I’m so glad you joined us because we have Robin Sharma and Hunter Thompson. Robin is the author of fifteen bestsellers. He’s a globally celebrated leadership expert. You’ve probably read several of his books. Hunter Thompson is a different Hunter Thompson than the one you might be familiar with, but he is just as interesting. He is the Founder at Cash Flow Connections.
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The 5AM Habit with Robin Sharma
I am here with Robin Sharma who is one of the world’s premier speakers on leadership and personal mastery. He’s named one of the world’s top leadership gurus. He’s got a book and I’m interested in that since I am up early. It’s called The 5 AM Club. I’m interested to talk to you about that. Welcome, Robin.
Diane, thanks for having me on the show.
You’re welcome. I love the name of your book because I thought I was the only person awake at 5:00 AM and actually working at 5:00 AM. You’ve written quite a bit. I was looking at your background. No wonder you’re one of the top leadership gurus. Do you ever stop writing? You do a lot.
The back story is I began as a self-published author when I was a litigation lawyer. I had this need to express creatively and I started writing. I wrote a book called The Monk Who Sold His Ferrari, which became popular. That led to more books. I’m sharing The 5 AM Club, which took me a few years of hard labor to finish, but I’m excited about the book.
That’s a long time. I’ve been working on mine for a few years and I’m thinking, “This is taking forever.” What took so long for this to come out?
A bunch of things. It was a fascinating process. Sometimes the words didn’t flow and then sometimes the words poured out in torrents. The book was written in various locations Rome, Mauritius, Cape Town, South Africa, Canada and Switzerland. It was a beautiful, terrifying process. One of the other reasons the book took so long is I took this book personally. I wanted every line to be my best. It’s a blend of neuroscience and what happens when you get up at 5:00 AM along with ideas on creativity and productivity along with larger philosophies on what’s life all about. Why we’re attracted to digital distraction and how we can live much better lives. I wanted the book to be my best and that’s one of the reasons I sweat it so much.
You’ve got a lot in there that’s interesting to me from my years in pharmaceutical sales. Being married to a doctor, I’m always looking at the scientific aspects combined with business. What’s interesting to me is the neuroscience of people who’d like to stay up late and people who like to get up early. What did you find on that percentage-wise? Do most people get up early? Do they stay up? Is it something that we’ve got our circadian rhythm set to do? What is it about people who like to stay up late versus early?
The way I’d answer that is we all have the capability as human beings to install new habits. The reason I’ve been on this mission to get people to wake up at 5:00 AM for many years is there was something special about the time between 4:00 AM and 6:00 AM. If you look at a lot of the great women and men of the world, the most creative people, even a lot of the saints and sages, found early in the morning before the sun rises that there is such tranquility. There is such creativity. You have access to your best wisdom. What a lot of the research is starting to show is if you practice this habit for 66 days, it becomes easier to get up at 5:00 AM than not to get up at 5:00 AM.
We talk about the neurobiology. In the book, I talk about the 20/20/20 Formula, which is the first thing to do at 5:00 AM to start moving. In terms of neurobiology, what that does is it’s going to reduce your cortisol, your fear hormone, which is highest in the morning. When you start to move first thing in the morning, it’s going to release dopamine, which is the inspirational neurotransmitter. It’s going to release serotonin. Even if you’re the crankiest person in your house, you’re going to start to feel better. By doing this, you start to rewire the way that you’re feeling and the way you begin your day is going to set up how you’re going to live the rest of the day.
I find this whole thing interesting because it comes naturally to me to wake up early and I like anything that gives me dopamine or serotonin and all that. I studied that in my research for curiosity. I have a daughter who’s more like me, who can get up early and another one we’re pretty much passing ships. She’s about going to sleep about the time I’m getting up. Can we get the same benefits by 5:00 AM if you’re going to bed then? Are you saying you have to get up then?
A lot of people are night owls and that’s when they do their best thinking. Like anything in life, embrace what works best for you. Having said that, there are a lot of people who are resistant to the idea of rising at 5:00 and joining the 5:00 AM club. I’m sure you know about neuroplasticity. They start to practice the habit, run the 20/20/20 Formula and there’s a brain tattoo in the book which is, “All change is hard at first and it’s messy in the middle and it’s gorgeous at the end.” They go through the difficult process of wiring in that morning routine and learn 66 days later. What starts to happen is they start to realize the benefits of getting up at 5:00 AM.
For a lot of us, it takes a little while to get used to a new habit. If you talk to some of the greatest minds out there, I was looking at some of your literature about this. Some of the biggest minds do this early morning ritual. I’ve seen Tony Robbins speak personally in different places. He gets up, he does the ice bath. He does certain things. Do we have to dump ice on ourselves to get moving? Do you have other things that are necessary to do in the morning? Can you pretty much get up and start moving?
