The Problem With the "Perfect" Investment | Ep 135

James
This week I would like to talk about something that doesn't exist. And that is the perfect investment. Nice.

Which we probably talk about this or talk around it. all the time, but it's a really important thing. So we're gonna do it again this week on the Furlo Capital Real Estate Podcast where we dive into the intricacies of passive real estate investing, including things like non-existent perfect investments where perfect math um rules the day.

And our mission is to equip people to invest wisely in both property and people so that together we can build perfect wealth while improving perfect housing. I suppose. I'm James and this is my Perfect wife.

Yes.

Jessi
Aww, see that is true. But the perfect investment, not so much. No, I thought for a minute you were gonna go like mythical creatures, unicorns, dragons.

James
No, those are those are legitimate I'm kidding, they're not at all.

Jessi
I was like, what I mean dragons.

James
I did listen to the Bible project. Total side note. Do I want to go down the shot? There are some people who believe that UFOs are actually demons.

Jessi
I okay. Wait.

James
Was that heard the same thing on the same podcast? I think we did.

Jessi
It's the same podcast.

James
Yeah, yeah, yeah.

Jessi
Oh yeah, I heard that.

James
Which I was like, oh, that's a new one for me. I have never um I haven't put a lot of thought into it, but I was like, no, that's an interesting interpretation. Because I definitely do believe that demons exist.

Jessi
Yeah. But I mean it's one of those things that's like Yeah, okay.

James
We're going down that route now.

Jessi
This is not a make or break like issue if I don't figure this out in my life, it is still gonna be okay. Still have a good life. I'm gonna have eternity with Christ.

It's gonna be fine. But super intriguing. That's always.

And it's like, yeah, demons do exist. I do believe that. So it's like, huh, how would I?

Describe that or is it possible?

James
I also and and this here's my tie-in. Here's my tie into all this. I don't think it's a hundred percent one way or the other.

I don't think it's every single UFO sighting is a demon, or it's not, or it's just an airplane, or it's something else. That's true. It could be, it could be.

of some military test going on. It could be some explosion being that's going on. It could be beings from another planet.

It could be all of them. Like That's okay. I don't know how likely that last one is.

I I okay. But like but my point is you don't have to put your ke you don't have to go all the way into one camp. That's true.

In order to you don't have to reject everything else. Yeah. And I think often there's not one explanation.

Yes, and I think here's the tie-in. I think this is the problem that some people run into with investing. All the numbers have to be perfect.

They all need to align a certain way. Otherwise they reject it and go, this isn't for me. Because you can have something that is quote a good investment and still has problems.

Yep. Um from all sorts of stuff, the physical asset to the operations to the tenant to the just the time and history that you're in, the market, like all of that.

Jessi
And well, often there's something that's not Perfect, like you were gonna say. Right, right.

James
And that yeah, yeah.

Jessi
Something you have to make work.

James
Yeah, and I think um, yeah, we'll just try to just write into this. I think one of the issues that we run into for ourselves What would which makes us like focus on those amazing investments are a few things. Number one, you get survivorship biased.

Right? It's the investors who were successful Who found good deals who they're the ones who share and talk about it. So you go, oh, like this must be quote what everyone's finding.

And the answer is, well, no, not really. Uh or you're talking with people who don't really have any deal experience. They've just heard stories or they've heard other stuff, or they've just they're spreadsheet junkies and And they've underwritten a bunch of deals, but they actually haven't done one yet.

Um, that happens. Uh or this also happens, and this is something that you and I need to be careful of, is they compare compare past deals. with current deals.

And I think about our Lion Apartments, which we've got, what was that? It was over 10 years ago, 11 years ago now. And it was a very different market back then.

Yeah. Very different situation. Tiny little difference is back then the rule didn't exist that said uh you had to compensate everyone for moving out now.

We did. Yeah. And so it was okay.

We were on the cutting edge. But uh but just the things were different. And so comparing current investments today to that one just isn't it's it's it's not necessarily wise to do.

Jessi
Yeah.

James
And Uh yeah. Uh I I think the other thing that people run into is just analysis paralysis. And and that uh is the makes you think about our what am I trying to say Under the guise of I'm waiting for a better deal. Sure. I'm waiting for the better numbers.

