EP 193: Michael Wegmann and Randy Smith - California Active Investor To Passive Investing

[00:00:00] Hello and thank you for joining us today on The Gentle Art of Crushing It show, where we focus

[00:00:05] on learning and sharing with our listeners all there is to know about how to create success in

[00:00:10] our lives. This show stands on the shoulders of giants. Our mission is to empower and inspire

[00:00:17] our listeners to create the life of their dreams whilst having a blast in the process.

[00:00:23] Let's celebrate life together. Welcome to the show.

[00:00:26] Welcome back to The Gentle Art of Crushing It podcast. My name is Randy Smith and I am your

[00:00:34] host today. And I'm excited to have Michael Wegman with us today. Michael is the CEO of

[00:00:39] Wegman Investments. He's been involved in real estate for over 30 years. He's flipped 16 homes

[00:00:46] and now he's doing something similar to what I am doing. So Michael, welcome to the show.

[00:00:51] Thank you, Randy. I appreciate it. Glad to be here.

[00:00:55] Outstanding. Well, let's jump in right away. Michael, can you tell the audience a little bit

[00:00:59] more about yourself and how you found yourself in this space?

[00:01:04] Great. Right. Well, I've got a technology background. I worked for Paramount Pictures

[00:01:09] Interactive originally and then broke off and started my own software company, Math.com,

[00:01:15] and created the world's most popular leading math site. And that was my technology background.

[00:01:22] That was a great opportunity, sold the company and then got into real estate. I read Robert

[00:01:29] Kawasaki's book, Rich Dad Poor Dad, and really saw that real estate owning an asset that

[00:01:37] produced revenue and typically appreciates in value as kind of a really great investment.

[00:01:43] So that got me after technology into flipping homes. So I flipped five homes and kind of

[00:01:51] did it, you know, seeing all the remodeled on home TV, how glamour it was, how great the

[00:01:58] returns were, which there can be there. But I quickly learned through a mentor

[00:02:04] that flipping houses was a higher risk, more stress because it's empty. You're not getting

[00:02:11] rent. You're much more susceptible to interest rates. Also, it's very competitive.

[00:02:19] And I found that multifamily was a better opportunity because, you know, the things

[00:02:25] that are risky in home flipping aren't as risky in flipping a multifamily because you

[00:02:31] can move one tenant out, have three tenants still paying if you've got a fourplex.

[00:02:36] And that's kind of where I started. I started with the fourplex, went to a fiveplex, eightplex,

[00:02:41] then eventually one of 12. And that's kind of my history. You know, flipping those apartment

[00:02:47] complexes multifamily was a much more profitable lower stress. It's based on your income. It's

[00:02:54] not based on a comp. So that was where I found kind of my roots. And then, you know,

[00:03:02] I'm in California, in Los Angeles, where it was partially rent controlled. But during COVID,

[00:03:08] it went 100% rent controlled. So I divested from my assets because it's just really difficult.

[00:03:16] It's landlord unfriendly. And with rent control, it's really difficult to flip a unit

[00:03:22] because tenants can stay as long as they want, as long as they're paying. And in fact,

[00:03:27] in Englewood, where I own one of my last properties, you know, I have to pay a $2,000 fee

[00:03:32] for having rents that are above market. So it's kind of adding injury to insult. So

[00:03:40] that makes me want to get into syndication syndications nationally with partners.

[00:03:57] If this sounds like you, check out impact equity.net and schedule some time to talk with

[00:04:02] the founder, Randy Smith. Randy went from massive income to leaving his W-2 through

[00:04:07] passive income. And he can help you do the same www.impactequity.net.

[00:04:14] Got it. Got it. Okay. So you started flipping single families after it kind of interesting,

[00:04:20] the technology piece too. But you started with single families and then you started flipping

[00:04:27] multi-tenant investments. So four-plex, six, eight, 12, you said. Yep. Apartment complexes.

[00:04:35] And so with those, did you, were you, how long were you holding those assets? Was it a true

[00:04:41] flip like you'd buy and renovate and sell or were there years that you were holding those?