The best thing is to get up and start moving because most of us wake up and we’re feeling tired. By moving, you’re going to release BDNF, brain-derived neurotrophic factor. Why is that relevant? It’s been shown to be, “Miracle grow for the brain,” to use the words of John Ratey, a doctor at Harvard University, “It’s going to help the brain think better and process better.” We talked about dopamine. That’s going to make you feel stronger and it’s going to give you more energy and release norepinephrine. What I’m suggesting is by 5:20, which is the first part of the 20/20/20 Formula, you’re feeling fundamentally different from the way you felt when you first woke up. That’s a key point. The way you feel twenty minutes later after doing that sweaty exercise is fundamentally different from the way you felt when you first woke up.
What else do you do during that first hour after 5:00 AM? You can write in a journal, which is going to allow you to become clear in your thoughts. It’s going to allow you to record gratitude. It’s going to allow you to process through any pain or frustration you might be feeling. It’s also going to allow you to anchor you to your values. One of the things that happen to people is with the busyness of life. We spend our days being busy versus living the life that’s important to us. During that morning time for the morning routine, you can also read. You can also pray and meditate. You might even go for a walk in nature. The larger point is what I suggested, which is the way you begin your day sets up the way you’re going to live your day. If you want to revolutionize your life, the starting point is getting your morning routine to world class.
I’ve seen such a shift and much discussion about mindfulness and the things you do to help prepare you. I even talked about this with Daniel Goleman. That’s his focus more now than emotional intelligence as it was in the past. Some people you talk to them and they hear mindfulness, they automatically go, “I’m not into yoga or meditating,” and then they close down. What do you say to people who are maybe Type-A personalities that maybe they don’t mind getting up at 5:00 AM, but they want to get right to it?The best thing you can bring your performance is your presence. Click To Tweet
The best thing you can bring your performance is your presence. I’ve heard that. I worked with a lot of billionaires and a lot of NBA superstars and A players. The ones who say, “I don’t have time for a morning routine. I don’t have time to meditate. I don’t have time to write in a journal. I don’t have time to work on these four concepts I’ve shared in The 5 AM Club, mindset, heartset, healthset and soulset.” The Spartan warriors said it so well, “Sweat more in training and you’ll bleed less in war.” What could be more important at the front end of the day while your competition is asleep before the phone starts ringing than to take some time to prepare your mindset? To build focus, and then not only to do that but also to work on your heartset so you’re not in pain or you’re not bringing toxic emotions to the workplace. Your soulset so you build your energy levels which are key to performance. Also work on your soulset, your spiritual life. When you go to work, you are an instrument of service and you’re bringing great value to the marketplace. You’re doing your best work versus stuck in selfishness. If you look at the people who I believe are having the greatest impact on the world, they are the people who understand that the best move a human being could possibly make is to bring your best self into the workplace every day and into the world. That doesn’t start by starting the day like a five-alarm fire. That starts by starting the day at 5:00 AM and making the time to reconnect with who you truly are and your gifts and your talents.
You give a lot of examples of things to create a monumental life. I was watching your YouTube video that you had. You said that there are all these things and you’re talking about some of them here on the show. What drew me to some of what you were talking about on that was you were saying about the importance of not just getting your mindset and all that, but how to be humbler and to have gratification. We don’t always have to have immediate gratification. I was listening to some of the things that you came up with to have a better life. Did you incorporate these nine rules into the book or is that something else?
The 5 AM Club is a story a lot like The Monk Who Sold His Ferrari. The heart of the book is what I call the victory hour. It’s the science of how to get up at 5:00 AM. What do you do from 5:00 to 6:00, which I call the victory hour? I get into some of the information on habit installation. What do you do from 5:00 AM to 6:00 AM, which is the 20/20/20 Formula? There is also a whole chapter on the ten rituals of daily genius. That comes from my work with some of the most successful people in the world as well as my study of the greatest people, the great history makers of the world. It’s a lot more than just 5:00 AM and some of those rituals involve how do you break free of digital distraction? If you look right now, we have a lot of addicts in the world. It’s the dopamine addiction and the reward loop addiction. There are a lot of people spending the best hours of their best days, days they’ll never get back glued to a screen. There’s a line in the book which is, “Your phone is costing you your fortune.” I show people how to break free of that digital distraction. I share with people in some of the chapters how you become more authentic in your life.
