownership for someone For a manufactured home, they were like, I might as well just buy a regular stick belt home for this price.

Jessi
Yeah, your mortgage.

James
Which again, we actually had it under contract twice and they walked in both situations. So we went from a price of forty-five thousand dollars Down to $35,000, down to $25,000, and ultimately sold it for $20, we ended up losing $14,000 on a $1 purchase. And the problem was there was no off switch.

We just couldn't we could it just in theory it almost would have been and and the problem was like especially once we started spending money on the construction side of it. You're like, I I can't walk away at this point. I have to see this thing through, which was the exact thought that they all had in World War One and the problem that you can run into with investing, especially if you're a private money lender, like, dude, you're long for the ride.

It is what it is.

Jessi
Yeah

James
And so um, you know, and if so if you're an equity holder, same thing. Like you're you're committing.

Jessi
But you're not necessarily calling the shots for the whole deal.

James
Yeah, yeah. Were you do you remember what that was like when I when we were holding it for that

Jessi
Yeah, I remember it was very frustrating. Okay, yeah. Because it was just like I just lose I just want to like Make some progress, move forward, find a buyer, something.

Yeah, yeah, yeah. Yeah. And it was like my word.

James
Yeah. And at the beginning time it's like, oh yeah, this is gonna be great. It seems awesome.

Like we'll get some troops, we'll win, you know, kill some baddies, we'll be fine. That's not how that worked out. So I thought that was just a good case study of what we're talking about here.

Yeah. Um

Jessi
similar feeling of

James
Yeah. And again, they had the similar problem, right? There were alliances that were signed early, then they were triggered in days, and you're like, oh no. Um, just like that 55 plus rule that was there long before we did the investment.

Um and I did negotiate the price to a degree. I mean they pretty much gave it to us. But all the other stuff just came attached to it.

You know, I I wasn't fully yeah. Um So you just want to be clear about what are the things that I'm choosing and as a result of those, what are those things that I am inheriting? Right?

Um Yeah. Yeah, hopefully that makes sense what's going on there. Um we've talked about the the concept of um You know, free perfect in how big tail.

Um that's the same thing with like with contractor. There's a contractor triangle, right? You can have quality, you can have you can have a cost or time, right?

And and at the When we did it, I gave up on time. I was like, no, I want it fixed up. I want it good and and I was trying to get it done reasonably priced.

Mm-hmm. And so I was like, Cool, we'll fit you in whenever. And so I gave up on time.

Yeah. And in retrospect It would have been cheaper to say, no, no, no, pay a little bit more to make it a priority. He didn't really say that.

Sure. He was like, yeah, sure, we'll totally do it. And we just missed the eventually.

Or I wasn't explicit enough on getting it written down, like, hey, here's what I want it done by. Will you agree to these terms? Otherwise, like

Jessi
Well and that's some of that going back to the World War, that's some of that frustration and miscommunications. We were like, Oh my gosh, so much of this could have been avoided if we just had had some clear communication and just double checked You know, ahead of time, like, okay, hold on a second. Like, what is it that you want here? All right, let's just see if we can Make some changes and give you a little bit more land or give you a little more freedom and

James
it's like

Jessi
once it starts going, it just

James
Yeah, no, that's perfect. It was um Verdoon and the Simone Smoey Somo Somey Somi? I think that's how it's pronounced.

Um they just kept going because This they'd already like they'd already spent the time and energy on stuff. And and I think we had that exact same thing where we kept lowering the price a little bit because it was like, well, we already lowered it some. It's it's just ten grand more, it's just ten grand more.

Until you're like Oh my gosh, we actually dropped it twenty five, like over fifty percent from what it was. And but like it's that slow hot water hot water hot hot boiling water thing. Yeah, definitely happened both in World War One And us here and and you can justify each micro step.

Sure. I think we had a joke about that once where I was like, I think um What was it? It was something about like, oh, I can only have so many ounces of like, you know, of a cookie or something.

