Why The Same Real Estate Deal Can Feel Great Or Terrible | Ep 116

James: Jessi, let me ask you something. If I told you that a deal usually returns six to 7%, how would you feel? About 9%.

Jessi: Great.

James: Okay. Now, what if I told you that most investors are actually targeting 15 to 18%? Whoa. How do you feel? About 9%?

Jessi: Uh, well. It's not as great.

James: Okay. So same deal, same risk, but a totally different feeling.

Jessi: Yeah.

James: Right.

Jessi: Yes. Sure.

James: And so nothing else has changed except the anchoring that I did at the beginning of it. Ooh. Which is what we're gonna talk about today on the Furlo Capital Real Estate Podcast Mind Games, where we're diving into the mind games of real estate investing. That's right. Um, and our mission is to equip people to invest wisely, especially in those kind of situations.

Mm-hmm. So that together in both property and people, so that together we can build wealth while improving housing. I'm James and this is my mind Bend wife, Jessi.

Jessi: This is good. It, it feels like some parenting strategy I could like start utilizing or something Ah. To make my kids think that chores are amazing.

Okay,

James: sure. Yeah.

Jessi: You know, hundred percent. Like, I mean, sometimes I try to go there. I'm like, this could be so much worse. Like, yeah, right.

James: Yeah. Right.

Jessi: But if I had a concrete example where I was like,

James: mm,

Jessi: you know, I don't know. All right. I'm gonna, I'm gonna listen closely. Okay. Yes. To these strategies.

James: Easier.

This for the record, it's not a parenting podcast. It's not, this is realistic investing,

Jessi: however,

James: but I guess there are things that transcend Yeah, I, um, all of it. These

Jessi: can be applicable in multiple situations.

James: Yeah. So we're gonna talk about anchoring. Which is, it's the brain's tendency to rely too heavily on the first reference point that it encounters when making decisions under uncertainty.

Jessi: Okay.

James: Okay.

Jessi: It's very specific.

James: And so once it's set, everything else is judged relative to that anchor.

Jessi: Yeah.

James: And it's not objectively at all. Okay.

Jessi: Yeah.

James: So, uh, here's another fun one. Example. Feel free to play along at home. Um, let's talk about Gandhi real quick.

Jessi: Okay.

James: Um. Do you think that when Gandhi died, he was older than 114 years old?

Jessi: No.

James: How old do you think he was when he died?

Jessi: Uh, I don't know. In his nineties, I guess.

James: Okay. Interesting. Interesting. Now, what if I had asked it a little bit differently and said, let's talk about Gandhi again. Do you think Gandhi was older than 35 years old when he died?

Jessi: Yeah. Yes. But I Now you're doubt. Now you have me doubting whether he got into his nineties. You're right.

James: Well, that is the power that works. Power anchor green right there. Yep.

Jessi: See, I would say like, okay, well may, maybe he was in his like seventies or eighties. Oh

James: yeah.

Jessi: Are you actually gonna tell me how old he was when he

James: died?

Died. I, I actually have no idea my, that's just a classic example. That's old.

Jessi: He

James: was

Jessi: old, I

James: think, I don't know. Oh my word. We're just gonna, we're just gonna bother me. Just no. Um, so everyone can be like, so you can sell yourself now. We are not gonna close that loop. I don't know the answer.

Jessi: You're gonna look that up on your own.

Yeah, which I will do. Sorry. After the, after filming this, sorry. I'm going to look it up because now I have to know.

James: You're welcome. Yes.

Jessi: Oh my word.

James: Troublemaker. But, but that's the example, right? And, and this is why that's

Jessi: weird. That's weird. It's like a psychological flaw. We're like, why? Why would that influence my my thinking so much?

James: Yes. Which, if you think about it, why this is so important is if you're thinking about investing in something, there's a couple unknowns. Yes. And how the sponsor frames it is really important.

Jessi: It's true.

James: Yeah.

Jessi: It's so true.

James: Yeah.

Jessi: They could, they could. Yeah. Push you one way or the other just by changing a single number.

James: Yeah. No, that's true by, yeah. And in some ways we're talking about the difference between over promising, under delivering or under promise, over deliver. Like that's Sure. That's that exact same idea.

Jessi: Yeah.

James: That's in, that's in play here.

Jessi: Wow. Okay. Keep going. Fascinated.

James: Cool. So the problem that say high net worth investors have

Jessi: mm-hmm.