[00:04:46] Yeah. My initial ones I held, I built a portfolio of $30 million just kind of by

[00:04:51] tooth and nail. I'm a real estate agent, so I would get my commissions,

[00:04:57] roll that into buying a property. And my initial properties I held, I would basically,

[00:05:04] over time, since there was rent control, I would get the tenants, eventually it'd move out

[00:05:10] and then remodel the unit and increase the rent property anywhere from 50 to 70%.

[00:05:16] And then I held those properties and then I would take money from that asset,

[00:05:22] take equity out and buy another one. So I wasn't reading as many books as I should have,

[00:05:30] knowing I should have probably sold the property, done the 1031 exchange

[00:05:34] and gotten bigger, better. But I was just building my portfolio thinking that's the way

[00:05:39] to do it, kind of the slow, earnest way. But then as you kind of talk to mentors and read books,

[00:05:46] the better way to do that was actually flipping properties. But again, in California now with rent

[00:05:52] control, it's just, it's really difficult to do that. You're at the mercy of the tenants

[00:05:57] who have a lot of rights. Got it. Got it. Yeah. So that's interesting. You hear a lot

[00:06:04] of people that will buy assets and they do kind of what you said is they will just do cash out

[00:06:10] refis every three to five years or so, which essentially is creating really tax advantaged

[00:06:16] income for you as the operator or the owner. But when you come to sell those on the back end,

[00:06:23] if you've been pulling money out that whole time, it does create

[00:06:27] quite the tax situation for you once you do sell those. Is that true?

[00:06:32] Yeah, that is. That's declared as income. So instead of selling the property and doing a

[00:06:40] 1031, which is much more tax advantaged or doing what's called a DST, a Deferred Sales Trust,

[00:06:48] but the 1031 is a much more financially popular transaction for flipping an apartment complex or

[00:06:58] you know, an investment property. Got it. Okay. So you, I think you mentioned that you sold all

[00:07:05] of those assets and now you've become a passive investor as well. So did you 1031 those assets

[00:07:12] into passive investments or did you just take the tax hit when you did those?

[00:07:18] Great question. I've sold all my properties but one investment property. Instead of 1031,

[00:07:26] I've done what I mentioned before, a Deferred Sales Trust, which is much more flexible. Instead of

[00:07:31] rolling it into an equal or greater property value, a Deferred Sales Trust, you can actually

[00:07:37] break up say you've got a million dollars to play with. You don't have to put that entire

[00:07:42] million dollars into a new property like a 1031 exchange. You can actually divide that up into

[00:07:48] 100,000, 100,000, you know, have 10 different units of investment. Some could go into a

[00:07:55] multifamily investment syndication across the nation. You could put some in the market,

[00:08:01] you know, traditional Wall Street, you know, Google, Facebook, you know, Tesla

[00:08:06] and you can even cash out some. So if you've got an event where you're taking out $100,000,

[00:08:12] it's tax on that only $100,000. The remaining $900,000 that's invested is still tax deferred.

[00:08:20] So I'm really excited about the Deferred Sales Trust versus a 1031. It's got a lot more flexibility.

[00:08:28] Interesting. Now, I think I had an operator come on and he talked in great detail about DSTs

[00:08:36] and I'm involved with another passive investing community where I hear people talk about

[00:08:41] one of the drawbacks can be that there can be some significant fees involved with DSTs.

[00:08:48] What has your experience been with this? Has that been your experience?

[00:08:52] The Deferred Sales Trust manager charges a 1% fee for that management.

[00:08:58] And then the broker who advises on the investing, you know, into the stock market

[00:09:04] or other places to put it for funds that they are responsible for investing,

[00:09:09] it's another 1%. But, you know, after the relationship and the money I have,

[00:09:14] I've got that down to 0.65%, which, you know, the grand total between the...

[00:09:20] Yeah, it's the total with the trust manager and the broker who's actually placing the

[00:09:27] investments, it's 1.65% a year, which I find that very manageable versus, you know, the

[00:09:34] tax event that you would have if you actually took that money out.

[00:09:38] Sure. Yeah, and being a guy in California, you're getting state tax, federal tax,

[00:09:45] they're basically going to get half of the money if you were to have that taxable event.