There’s a chapter on how do you build joy in your life. The final chapter which is set on Robben Island is very much about what you’re suggesting. What is life about? The theme of that chapter is when you strip away all the accessories. Life isn’t about more likes on the social platforms. I don’t think the purpose of life is about accumulating material things because there are a lot of rich people and money is all they have. Life is not about being busy. Life is about two things. Number one, it’s about materializing the gifts and talents you’re born with. That’s a great source of happiness. The second thing is being an instrument of service. Whether you’re a street sweeper or you make pizza or you’re a coder or a CEO, use your days as a platform to lift other people up. If you do those two things, you live a fulfilling life.
A lot of people don’t consider the purpose of what they’re doing. That was one of the things I was trying to change with having people become more curious is to ask questions and to think about why you even are doing what you’re doing. What your inner voice is telling you what you think is not good or good based on what your environment’s been your whole life. A lot of people think, “I’m not a morning person,” because they’ve never been a morning person or they’re not interested in mindfulness because somebody said it was not cool. There are many things that if we asked more questions and thought about it, that we can be more creative and more aligned with the things that make us happy. That’s pretty much what I am getting out of what you’ve written here.
In some of your talks I saw, you mentioned Susan Cain’s book, Quiet, about the power of being quiet. There are many people that have different qualities that we don’t realize the value that comes from that. That’s why Susan’s book was such a big hit is that she hit a nerve that we weren’t talking about. You don’t all have to be these type A people that do this one thing this one particular way. If you couldn’t do a lot of the things that you talk about in the step by step of how to feel self-renewal and personal growth, that’s all important. I’m curious if you’d address what you do at night or is this all morning based?
To speak to your previous point, you’re absolutely right. To me, I’m going to use a word that’s not very sexy anymore, but it’s contemplation. That’s part of the value of The 5 AM Club. What’s the point of spending your days climbing these mountains if you realize at the end of your career, at the end of your life you’ve climbed the wrong ones? The research of University College of London says 66 days practicing this habit and you’re going to be able to wire it into the point of what they call automaticity. It’ll be automatic. You get up at 5:00 AM while the rest of the world is asleep. It’s such a quiet time because the phone isn’t ringing and emails aren’t coming in and people aren’t WhatsApp-ing you and you can contemplate. It gets to your point about what is success.
You can make the time to think or meditate or write in a journal every single morning and ask yourself. Be curious and investigate every morning who you want to be as you go out in the day. You can investigate, “What are my metrics of success?” In the world right now, there are a lot of people chasing these shiny toys that society tells us will bring us happiness, like likes on the social platform, money, a big house, fame and fortune. If you look at rich people and successful and famous people, they’re still who they were before. It’s the Jon Kabat-Zinn line, “Wherever you go, there you are.” Part of the value about getting up early is you have space to think. You have space to reconnect to what you want to stand for every single day.
To your point about nightly ritual, there’s a section in The 5 AM Club which explains in order to run The 5 AM Club morning ritual at 5:00 AM, you’ve got to have a great pre-sleep ritual. It’s one hour before you go to sleep that’s important. You definitely don’t want to be checking digital devices because that’s going to affect your melatonin production. You want to take the time to maybe have an Epsom salt bath, maybe want to do something based on Marty Seligman’s research. Ask yourself what three good things happened to me during the day so that you go to sleep in a state of gratitude. You want to sleep in a dark room and a cooler room. There was even one person who joined The 5 AM Club and they would sleep in their exercise gear so they would wake up in the morning and just put their runners on and get going. If you are checking your device, if you’re on the social platforms before you go to sleep and you’re activated, you’re not going to sleep well. If you don’t sleep well, you’re not going to be able to join The 5 AM Club and hit the ground running when the alarm goes off.
The Epsom salt is interesting. I assumed it to get the magnesium from it. I don’t even answer my phone after 5:00 PM because I get hyper. If somebody talks to me, then it will mess up my whole sleep cycle. When people go, “I’ll give you a call around 8:00 PM,” I’m like, “Good luck with that.” I’m going to be asleep because I want to get up at 5:00 AM. Do you go to bed early?
I do go to bed early. The book has been out and there are people from around the world saying, “Why would I read The 5 AM Club and get up early?” We now know emerging research that says the number one factor to shorten life is sleep deprivation, but The 5 AM Club has nothing to do with not getting enough sleep. There’s a whole chapter called The Essentialness of Sleep. I’m all about getting seven to nine hours of sleep so that you can perform at your best. We know what makes great performance is a strong recovery, so sleep is important. Not checking your phone after 5:00, that’s a smart idea because there’s a concept in the book I share called the tight bubble of total focus. If you study the great geniuses of humanity, they all had one thing in common, extended periods of time in isolation away from distraction.