Jessi
And Yeah, you just keep researching and it's never quite good enough.

James
Yeah, yeah. Yeah. Or I don't know, hypothetically you spend 18 months looking for your first duplex, doing, under the guise of I want to look at a hundred properties to fully understand the market first, which may or may not have happened Though it was a ton of fun. Yeah. Uh driving around.

Jessi
We did learn a a lot, so you couldn't learn a lot in your analysis.

James
Well that's what's hard about right some of these things. It's like it is good. You do want to analyze a lot of properties and you do want to look at a lot of things and you do want to understand the market. Like those are not inherently bad things.

Jessi
But set a time limit.

James
But you can It can tiptoe into a a not good thing. I'm sure, right, there's gotta be like a limit to eating something healthy, right? Like drinking too much water.

You can drown, even though water's really good for you. Yeah. Or having eat a bunch of carrots you turn orange.

I don't know. I don't know.

Jessi
Too much of a good thing can be bad.

James
Yes. Exactly. So Here's the reality is that all deals have problems. And the professionals, they're not looking for those perfect deals. Instead, they're trying to figure out if they can price in those problems.

Jessi
Oh. Yeah. So it's like finding an okay deal, but making it work

James
Right. So and that's another way to say it, but saying like you find a deal that maybe has a lot of maintenance, uh deferred maintenance that needs to happen. Okay. So you go, well, I would normally pay X, but now I'm going to pay X minus that deferred maintenance. That makes sense. Because that's what I'm going to have to spend to get it back up to actual X.

Jessi
Yeah, it's not necessarily a non-negotiable, because it can be fixed.

James
But you have to tweak. Or if you're in a market where vacancies tend to be higher than normal, you Put that into the underwriting model. You price it in.

I'm not gonna pay a normal amount because vacancies are higher or whatever, rents. They just they're not rents in I don't know. In Lebanon and Albany are not gonna be the same as Corvallis.

Yeah. Price it in. I'm not gonna pay the same amount for a property in Sweet Home as I am in Portland.

Yeah. Like you're just not gonna do it.

Jessi
So is that the main um Or like the primary way that you adjust the deal is in the underwriting. Yeah. You know, before you're making an offer.

James
Yeah, there's actually there's two different styles of underwriting. You have your tops down and then your bottoms up. Mm-hmm.

Wait, we do it Tops down, it's pretty classic. Well, what are property similar properties selling for right now? That's your tops down.

And especially in the commercial space, there's New cap rate math to figure it out. If it's single family homes or you know residential stuff, again, that's the whole comps thing, right? Yep.

And that's what if you're a seller, that's what you use to figure out here's what I think it's worth. The more reliable better way, but it can also be more tricky, is to do a bottoms up, which is to say I know I want to make X amount of money. I know my expenses are this much.

I know the rent I can get either now and shortly in the future is this much. Do all that math and go This is now how much I'd be willing to pay. This is my max offer to hit my profit number.

Which is how I actually do it. Yeah. Now I'll put in their number to start with because I'm kind of curious, like Cause that to me how big is the difference between what they're expecting versus what I can actually do?

Right. And yeah, and that um That will determine how interested I am in pursuing it. For example, there's a property near our house.

It's a combination of some offices and some residential. Super interesting. Yeah.

Because I'm like, dude, I can Like walk there if I had an office there. There's currently a property management company there, actually. So I'm like, oh, it could totally work.

Except it doesn't have a warehouse, which is something I'd want. But anyways, like It's intriguing to me. But the asking price is so much where I'm like, that's not even gonna be close.

I have to I need like a 60% discount. count for the numbers to work here. And I just know I'm not gonna get out.

Yeah. So whatever. And the problem is it's a property is already fixed up.

They're There aren't those problems that I can be priced in and and, you know, he doesn't have anything to go like, yeah, I know.

Jessi
And so I just um Well and for the right buyer, that could be a good deal. Oh, I'll be able to do that. Put my money somewhere where I know it's gonna be stable and I could sell it in the future or whatever. Yeah.