[00:09:49] Interesting. Okay. Well, very good. So you've decided to

[00:09:55] disposition those, get rid of those assets. You started investing passively. Talk about

[00:10:01] that journey, if you can, a little bit. What did that look like moving into the space? Did

[00:10:05] you one day just wake up and decide I'm going to sell all these assets and start

[00:10:09] leveraging this DST? Or was that a long gradual process? And what did that due

[00:10:14] diligence process look like when you first started?

[00:10:17] Thank you. That's a great question also. What happened was, is that, you know,

[00:10:22] I was looking at my turn in investment returns, and I was getting like 10% to 12% a year,

[00:10:28] which is secure because it's real estate. I knew what I had been doing for years, so I

[00:10:34] was very confident in that. But again, with rent control, the landlord unfriendly state of

[00:10:40] California, I started looking outward and that's when I found the Brad Sumrock Group,

[00:10:46] which is a, you know, he basically teaches individuals how to syndicate.

[00:10:52] And within that complex, I found, you know, being 60 years old, I really don't want to

[00:10:58] syndicate myself anymore. I'd done two of those myself previously in my real estate experience.

[00:11:04] But with this group that I had found, I found syndicators who were some of the

[00:11:09] best across the nation. And just through networking, you know, I looked at about

[00:11:15] a dozen different syndicators and evaluated them and found the best ones. And then I got

[00:11:22] a lead on to Rice 48 with Bikron and Zach, the founders of Rice 48. And I just found them so

[00:11:31] compelling. You know, they're vertically integrated with their own property management

[00:11:36] construction company. They buy supplies direct from China. And I'm like, these guys really

[00:11:42] know what they're doing. And they've just got an incredible track record of turning things

[00:11:47] around. I like their aesthetic, having flipped homes and my own apartments. I think you've got

[00:11:54] to have the right aesthetic. And they've got their nailing it both with branding, signage.

[00:12:00] And to answer your question fully, you know, it took me probably two years to sell the

[00:12:05] properties that I had. And now I'm investing in passive investing in a Rice 48 and then

[00:12:11] looking beyond that as I grow my portfolio and wait a minute investments that I started

[00:12:16] about a year and a half ago. Fantastic. Yeah, it's, you know, my story is somewhat similar

[00:12:23] to yours. I didn't buy the volume that you did, but I certainly bought my share of single

[00:12:28] families and was heavily involved and dealt with all the construction management on all

[00:12:33] of those assets. And when I started doing the math about return on equity, it was a

[00:12:42] sad day in the Smith household because my return on equity was nowhere near where I wanted it to be.

[00:12:49] And I started that slow process of selling the assets and then starting the due diligence

[00:12:54] process to move over into the passive investing space. So now what I found is that there are

[00:13:01] so many different operators out there. And I think you hit the nail on the head. Rice 48

[00:13:05] is a fantastic operator. I partner with them. I've invested very heavily with them as well.

[00:13:11] But they have a very unique business strategy that they leverage. And it's a very,

[00:13:17] you know, ideally it's a very quick flip when they're buying these units. They renovate them,

[00:13:23] they increase the rents and then they sell. There's a number of different business models

[00:13:28] in this space. I'm curious why you liked the Rice 48 business model compared to

[00:13:35] maybe some of those other operators that might hold them longer or do the infinite

[00:13:39] return model that you're seeing so many pop up with right now.

[00:13:46] One answer is I like the return. I like the return that they get. I think their first 11

[00:13:53] deals that have gone full cycle, they've more than done a 2X return in less than 18 months.

[00:13:59] So they really have it dialed in. Some of these people hold longer. They remodel

[00:14:06] and turn the units slower. I don't see a need for that. I see what they call forced

[00:14:11] depreciation where you get in, remodel the units, rent them out for higher rents.

[00:14:17] And the market can hold it with the equity multiplier. It's time to sell. And they're

[00:14:25] primed to do that and they're great at doing it. So yeah, I'm a big proponent of Rice 48.

[00:14:32] Yeah, no, I agree with you. I agree with you. I think they have an excellent business model.

