#50 - Real Estate Investing: Building Resilient Wealth and Financial Independence with David Phelps

[00:00:00] That's the key here if you're starting something new.

[00:00:02] Really got to find the people who are not just there to sell you something because they think

[00:00:06] it's good or maybe they just need the money and they're just trying to sell anything they've got.

[00:00:09] You've got to be really careful about that and not get caught up in trends or fads,

[00:00:14] which that certainly was a fleeting one there.

[00:01:21] I couldn't be more excited. Congrats.

[00:01:22] I could hold captain on it, but man, I am excited.

[00:01:25] Focus on more real estate, fly some fun trips.

[00:01:27] I'm really excited about the change.

[00:01:29] It was time.

[00:01:30] That's great.

[00:01:31] Well, I just got back from skiing in Park City with our investor ski retreat and a couple

[00:01:35] of Hawaiian pilots were there actually, so we missed having you.

[00:01:38] I know.

[00:01:39] I wanted to be there, but I was busy doing V1 cuts.

[00:01:40] No, that's right.

[00:01:41] That's right.

[00:01:42] Well, cool.

[00:01:43] I'm excited about to get to the show. We talked about a gamut of things. So anything, any parting thoughts before we jump in?

[00:03:01] No, I'm excited to get into it.

[00:03:03] Let's get to the show.

[00:03:04] David, thank you so much for joining us.

[00:03:06] My pleasure. I was, started real estate. I just had this always this bug in me when I was in college about trying to learn how to be a good quote investor. I just, I liked the term. I thought investments sounded good. I had no idea what it meant really. So I read books about stocks and bonds and really back in the, I'll date myself here, but it was really back in the late 70s when I was going through college

[00:04:21] and I read some books on stocks and mutual funds.

[00:04:24] Mutual funds were just coming out then.

[00:04:26] Well, that's interesting,

[00:04:26] but it couldn't really make a yes, in fact, it was my father. So, hey, dad, I got a great idea. I'm gonna be going to school here. I was back in Dallas when I started dental school.

[00:05:41] I said, you know, I can just like everybody else,

[00:05:44] I can pay rent and have an apartment,

[00:05:45] which would have been fine,

[00:05:47] just kind of following the crowd. but I just always thought I need to have this alternative plan like just in case or something that I felt like was gonna build or something. I didn't really see how it was gonna work, but I understood the basics of real estate enough at that point to go, there's something here. And so I took that 25,000, my share, and parlayed that into multiple properties because I didn't, I had to make that money work for me.

[00:07:01] You guys talk a lot, we understand the power of leverage.

[00:07:05] Of course it cuts both ways,

[00:07:06] but I understood enough about how to use it. she's diagnosed with high-risk leukemia and that just turned everything upside down for our little family at that point. Just you don't know what hits you at that point because you don't have any training for dealing with that kind of thing. Our daughter got through it which was the main focus but our marriage unfortunately didn't make it and that's just a no-fault situation to anybody

[00:08:20] who's gone through any kind of a hard devastating personal health financial whatever crisis probably And so we were introduced by someone with whom we have great respect. In fact, he's been on your show a couple of times. I checked and saw, I'll just say Mr. Derek Long, love the guy, he's super sharp. So we connected with Derek and okay, I'm spinning out here a little bit. I was going back to network. So the key thing I knew was I had a network that I built up over the years in real estate.

[00:09:41] So repeating my game plan to kind of pile up assets

[00:09:47] and snowball down the debt, So all the chemo, all the seizure medication, it just was caustic to her liver. And the liver was no longer filtering blood. It was actually causing blood to pool in her stomach that should have been going through her liver. And actually she was, I'll just keep this light, but basically regurgitating blood out of her stomach.

[00:11:02] It's kind of scary thought when you see your kid doing that.

[00:11:04] It's not a good sign.

[00:11:06] You have no idea what is my position here now? Yes I need to be financially sound for my family that's important but is it also maybe would be good for me to be there? I mean I was splitting time between you know my

[00:12:23] dental practice and being at the hospitals back and forth back and forth. It was you to set me free for, I thought, maybe 18 months. And I sold out to sell my practice too, because I had to let that go. I couldn't be responsible for both. So sell the practice, take one I had, take that equity, because I could put it back into assets again, because I knew where to put it. That was another key, I knew where to go. And combined, I thought, okay, I can at least float

[00:13:40] this thing called being financially responsible

[00:13:42] for at least 18 months.

[00:13:44] I could go back and do another dental practice.

[00:13:46] I could be an associate somewhere.

[00:13:48] I mean, all kinds probably not gonna fit your game plan because that was really more active involvement. Now today I'm much more passive, but back then it was active. So really what we did then it was coming out of the 2008 financial crisis and you could pick up any kind of property asset on a discount so they became my capital partners on really,

[00:15:01] no big deals.