James
Yeah. So Right. Uh yes, which that's the So what I'm trying to make is different than that that other person is trying to make.

And how I'm going my business model and how I'm going to manage it is different than that other person. Yeah, if they're going to be owner occupied and have the entire thing and they're like, yeah, that's whatever. Cool.

I'll pay a little bit more to have complete control and not be worried about being kicked out. Yeah. Like that's a thing.

Uh I work with an organization right now. They're renting a space and everything's great and their rate is unbelievably good. But there's always that threat of, man, like, A, they may have to jack our rate up significantly, or they just can't house us anymore.

And so We're having very, you know, not intense conversations, but you know, we're just kind of mighty like, man, what would this look like if we had to go somewhere else, what would that be? And if we did, does it make sense to buy so that we kind of own our destiny a little bit more? Or not at the whims necessarily?

But Um, we're nowhere near that. But that's that yeah, you could totally price it anywhere. Like I'm willing to pay a little bit more for the stability over the next thirty years.

Yeah. Instead of not. Totally a thing.

Yeah, so again, you just want to have the uh any any risks, any unknowns, any uncertainties, any problems, you just want to have those priced in. Like cause everything's solvable within reason. Sure.

And for the price you can get it. It's funny, we've got another property that we're looking at in Sweet Home. So we just we're Building a home.

We're almost done with it. I actually, oh man, there's a chance to buy a ton of airs that are actually live on the market. Be sweet.

We're that close. And we looked at the neighbor's property next door, and it's Like it's it's teardown. Like it's not good.

They've got plants everywhere. You can tell it hasn't been lived in for a while, and the last people who lived in it were not s Not good people.

Jessi
Yeah.

James
And so we've actually got a hold of the owner and we're just talking to him and like, hey, here's your situation, whatever. And and we're kind of the plan would be Bulldoze it. Build new. Build new.

Jessi
Yeah.

James
It does have a nice big garage, which is actually very similar to the one that we just built. Like we would build the exact same house just right next door.

Jessi
Okay.

James
Because like so much of it's the same. Yeah. But we were talking with a guy, and we're like, well, given the economics and how this works, like we know a new house will sell for this.

We know to build a house, it will cost us this. We know we have to get rid of the existing house, which will cost us that. Yeah.

So would you take 20,000? And he was like, no. Like, okay. You know, but I know that there's potentially I don't even know if it's habitable to be honest.

Yeah. But I have a hunch like he could find someone else who might be willing to pay fifty or seventy thousand dollars for it. I don't think it's worth a lot more than that.

Yeah, potentially they do that. Or there's a one man show and I I've I've got a friend. I've known him for Let me think about this now.

Um, four years? Going on five years? I think.

And he's been working on the same duplex project. Oh my god. Him and his buddy for five years.

He's got it up in Salem. He lives in South Corballas. And he's like, some nights and weekends, obviously not very many.

He goes up and he works on it. Just the two of them.

Jessi
Wow.

James
And he's like, yeah, we're just We're working through and he goes, We got one side done. Yeah, and we've got it to studs on the The other side. So we're making progress.

And I know and I'm like, oh my gosh. Like I thought I was moving slow. This is kind of insane.

Yeah. So Like, but for him, this might be a great deal because he's already driving an hour to Sweet Home. He's it's just him and his bud who are building it, and he's like, we can take three years to do this, whatever.

or ten.

Jessi
How does that how is that even profitable though?

James
I don't think it is. Well, I don't think he's probably not valuing his time. That's that's probably what I'm saying.

He's just looking at the material cost and sure he's got some holding costs, but like he doesn't have any electricity or water really right there now. And so for him, he's like, yeah, holding costs are pretty cheap and I I think he paid cash for it initially. Yeah.

Jessi
So it's just to say like a different way to look at this, I feel like, is The perfect deal doesn't exist in general.

James
Yep.

Jessi
But a perfect deal could exist for you. You just need to think through like what are your parameters, what can you afford or not? And what are you willing to put up with or not?

So yeah. Not that you should be searching for the perfect deal. You just you should analyze appropriately and then That's fair.

You know Make decisions.