[00:14:37] The fact that they're vertically integrated with both their property management and construction

[00:14:42] management allows them to control as much of that business model as possible, which you know

[00:14:49] being an operator like property management, construction management is critical to the success

[00:14:56] of the project. So let's shift a little bit. You've started to move into the space where

[00:15:04] you're sharing your experience now with your network and your friends and family and starting

[00:15:10] to build a larger network as well to make these type of investments available to a broader

[00:15:15] population. Talk to me a little bit about that strategy and why you've made the decision to

[00:15:21] move in that space. Well, with the good and bad of it, I turned 60 in June of this year. So

[00:15:30] I've kind of done the flipping of homes and I've done the apartment flipping. I've dealt

[00:15:34] with tenants. I've kind of done that whole tenants, termites, trash, toilets, which

[00:15:42] it's an experience. You've got a good return on it. But now I find that I can actually make

[00:15:48] as much or better return investing in RICE 48 who they're in the hottest market. Unlike California,

[00:15:54] which has high taxes, lower growth rate, lower job growth rate and population growth rate,

[00:16:01] they're in the hottest top five metro areas in the nation. So it's just a great place to be.

[00:16:09] It's not like there's a few hundred thousand to remodel these apartments. There's like over

[00:16:14] two million in Dallas, Fort Worth and Arizona alone. So this model is going to be around for a while.

[00:16:21] I like investing in it because I've done it. It's something I know. I know how to flip homes.

[00:16:26] I know how to flip apartment complexes. I've made a lot of money in it. And it's something

[00:16:32] I know when you know it, you know that it's traditionally a lower risk with a higher return.

[00:16:38] So that's kind of where I'm at. And allowing friends, family, colleagues

[00:16:45] to kind of tap into my experience and hopefully they trust me to get into this

[00:16:52] flipping syndication that's so hot in the Sun Belt, in Houston, Dallas, San Antonio,

[00:16:59] Arizona, some in Florida, where there's no rent control and it's a better tax advantage.

[00:17:07] It's landlord, what they call friendly, allowing the landlords to have more control in the process

[00:17:13] and the syndication and flipping. Yeah. Quite often the exact opposite of what you had

[00:17:20] in California, right? So yeah. Thank you. Yes. Yes. Yeah. Until it opened my eyes,

[00:17:28] I was just getting the bloody nose here in California, turning a good profit, which was

[00:17:32] nice. And in my head I was like, this is the best. But now I can see I can actually earn more

[00:17:38] by investing in Rice 48 or other syndicators who are in a much more hot market and like you say,

[00:17:45] have greater control, controlling the property management, the construction company.

[00:17:51] I was at the mercy of contractors, right? Which some days they come, some days they don't.

[00:17:58] Sometimes they get proof of permits, sometimes they don't. So, you know, Rice 48, there's low

[00:18:04] risk because they're just rehabbing units or rebranding, right? They're not doing ground up

[00:18:09] construction where they're having to deal with permits and city. And they also keep the revenue

[00:18:15] coming in from tenants. If you're doing a ground buildup, you have no revenue. So

[00:18:21] if something happens with the city or permits, you're sitting vacant, empty. And like you said,

[00:18:27] carrying a house, like on a house you get, say you sell it for two million, you bought it for

[00:18:31] one million. It looked like a $1 million profit when you have your carrying cloths,

[00:18:36] your construction, your materials, your time, you know, quickly your roads.

[00:18:43] Yeah, very good. Very good. Well, let's dig into this market that we're both operating

[00:18:50] in today. And I'm curious your thoughts about the economy and interest rates and how all of that

[00:18:58] is impacting the multifamily space. Do you think now's a good time to be buying assets or

[00:19:04] would it make sense to sit on the sidelines longer? That's a great question. You know,

[00:19:10] I think the market is adjusting. You know, with the seven hikes in interest rates, I think

[00:19:15] we've seen, you know, a pretty strong adjustment that's got to occur. Prices,

[00:19:20] you know, are coming down. If you look, you know, what's selling now versus a year ago,

[00:19:26] there's a 25% discount because, you know, with the rates, people's buying power is just not

[00:19:32] there. So I still think it's a good time to buy. You know, real estate can be cyclical.