[00:15:03] Really I was still just doing mostly single family.

[00:15:05] I had a mobile home park back then,

[00:15:06] but that wasn't part of this process. like larger properties, multifamily, cell storage, where you find good operators. And so I knew people out in the space, we just hadn't put anything together. And I said, well, I'll just take a dozen or so doctors who are interested. I said, we'll just do a meeting. We'll just come to a meeting and I'll just share what I know and I'll bring some other people that I know and we'll just talk I had this other thing going on that is going to give me the opportunity to get some breathing room and live with the situation that I'm in. Right. And I think that's what this is all about. You know, this isn't necessarily the way to 50K at a time, you're way out of a job.

[00:17:40] Right.

[00:17:41] Or, or quit your aviation career that think, for any professional or business class you know, equities, you know, higher risk to lower risk on the capital stack to bonds or CDs or money markets, which are paying more today, but still probably not enough to keep up with inflation. So it's a depletion model. And when I, many of our doctors who have come to us and, you know, have had some form of financial advisor, and I'm not here to demean financial advisors at all. Look,

[00:20:23] I think there's certainly a place for advisors home run over here. Many of them didn't know how to buy right. So now they're stuck with leverage or just let's go flip some houses because our local real estate guys are just making money hand over fist. And they go out and get tripped up and then they go, I can't do that. So my dream's over. I'll just have to go back to being a slave to trading time for dollars and my 401k will get me there someday.

[00:22:45] Frank, the genesis of my company was looking at folks like you at real estate conferences and thinking, why doesn't this exist for pilots?

[00:22:48] So Turbine Capital was born as a mirror image of what had already been built for the physician

[00:22:55] community.

[00:22:57] And as a follow on, Ryan and I think is more interesting is if you run the opposite calculation, if you'd have taken that $25,000 and stuffed it in your mattress, it would be worth 8,400 today. So that's the power of the erosion, really the negative power of inflation on your savings. And this is why savers get burned. This is the whole thing Robert Kiyosaki talks

[00:24:24] about, right? So this is why we love real think is the nexus for everything we do in life. We grow up believing certain things to be true, whether they are or not, and many times they're not. It's just what's been transported to us either through parents or generations of well-meaning people, teachers, community leaders.

[00:25:42] Everybody has their thought process about

[00:25:44] what's the right way to go through life

[00:25:46] and go to school and XYZ, right? My group the other day, I had it sitting here somewhere. Oh, yeah. So, I tried the other day because they wanted to kind of see what I was doing when I was back doing on the street. And I pulled up my HP 12C, a classic. That's what I learned off of. I said I was enamored by running numbers and seeing what I could do because I was never a guy that really enjoyed or was good at

[00:28:02] financial advisor says, just keep plugging away at this. And we think we can get you there.

[00:28:04] What's there?

[00:28:05] Well, we don't really know.

[00:28:06] Maybe just keep doing it until you're burned out

[00:28:08] or you can't go any longer.

[00:28:09] And most of them go, well, that's not really

[00:28:10] what I had in mind here for my career.

[00:28:12] I'd like to have options to where if I enjoy what I do,

[00:28:15] maybe I can cut down the hours or I bring in,

[00:28:18] in our case, we can bring in associate doctors

[00:28:20] or even partners, but scary to do that when,

[00:28:23] because again, we're giving up control, right?

[00:28:25] We don't want to give up that control.

[00:28:26] But when we have a deep well of knowledge, what's happening in the market today? What's happening with interest rates and residential real estate and commercial real estate?

[00:29:43] Because our listeners who are starting to follow along in terms of what's happening

[00:29:48] in the day. And you hear a lot of people that get involved in the economic cycle relating, you know, is Jerome Powell, is he a Paul Volcker or is he an Arthur Burns? Arthur Burns wouldn't let the hat out and Volcker came in to smash it. And smash it he did, taking interest rates, federal funds rate up to 20% and we had back to back recessions.

[00:32:21] Perfect timing for me to jump into the real estate market.

[00:32:23] But actually it was, actually it was because stuff was on sale.

[00:32:26] No one could buy. So we got a good deal.

[00:33:25] yeah, a lot of real estate, commercial real estate, particularly housing to a lesser extent, but commercial is in not a, well, some asset classes you could say are free fall, like office

[00:33:32] for reasons including COVID and the work from home that occurred. But other asset classes,

[00:33:39] you tear down, some are in trouble. And what I tell people is that this is normal,

[00:33:44] this is a cycle. Then I say, well, then what do I, are you gonna be direct hands-on? Most of our people, your pilots and my docs don't wanna be hands-on. Okay, next level is, all right, well then who do you know or who do you know who knows somebody? What does that look like? Well, then you gotta start digging deeper, right, gentlemen? We have to say, well, what's the track record? What's the culture?