James: Is that they're successful. And so oftentimes what they'll do is they will create anchors of massive success.

Jessi: Oh.

James: So like for example, they might say like, well, my first deal returned like 22%. It was amazing. So now I anticipate all of them. You and I, we dealt with this with our line apartments. Right. We regularly had to tell ourselves, 'cause that has, it's, we talk about once in a lifetime, unbelievable.

Amazing deal. Mm-hmm. That's how we talk about it, because it is, it is an average annual return of 144%. It's insane. Unbelievably good. Just insane. And we know it. And, and we just need to

Jessi: be and Yeah.

James: Yeah. And we just need to be conscious of like, okay, like yes, that is great.

Jessi: You can't compare everything to that.

That is not the norm.

James: Yeah, yeah, yeah. It's

Jessi: an outlier. Yeah.

James: Correct. And so that's, um, you just gotta be aware of it.

Jessi: Mm-hmm.

James: And, um, and I think, again, people. Who are, who have, who have a high net worth are successful and they're used to, they

expect

James: those kind of things. High

Jessi: return.

James: Yes.

Jessi: In general.

James: And they'll also have other anchors that kind of creep in on them where they'll ask questions like, well, what will my peers think about this?

Or is this deal oppressive enough?

Jessi: Sure.

James: Um, and oftentimes an anchor can be, 'cause it can be tied to identity, not just the math.

Jessi: All that's so interesting. Like what, what's the amount that somebody else. What's the value associated with each amount?

James: Yeah. Or

Jessi: return

James: or

Jessi: whatever, you know,

James: whatever. Well, I even think about like Baker Tower, right?

Like that's one where the numbers were good, but it's also, it's an impressive cool building. It's

Jessi: cool. Yeah.

James: And, and I've potentially run the risk of people like, well this one's just a normal deal. Where's the, where's the cool historical building? Where's

Jessi: the factor?

James: Like that could be a thing. Right. And that's something I need to be aware of.

Mm-hmm. Looking into the next deal. And also just being aware of like, yeah, some deals are amazing. Some deals are less than amazing and it's okay. Okay. Ready to try another experiment here.

Jessi: Mm-hmm.

James: Um, what do you think is a good annual return for passive real estate right now?

Jessi: Uh, well, I personally,

James: yeah,

Jessi: I would want a pretty high return.

Like it was like 10% pops into my mind or more.

James: 10% or more. Okay. 'cause

Jessi: it's like,

James: fair enough.

Jessi: I don't know. I feel like I could get that other places.

James: Okay. Interesting. So now what if I told you that institutional capital we're talking about the big investors

Jessi: uhhuh,

James: they're thrilled with a six to 7% stabilized yield.

Jessi: Then I should probably be happy with

James: How does a 9% deal feel?

Jessi: Yeah. It feels pretty good.

James: And so again, same asset, same risk is, but you get a very different emotional reaction.

Jessi: Mm-hmm.

James: Um, based on them. And, and that's the thing, right? Anchors, they don't change the spreadsheet, they change your level of satisfaction.

Jessi: Yeah.

James: With a deal.

Jessi: Weird.

James: Yeah.

Jessi: Yeah. 'cause if you were looking at the same deal, this 9% deal. In all of these different scenarios or circumstances, the deal hasn't changed. Right. It's exactly the same.

James: It's the same deal,

Jessi: same numbers, same return. Yep.

James: It's all about expectations.

Jessi: That's weird.

James: Yeah, yeah, yeah. No, it's true.

Um, so there's other places where it also shows up beyond just price.

Jessi: Mm-hmm.

James: So you can get it, like, so, and that's typically, okay, lemme take a step back here. Typically anchoring is talked about in price negotiations.

Jessi: Okay.

James: Right. And they'll say like, and that's where they'll say like, you wanna say things that.

Um, like if you're trying to get the price to be higher and you're selling it mm-hmm. You might talk about all the time and energy and effort that went into making this thing. Mm-hmm. Therefore, you are now valuing it more. Mm-hmm. 'cause they go, oh wow, look at all they did. Look at all they put into it. It must be worth a lot.

And then when you come back and say, and this is the price. Mm-hmm. They go, oh my gosh, what a deal. Relative to in my mind what I had thought it was.

Jessi: Mm-hmm.

James: And, and same thing. You see it on the, on the buyer side where you might. You might be like, well, I can go get this alternative asset for a whole lot less.

Why would I ever pay more? And, and they, and those are the kind of the, the discussions. Mm-hmm. So it often is around price.