[00:19:40] In two to five years, which is the average whole time for a cycle on a syndication apartment

[00:19:46] complex deal, the market will be back. You know, it just happens. And then we talked about

[00:19:54] this before with forced depreciation where you go in, remodel the unit and you force up rents

[00:20:00] anywhere from 40 to 50%. The property's automatically valued more. So you might have

[00:20:06] to hold the property longer. I don't think you're going to get a two year flip like the

[00:20:10] Rise has done in their first 11 deals, but I still think the model's there.

[00:20:17] If you look at the model they've built, which I know you're a real detailed guy from

[00:20:21] what I've heard, Rise has planned into their model cap rates with the banks. So

[00:20:30] they make sure that, you know, if interest rates do go up, they've got about a 2% spread

[00:20:35] where they're not going to be on the hook for that cap rate or interest rate that's gone up.

[00:20:41] So I think it's still a great time to buy. I think a year and a half, two years ago,

[00:20:46] if you got in, you're really having some struggles for these syndicators who have.

[00:20:52] But I think now is a good time. I would be cautious, conservative. I would look at the

[00:20:58] deal to make sure they've got good amount of reserves. They're not overextended with the

[00:21:02] heavy loan and go with the syndicator who has a great experience like Rise 48.

[00:21:10] Yep. Yep, absolutely. I think the people that are getting hurt today are the ones that either

[00:21:17] one they bought two shorter rate caps or they didn't buy the right rate caps

[00:21:21] and they're being forced to sell today. And unfortunately, investors are losing money

[00:21:26] because of that. We're seeing operators walk away from assets.

[00:21:31] Yeah, or they're having a capital call, having to put more money in. And a lot of people don't

[00:21:37] want to do it. So some of these are fire sales and collapsing. Yep. Which makes great

[00:21:44] opportunities for folks like Rise 48 and other operators to step in and pick those up. So

[00:21:50] very good. I think it's an interesting time. I think now is the time to be buying assets.

[00:21:54] As you mentioned, 20%, 25% discount compared to a couple of years ago.

[00:21:58] And over time, I think as we see the interest rates start to come down, even if it just takes

[00:22:04] the next six to nine to 12 months for those to come down another 50 or 100 basis points,

[00:22:09] that will drive the value of these assets up. It will take some of the dollars that

[00:22:15] are sitting on the sidelines and bring that back into play. And we keep hearing this saying

[00:22:22] that it started out as survive to 25, and now I'm hearing survive through 25. So I think we're

[00:22:30] going to be latter part of 25, early part of 26 before we see a lot of these assets really

[00:22:35] start to turn. So very good. Now, I know multifamily has been kind of at the core of

[00:22:43] your interest, but are there other asset classes that you like? Are there other debt

[00:22:47] instruments or investments that you're personally looking at and staying close to with your own

[00:22:52] personal dollars? Or is it all multifamily? Right now, it's all multifamily. Like I've said,

[00:22:58] it's my experience. It's what I know. So the last year and a half, I'm really just

[00:23:04] priming and pumping and showing that multifamily and syndication is the way to go

[00:23:09] given my experience. So I think that leverages my trust with my family, friends, colleagues.

[00:23:16] I think I'll branch out after that, but I really want to specialize and hone in on this initially.

[00:23:23] Fantastic. Fantastic. Well, very good. Well, I know that I do have a few questions that I like

[00:23:31] to ask everybody before we wrap up our podcast, but is there anything you'd care to share with

[00:23:35] the audience before we jump into that? Investments.com or michaelatinvestments.com.

[00:23:40] That's a great way to reach me. I just think we've already talked about this, but it's almost

[00:23:48] always a great time to invest in real estate. Right now, there's like you said, 25% off. So

[00:23:54] this is a good time to be investing. I think survive through 25 is actually what's going on

[00:24:00] because real estate will go up. It has its ups and downs. We had a really significant up

[00:24:08] in 2020 and 2021. I'm a real estate agent and that market was so hot.

[00:24:17] Some of my clients, we were over bidding by a half a million dollars and still losing

[00:24:22] even with an all cash offer. So real estate just like the book, rich dad,

[00:24:28] poor dad is always a great investment for the most part. Absolutely. Absolutely. Yeah. And very

[00:24:35] well said. What do they say? Don't wait to buy real estate, buy real estate and wait. Right?

[00:24:42] Yeah. Any significant amount of time, the value of that asset will go up.