[00:35:00] Who's behind the curtains of some operation,

[00:35:03] whatever asset class is?

[00:35:04] And then another part that we really are looking at harder

[00:35:07] now that we really didn? When I tell a lot of my docs, and again, I'm not a financial advisor and I'm not playing one here today at all. Okay. Just so we're clear. We have a disclaimer in the show notes. Perfect. Perfect. Perfect. Yeah.

[00:36:20] Can I come in here and talk about teeth whitening and I'll do that all day long.

[00:36:21] I'm still licensed and incredible.

[00:36:22] Actually, you'd like to see how I fell for that?

[00:36:24] Okay.

[00:36:25] Later after the show.

[00:36:26] So, you know, we part of the capital stack. And I know you guys offer a debt component to your fund. I tell people that equity investing, the ownership piece, is more about the story. It's the story. There's no real guarantees. It's like we think this will happen.

[00:37:40] We think if this and this happens,

[00:37:41] that we can project that we'll get these returns.

[00:37:43] But it's a story.

[00:37:45] The debt side in private credit transactions or with a fund or syndicator who does that. Because overall,

[00:39:01] you're probably safer in that part right now. I love this. It's important right now because if you're really, you gotta think about, whenever I ask that question, where should I put my money? It's like, well, what do you really want? Do you want a guaranteed cashflow? Nothing's guaranteed, but the closest thing contractually to it, or do you want more upside potential? And I like to think of like a barbell strategy

[00:40:20] where you have some debt that's producing you income

[00:40:23] and cashflow, and you have some equity that,

[00:40:25] hey, if the deal hits it out of the park,

[00:40:27] or maybe we are in a discounted environment, Well, the bank is providing a loan for the other 800,000 and you over time are chipping away at that loan and you own more and more of that real estate. Now if that house goes up to a million three in value, you own all of that $300,000 of equity appreciation. The bank doesn't magically own some of that long-term appreciation.

[00:41:41] That all belongs to value. So it's a $500,000 loan on a million dollars of value.

[00:43:02] That property would have to come down by 50% operators, what are the assets that the debt fund is providing capital to? I was talking to an operator earlier today who similarly is creating a debt fund and they are going to use the capital in that debt fund to do hard money lending.

[00:44:21] Okay, I'm not saying that's good to theoretically earn a higher rate of return. So that could look good on paper while we're lending money. But again, it's all in the details. And I think this is where investors have to dig in and gain a greater understanding of exactly where the money's going, how it's going to make that money. Because even though it's contractual, if the money's not there, that

[00:45:43] fund could die a painful death and still could just of a capital raiser for the oil and gas industry. Okay. Well, you guys know what I'm talking about. We have a good friend in oil and gas, so I'm not saying negative to oil and gas, but the drilling aspect. This was oil shale fracking back in an environment that was west of where I am in the Dallas Fort

[00:47:04] Worth area, Barnett Shale. Big geological development. And it was going big gangbusters who are not just there to sell you something because they think it's good or maybe they just need the money and they're just trying to sell anything that they've got. You've got to be really careful about that and not get caught up in trends or fads, which that certainly was a fleeting one there. The other lesson is really, as we and I have become more passive in my investing,

[00:48:20] which is where I want to be,

[00:48:23] probably looking, as I said earlier,

[00:48:25] about the second piece of due diligence.

[00:48:28] Well, there's just not my area of expertise. So do you have somebody on your team, on your side that can help you look at some of those things? I think right now is a really important time to not drop the ball on any of those particular aspects. That's great. I love that. You know, I guess my, one of my last questions that, you know, as we wrap up and I wanted

[00:49:40] to thank you, David, for coming on and sharing your insights and wisdom.

[00:49:43] My final question I always like to ask is, you know, what, what in the last six months

[00:49:47] have you, I mean, you've been in this for a long time. about what I see and try to reduce the exuberance and euphoria that we've all seen in the last few years and just try to reduce the expectations. Because again, it seems like everybody that I see wants to chase yield. Well, where's the highest return I can get? Can you get me an

[00:51:01] IRR, internal return of high teens and twenties like we saw in the last few years because everybody on to that with, I have always found, including myself in my earlier years, that retail investors are typically very poor at identifying and accounting for risk. The returns are just a projection and they're projections that are based on specific set

[00:52:22] of assumptions.

[00:52:23] And those assumptions have to become true in, but I'll make an honorary one if you want to jump in. Learn about your teeth while you learn how to invest money. But I do similar to what you do. You do it for pilots, I do it for dentists, but like everybody's welcome, right? Because we're talking about stuff that a lot of people want to know about. The website for those who are interested, it's freedomfounders.com.

[00:53:42] I've got a few books on Amazon

[00:53:44] that speak to different aspects of investing

[00:53:47] and how to make money work.