James
And I would also say for me personally, the best deals often look the worst on the surface. For me. And as we've established, there are some other people where that's not their situation or what they're looking for. But the problem is properties that are really well fixed up, they have everything priced in. And they are at the market. And if you're in this game to make some significant returns,

Jessi
Yeah, it's not gonna be turnkey places.

James
And that's why I'm buying. That's why I'm investing. Like I'm here, I'm in it to make money off the deal, not for some other reason.

And this is just convenient or helpful. Right. You know?

Um And I would say too that your job as a passive investor isn't to find the perfect sponsor or the perfect deal that they're investing in either. It's to find a sponsor who's able to price those things in and solve those problems and um Yeah, and has mitigations for when it for when there are issues. Yeah, I guess.

Yeah, so Uh one thing that you can do though is, and we talk about this with tenant screening, is define your good enough criteria. Right? Instead of saying here's what perfect looks like, looks like, here's what my minimum looks like.

It's gotta be something, I don't know, my cash for cash, like what's the minimum you want to make on that? You know, for you, you were like when we first got started, you're like a hundred dollars a month. Yeah.

That A well absolutely has to be positive. Yep. And maybe that was your like your true floor was it has to be positive.

It has to be positive. And ideally at least $100 a month. Yeah.

That was like that was your floor for that cash on cash. Maybe there's a market type. I know some where they go, I only want to be in a diverse, growing, stable market.

They don't want to be in the tertiary ones. They want to be in primary markets. Um, or it's a sponsored track record.

I don't want to be someone's first. Yeah, they have to have done that. Wow.

Sure they're out there. Yeah. But uh, you know, like that's your what are those minimums that you're like, this is really b like what I'm looking for.

And then if it meets them. Awesome, cool. You're willing to move forward.

And we do that with tenant screening. We go, here's our minimum income that we want, here's our minimum credit score, here's minimum for Landlord recommendations, like all those things. And if they made it, awesome.

Like we will rent to them. Yep. And so you want to do the exact same thing.

Um I also think uh you do want to look at the problems. Don't just ignore them and go like, oh, they're good, but like figure out are they solvable? Can you do it and how are they priced in?

And then also just try to understand what your own risk tolerance is. I remember I was looking at a deal uh in the Midwest, actually, and it was someone else who was doing it, and he just wanted to bring me in um to help raise funds for it. And it was he was gonna spend more on the rehab than he was on the purchase price.

Like it was a big project. And he was like, we're gonna make this thing awesome and amazing. In a part of the town that was like not awesome and amazing.

Yeah. And I didn't fully understand how he was gonna reach the rents that he was gonna reach given what the market was actually doing. Yeah.

There's also a concern that he had another business partner who uh owned the construction company and this was their first project. So that's a track record issue. Yeah.

But more importantly for me, there were obviously a lot of problems with this property, and they were solvable with a ton of money. But for me, I was like, I just I I wasn't quite connecting. I was like, yeah, the spreadsheet says that if you can achieve these prices, it'll totally be worth this much.

But that top-down analysis is not telling me this. Yeah. So I don't I don't I I just I struggled with that.

So those are And then I think that it's also good to to get in on a small deal to calibrate. Man, you learn so much by that first one. So even if you're only able to put in, you know, $25,000 or $50,000 to get going.

I think it's worth it. You're gonna learn a lot instead of looking at hundreds of deals and saying maybe someday. So you go.

That's what I got. So in conclusion, the perfect deal does not exist. It's fake.

It's fiction. Instead, what you want are priced-in problems, and that's where opportunities exist. And um in action.

can also cost you because you're not going to learn. And and I think what separates professionals from others is not necessarily that the professionals find better deals. It's just that they're good at evaluating the problems and and negotiating in such a way where everyone comes away saying, Yeah, yeah, all right, I get it.

Like this is fair to um put it down.

Jessi
They're turning those dials and those knobs to make it work.

James
Here's my question for you, dear listener. What problem in your next deal are you actually being paid to take on? So, what problems are you solving?

Jessi
Positive way to frame it.

James
How are you getting paid? Exactly. And if you would like to learn more about the types of problems that we solve, you can learn all about that at Furlo.com. So with that, thanks for listening. Have a great week.