Jessi: Mm-hmm.

James: That's where anchors, that's like classically where they were talked about in negotiations. Yeah. But again, they show up in other places. Something you, something.

Jessi: Yeah. Well, two situations pop into my head where I'm like, it seems similar to like, if you're negotiating like a, um, uh.

Salary or something. Oh, yeah. Absolute. And you're like going in for an interview and your, you know, your boss says this, then you do this. It's like this countering mm-hmm. Type concept. And that it's exactly the same. But I, I think like what you're saying, I'm thinking of some properties we walked into very early on where we, it's the same property.

Yet you walk in and go, oh yeah, opportunity. This is fantastic. And I go, oh my gosh, we have to get outta here right now. This is terrible. And it's like just, just your view on what you're placing value on and how it's anchored

James: Yeah.

Jessi: Is totally. Different. It gives you a totally different perspective.

James: Yeah, no, totally true.

Yeah. Uh, yes, very much. Yeah. And I, and maybe another word for like anchoring is like, what are your prior expectations? But the idea behind anchoring is it, it is this, you can get yourself.

Jessi: Mm-hmm.

James: It's like, well, what are those expectations based off of? Right. That's the anchor. Yeah. No, totally. So there's some other ones.

It could be off of returns.

Jessi: Mm-hmm.

James: Right. Which is the examples that we've been giving. Mm-hmm. Over and over. Right. Um. You can have that IRR. That's at the beginning and and this what's so hard about it, right? Even if you know what's going on. Mm-hmm. And I do the game with you, even you were like, 'cause like the Gandhi thing.

Jessi: Yeah.

James: I don't know if he was around 90. Right. He might actually be closer to like 40. Sure. You have no idea. I

Jessi: don't know.

James: But you were still instinctively going higher because even though you knew that was what was happening, you can't get rid of that first one. Mm-hmm. That's how powerful it is. And so like when you're looking at a slide deck and they give a number at the very beginning.

Jessi: Yeah,

James: that's the number. That's the

Jessi: number.

James: Like even if they go, oh, we had to revise it later. Nope. Too bad. Like, it's like, this is it. Um, market cycles can often be anchors. Right? Um, and you think about, uh, I thought this was interesting. Um, interest rates these days.

Jessi: Mm-hmm.

James: Are they expensive? Or are they not?

Right? It depends.

Jessi: Yeah.

James: Yeah, yeah, yeah. There used to be a time when people were thrilled to get 6.5% and then remember we're like, oh my gosh, I have to pay six point half percent. This is ridiculous. So expensive. You can't do any deals like, what are you talking about? Yeah. People, the deals. This used to be unbelievably cheap debt.

Mm. And, and now it's like, oh, this is so expensive. So you get those kind of market swing anchors. Um, also just, uh, appreciation, right? Mm-hmm. I know for years we've had just rent just going up and up and up. Right? This last six months to a year, it's been flat in Oregon. Mm-hmm. And I mean, even myself, I'm like, ah, wish I get, like inflation's still going up, so technically real rents are going down.

So it is actually a negative thing, but like. I, I've been used to like, no, no, no. It just trends up with rent, like, or with inflation. This is what it does even better than it, it's a quote, a hedge against inflation. I have talked about that multiple times. That has not been true this last year, so I don't really mention it, but, uh, but that's one of those things where

Jessi: yeah, you've, you've anchored

James: Yeah.

Jessi: At one point.

James: Yeah. Yeah. Yeah. Um, reputation. Is one, right? If, uh, if an investor does a really good deal, it's kinda a halo effect on them.

Jessi: Okay? Sure.

James: And or if they have a bad quarter, like you might just overreact like, this guy's a dummy doesn't know what he's doing. Wow, this reputation is really important.

Jessi: Yeah.

James: Um, and so, but their anchors, right? Mm-hmm. And that's maybe another, like, there's a halo effect is probably a, uh, it's probably a similarly related, but that's more, actually, that might be the opposite. 'cause Halo's all about, you're influenced by the most recent stuff. But in some ways it's, it can still act as a more immediate anchor mm-hmm.

On it. Um, yeah. Alright. Let's do another deal or another experiment.

Jessi: Okay.

James: Okay. 'cause I know get 11 news.

Jessi: Yeah, I do. It's,

James: um,

Jessi: strange to me.

James: Okay. We got two deals. Deal number one, this deal targets an 18% IRR, but may settle closer to 12%. Mm-hmm.