But as long as I only had a certain amount, it always registered, it always rounded to zero. You know, and so as long as I just do a little bit of time, it was always zero, then I could never figure out, man, what why'd you eat a pound of this stuff? You know, it's like, well, because I had I did 18 trips, yeah, you know?

And um And so I think uh that kind of stuff totally happens. And you just gotta be aware of it. That's the thing.

It's a thing. Um, so here's some takeaways, some things to keep in mind, okay? Um, you do want to know, is there an off switch?

And if so, what's the cost to pull it? Yeah. Because there might be one, and you just gotta decide, am I, you know, am I okay with that?

Which is a different question than the like what's the floor? Like what how much could I lose? Right?

Like, and you might have to decide ahead of time, what is my dude? I'm pulling the ripcord and I'm out type of thing. Yeah.

And so

Jessi
Yeah, because you may lose more than just what you invested. It could be a relationship. It could be your reputation.

Time. Yeah. Yeah.

Yeah. It could be s other factors.

James
So thinking through all of that. And I think as much as you can, you want to price in that time component. It's hard to do and I don't have an exact equation for it, but I think you want to take that into account.

Yeah. Um when you're doing it. And and uh kind of related to that is it's asking like who can commit my capital without asking me?

Right. So like when you when you let us borrow money to do a flip, like we're making choices on what what it is that we're building and what we're doing and we're just making those things. Whether you're lowering the price or something.

Getting stuff done quick or yeah, yeah. Exactly I think it's also asking questions, especially for some of the short-term stuff, like man, what if I had to hold on to this for 10 years? I couldn't just get rid of it.

I think especially if you're investing in syndications, that's really important to know. Cause sometimes you're like, yeah, we have a three-year plan that could last 10. That's totally a thing.

Uh yeah. Um And so I think one of the things, like my final thought here, is the price, the property itself is an asset. The loan and the note that you give is an asset.

Optionality is also an asset. Okay. That choice, the ability to to make different moves is really important and something that you want to remember and keep around.

And and And ascribe value to. Yeah, you know what? You may, like I could see us saying, hey, we've got a 12% loan that we're, you know, that you can get.

You're locked into this thing for, you know, it's a year. We're probably not gonna pay it back early, that kind of thing. And we're not gonna do any interest ahead of time.

Or maybe we say, oh, we could pay you eight percent and we'll pay you interest every single month And that's alleviating some of that optionality. You're not, you're actually you're just releasing the pressure valve a little bit every single month And or it's like, man, at that kind of thing, like, yeah, we can swap you out at some other time or something. You know, I don't know.

But um, that for me is something to think about. Like, hey, uh can we give our lenders some sort of options here to We give them that optionality maybe at the beginning, and you can say, hey, what's more important to you? Is it to have the flexibility or is it to make a bigger return?

Because if it's to make a bigger return, maybe if I take away some of your flexibility That's valuable to me. Yeah. And so I don't know.

That might be Yeah, that negotiation on the upfront. Yeah, yeah, yeah, yeah. Exactly.

I know I did that um when we bought our apartment building. We had to get a loan from this buyer, uh the seller And I gave him a choice. I said, hey, I can give you three percent with it backed by the property, or I can pay you six percent unsecured.

And he was like, I'll have it backed by the property. I was like, good, I only want to pay three percent to begin with. So um but like you know, that was that kind of like he learned that option.

So Um, I think it's totally cool. So, there you go. Any thoughts?

You want to be a private money lender? Wanna get committed to something for a super long time?

Jessi
I mean, if it's thought out and planned and vetted and I've gone through the proper due diligence, then yes.

James
Okay, cool.

Jessi
If it's just a war starting over some disagreement.

James
So strange. Okay. No, probably not.

That's fair. I get that. Well, if you would like to fund things that are helping out communities, building wealth and help improving communities at the same time, you should check us out at Furlo.com. You can learn about what it's like to invest with us and our investment philosophy and thesis and all those good things. So check us out.

And with that, thanks for listening. Have a great day.