[00:24:46] Yeah. And you don't get rich quick, but you get rich.

[00:24:50] Absolutely. Very good. Very good. Well, good. Well, let's hop over into the final section

[00:24:56] of the show where I ask just a few questions of everybody we have on the show. Can you share

[00:25:03] a specific educational resource with the audience that would help them on their journey to

[00:25:09] becoming a new or newer passive investor? Sure. There are multiple syndication books

[00:25:17] that are on the market, apartment syndications. I would look at those.

[00:25:21] There's a book by Brian Burke, which is the passive off investor. I'm not sure if

[00:25:29] I'm getting that title correct, but hands off investor. Yeah. Thank you. Thank you.

[00:25:36] I would educate yourself through that even going to some seminars like the Brad Summark group.

[00:25:42] They have seminars for $99 for two days on the weekend. You can do it virtually or in

[00:25:47] person and educate yourself on how do you vet a syndicator? What to look for their experience?

[00:25:54] Are they vertically integrated? Have you ever had a capital call? Just things to ask yourself

[00:26:00] to make sure that you've kind of buttoned down your questions, to make sure you're going with

[00:26:05] the syndicator that is experienced and has done well. Love it. Love it. Yeah. I like that you

[00:26:14] share those two-day conferences that you can even do virtually and learn almost everything

[00:26:20] you need to know to be a good passive investor or pair up with somebody like yourself or others

[00:26:26] that are helping people with that process. Very good. Now, is there a recent bucket list

[00:26:35] item you've checked off your list or one you hope to in the near future?

[00:26:41] Thank you. I have twin daughters that are graduating from high school. My husband and

[00:26:46] I are taking them to a Europe trip. We're flying into London, then to Paris and Amsterdam.

[00:26:53] We're doing that this summer for two weeks. That's a big bucket list for

[00:26:56] myself, my family, and my daughters. Yeah. Fantastic. My wife and I might do

[00:27:02] Amsterdam and Germany in the fall as well. Very cool.

[00:27:07] One of my dreams is to attend Wimbledon. I'm not sure we'll hit this trip but

[00:27:12] that's on my bucket list too. Fantastic. Yeah. Well, very good. Then the final question I'd like

[00:27:19] to ask is if you had $100,000 to invest today but you could not invest it in one of your deals,

[00:27:27] where would you place that capital? I'm actually investing in a

[00:27:33] gold and silver mine up by Baker's Field, California. They've already done one round

[00:27:39] and it was an old mining mill during the 40s. They had a lot of minerals that they found.

[00:27:50] They were gold and silver. It was sold just for the price of land value and I got in on the deal.

[00:27:56] Now they've dug deeper, they've done all the drills and they found a lot of gold and silver.

[00:28:03] There's a second round. The eventual outlet there is selling to a gold and mining company

[00:28:10] or doing an IPO. That's where I'd put, and probably early next week, putting more money in

[00:28:17] there. Fantastic. Yeah. You don't hear that often. Very good. No, no, no. I don't think

[00:28:24] I've ever heard of the 100 plus episodes I've done. I've never heard gold and silver so

[00:28:29] that's interesting. Yeah, very good. Yeah. The price of gold could be strong.

[00:28:36] Yeah. It seems like it's correlated to the market but opposite of the market generally so

[00:28:43] that's interesting that it's doing well now. Yeah. Yeah. More of a security. Very good,

[00:28:47] Michael. Well, thank you so much for being on the show today. I appreciate you coming on and

[00:28:52] sharing your story with the audience. It's been good to get to know you again and excited that

[00:28:58] I'll be working alongside you with a lot of these projects with Rise 48. Michael,

[00:29:03] thanks so much for being on the show. I appreciate it, Randy. Thanks for the

[00:29:06] opportunity and yes, great to talk to you. Awesome. Well, very good too. Our audience

[00:29:13] as always, we encourage you to continue that education journey. More important than that,

[00:29:17] though, make the decision to start passively investing. Both Michael and I are convinced

[00:29:23] that once you do, you wish you would have started that much sooner. Be sure to join us

[00:29:28] again next Thursday for another great episode and thank you so much for joining us today.

[00:29:53] Magnificent. Thank you and have a wonderful day.