Jessi: Okay. Mm-hmm.

James: Number two, deal. Number two, this deal is designed for a stable 10 to 12% return with limited downside.

Okay? Mm-hmm. So, which investment A or B feels safer to you? I can repeat 'em again if you want.

Jessi: Well, I'm catching on now and I'm paying attention. So they're both 12%, but it seems like the second one, because you said it was like low risk and. It.

James: Yeah. Yeah. Okay.

Jessi: Stayed there were the, the change true

James: was less smaller.

Okay. Next question, but which one feels a little bit more disappointing?

Jessi: The second one,

James: right?

Jessi: Yeah.

James: Even though I told you it's could be as high as 18, but it's probably sell around

Jessi: 12. That's because in my mind I'm thinking could be 18, but it could

James: be

Jessi: like that one's on,

James: so here's another.

Jessi: It's lower.

James: Here's the next question. Which one would you rather talk about and defend at a dinner party?

Jessi: The first one,

James: right,

Jessi: because there's. Even though it could be, it

James: is the exact same deal.

Jessi: Yeah, but it could be, but it's the way

James: better. But the other one could be way better too. That's the point. We're talking about the same deal.

That's the thing that's true. You're just, you're describing it

Jessi: differently, but it's the same deal.

James: Yeah, of course. I'm targeting an 18%. I always target 18%. Duh. But realistically, it's gonna be around 12

Jessi: where it's gonna fall.

James: But on the other one, I'm like, eh. Realistically it's gonna be 10 to 12, but it's probably 12.

Jessi: So really? You could just make all your deals sound incredible by anchoring them or framing them with the like,

James: yes, but, but then you have the flip side, right? If I make it, if I tell you, oh, it could be 18, but it's really like, but it might settle down to 12, and then when it's 12, how are you gonna feel about it?

Jessi: Yeah. I'm like, oh. Could have been 18. How come it wasn't there?

James: So I, for me, as a sponsor, I've opted for the second style of like, mm-hmm. No, I'm gonna be pretty conservative. Like, I know I can hit this number,

Jessi: which honestly is, is way smarter because it's in the long run. But in the long run it is in the short run, it's like, well, yeah, I'm not, I'm not as excited about it.

I'm not hyped up, hyped up, but if you undersell and then over deliver, I'm gonna be like, oh, okay. Like, yeah, you, you said. It could be 10, 11. I got 12.

James: No, no, totally.

Jessi: I'd be like, oh yeah, alright, I'll invest again. That's great.

James: Well, and it's funny, so I'll do stuff, I'll, I'll admit this on camera. Um, I'll do things where I will say like, Hey, yeah, this is designed for a stable 10 to 12% return with limited downside.

And I'm, and then I'll take a step further and go, and I use conservative estimates. So now what I've done is probably gonna be good without giving you a number. I've told you it could be higher, and I let you fill in the blank with whatever you want. I let you anchor yourself up and you go Conservative.

This is pretty good. Which is like, and part of it, there's, there's definitely truth to that. I was conservative on all the estimates, but like, I was totally, it's, it's the game. Hmm. And, um, yeah, it's an interesting

Jessi: psychology.

James: So it's like, yeah. How do you, but as a, as an investor looking at deals, you just gotta be aware that's what's happening.

Yeah. And to say, okay. I just got anchored. I'm having an emotional response, but what's the math

Jessi: anchored? Is the new triggered? I just got anchored. I just got anchored. But hang, let me, let me just settle down here,

James: dude, that, that should be, Hmm.

Jessi: I like where your head's at on this one. It's just seems funny.

That

James: could be the new trigger

Jessi: word. Did you just anchor me?

James: Did you just anchor

Jessi: me? I feel anchored right now,

James: dude.

Jessi: Next time, next time I, next time I notice you doing this, like in our real lives, I'm gonna be like,

James: yes, I'm excited for you to do this in a work meeting and just be like, did you, I feel anchored right now. I feel anchored. Which you're not gonna be like, ah, that's so nice. Because it has that like I feel grounded.

Like, no, this is bad. No anchor is bad. Did you just anchor me? That's gonna be the,

Jessi: just anchor

James: me. Oh, I love it. That's awesome. So obviously there's some, there's some, there's some costs to doing bad anchors. Mm-hmm. Right? Yes. Which it could. You could. You could either, like, you could do all sorts of stuff.

You could over optimize. Mm-hmm. You could, setting the wrong expectations, you could be chasing returns and ignoring the risk. That's probably the biggest one. Yeah. Um, you could be sponsor hopping because you're constantly like, because if you had this high, high. If you have a bad anchor and it doesn't work, you move on.

Oh yeah. And he's just doing shallow diligence.

Jessi: It's not necessarily a bad deal. It's a bad

anchor.

James: Yeah, yeah, yeah.

Jessi: Oh,

James: and again, anchors don't, us don't usually cause losses. They cause inaction and miscalculation and disappointment with whatever it is. 'cause the deal is the deal. Like that is what it is. Um, so here's some things that you can do to re-anchor yourself.

Mm-hmm. Mm-hmm. If you want to, uh, the first one. Instead of saying, Hey, this deal returns a 14%, you could give it some sort of distribution. Just, just build in the hedge Right. To begin with. Mm-hmm. And that's something I can do. That's something I don't typically. Um, but uh, 'cause it gets too confusing to say like, oh, it's between this range.

It's Right. It's a lot easier to say that. Um, and again, you kinda remember like you can anchor to a process, not an outcome. So care about like. They, this is how they make decisions or this is how they, they set up the capital stack or this is what they do in downside scenarios. Like, interesting, again, ing focus on behavior, not necessarily what

Jessi: the

James: outcomes

Jessi: are.

So like use one of those examples before like the 12% deal or the 9% deal.

James: So like you might say something like, well, in terms of a process, or I might say I always, or I only ever like, uh, like when we were first investing, we never modeled an appreciation.

Jessi: Mm-hmm.

James: Just didn't do it. You said a deal has to make sense

Jessi: without

James: it, day one.

Jessi: Yeah.

James: Right. That was our thing

Jessi: because then I know definitely will with it.

James: And that's a process anchor.

Jessi: Yep.

James: Right up ahead. We something we know we're doing.

Jessi: Yeah.

James: And it's all about processing.

Jessi: Interesting.

James: Yeah. Um, I do, again, it was like a lot of the assumptions that I do, I build in.

Jessi: Mm-hmm.

James: That's, that's where I, I anchor low and I tell everyone about it.

Yeah. Hoping that they, in their own mind do the math to anchor it up, but, you know, whatever. Yeah. Um, yeah. So again, anchoring it quietly shapes how satisfy you feel with the same outcome. Mm. And so the real question isn't what return you're targeting, it's who set that target in the first place. Right. And so the next time you're evaluating a deal, you wanna ask yourself, am I analyzing the investment or.

Am I defending an anchor?

Jessi: Mm.

James: So there you go. Anchor man. Super

Jessi: powerful. It's good study. Really interesting. We do it all the time.

James: Oh, totally. I mean, it's a nice shortcut. That's super helpful.

Jessi: Sure. It is. I mean, I'm just, we do it all the time with like groceries and how much, how expensive they are and relative to what it was and

James: yeah,

Jessi: like gas prices, but also just I'm thinking of like attendance numbers, you know, for different events that I've planned and I'm like, oh yeah, I ran this event.

Got 35 people, you know, I ran it again, got more than double, but it wasn't the anchor that I had set for myself.

James: Yeah.

Jessi: And so I was like, nah, wasn't really that great. And it's like, are you kidding me? It was more than double what you had last time. Yeah. Like, that's great.

James: Right.

Jessi: So we, we do it all the time

James: and it's just, and it's really important for when you walk into unknown situations.

Yeah. And, and then it impacts again, the situation is what it is. Sure. It really express your interpretation of

Jessi: it. Yeah. How, how are you feeling about it? And

James: yeah. And again, you don't wanna be unrealistic and fool yourself into saying like, a bad investment was a good one actually.

Jessi: Yeah. Yeah.

James: Well, I could've lost a lot of money.

I lost. That's a little,

Jessi: that's just as risky. Just

James: as bad.

Jessi: Yeah, yeah,

James: yeah. No, totally. You just wanna be aware of it. So, yeah.

Jessi: Okay. I gotta go look up Gandhi's age now.

James: That's right. I had totally forgotten. I don't actually care. It's

Jessi: still in

James: my brain. Ah, man. Oh, I am so excited to feel free to leave a comment on his actual age.

I'm totally in on that. Um, that'd be great. So with that, um, if you'd like to learn about more about investing with us, you can check us out at furlo.com. Wow. Uh, with that, thanks for listening. Have a great day.