There’s a model I share in one of the chapters. Our brains are designed for genius. Mihaly Csikszentmihalyi of the University of Chicago calls it the flow state. If you look at a great hockey player, you look at a great artist or you look at a great actor when she is at her best working the magic, she’s not operating in the beta waves of the brain. She’s in a flow state. Every one of your audience has the capacity to operate at genius every single day, which is a game-changing insight. If you’re not running the right routines and building the right environments to get your brain from beta waves down to theta waves so that you can drop into transient hypofrontality. It’s when you get out of the monkey mind. It’s when you get out of your intellect and you get into a different part of the brain, which is the seed of genius, which we all have. You only get to shut off that intellectual thinking, chattering inner-critic part of your brain when you’re in solitude. When you’re in isolation when you create this tight bubble of total focus that I share how to get into it in the book. When you do that, which is away from all the digital distraction and phones ringing and meetings, you start to access what I call the secret order that the great women and men of history all knew. That’s why they spend a lot of time in silence.
I haven’t been a pharmaceutical rep in many years, but I did a lot of research at the time as I recall. It brings back the training we had. Most of the heart attacks occurred between 4:00 AM and 6:00 AM. I don’t know if that’s still the case or if that was something I’m incorrectly remembering, but that’s when your cortisol is peaking and maybe that’s the link to it. If you could get started in a calm state, it would be interesting to look at the research of what it does for heart attacks and other health-related aspects. Did you get into any of that at all in the book?
Cortisol, the fear hormone, is highest first thing in the morning. That’s why the first pocket in the book of the 20/20/20 Formula is all about intense exercise. It’s not even walking. You want to start sweating. Why? When you sweat you release brain-derived neurotrophic factor, which is going to repair brain cells that are damaged by stress and promote faster processing, which allows you to think better during the day. From 5:00 AM to 5:20 AM, you want to be moving quickly to bring down those cortisol levels. What a gargantuan competitive advantage even doing the first twenty minutes of sweaty exercise going through your day with lower cortisol and more energy. I believe energy is even more valuable than intelligence. A lot of us have a lot of ambition and we have great opportunities and we have a big to-do list. If you look at the elite performers, they are better at energy management than time management because with the energy you can get giant things done.
I’m trying to remember on the athletic thing. They have eustress and distress. Isn’t there some kind of U-curve and the point where you get to the right amount of stress to be at your optimal range? It’s interesting to look at all of the science behind all of this. There’s so much neuroscience behind everything you’re talking about and a lot of people could find a lot of benefit from looking at your work and going to your site. How many books have you written? Have you counted?Life is not about being busy. It's about materializing the gifts and talents you're born with and being an instrument of service. Click To Tweet
This one’s an amazing one and I’m sure a lot of people want to know more about it. Is there a way that they can reach you to find out more about the book?
The 5 AM Club is available in bookstores or on Amazon. For anyone who’s interested in installing the 5 AM Club habits and learning the ten rituals of daily genius, you can go to The5AMClub.com. It’s important to know as well but the book comes with an online 66-day course. The details are at the end of the book. After people read the book, I then offer them the 66 days of mentoring via videos, no charge whatsoever, to help them install the morning rising habits. I’m also excited to share that. That’s important because a lot of times we read a book and we have great intentions and then life gets in the way. What we have is a free course as well as the free app. It’s in the App Store, The 5 AM Club App. It’s 66 days of morning meditations and coaching videos with a lot of science and a lot of research that will help people install this habit that I believe so much in. That after 66 days, it’s automatic and they’re running the 20/20/20 Formula with more energy and more focus and more productivity and creativity.
I’m excited to share that a percentage of all of my royalties is going to help children with leprosy. My dad was a doctor and early in his career, he worked with lepers. He said to me, “Robin if you have a chance to help this disease because it’s an extremely serious and difficult affliction, do it.” A portion of my royalties on every book will go to my foundation, which is going to help children in need. I want to encourage people if they want to learn how to get up early and run this morning routine, the investment in the book will also be an investment in helping children with leprosy.
Robin, thank you so much for being my guest. This was interesting. I hope everybody checks out your book and your site.
Thanks a lot, Diane. It’s been a pleasure.
The Power Of Investing with Hunter Thompson
I am here with Hunter Thompson, who’s the Founder of Cash Flow Connections, a private equity company that invests in real estate. He’s raised a total of $25 million and controls about 60 million worth of real estate. He’s been featured in Forbes and a lot of other publications that are too many to list. It’s nice to have you here, Hunter.
Thanks for having me on. It’s much appreciated.
I’ve got to ask the question. What’s your middle initial?
It’s L. My parents didn’t want to commit 100%, but you’ve got to keep in mind back then they were like, “Hunter is a cool name. Thompson’s our last name.” Hunter Thompson, they are familiar with the author, but this was before the movies had been made and before his celebrity status was common. They didn’t know that my second-grade experience was going to be pretty terrible.
My sister made me read Fear and Loathing in Las Vegas when I was a child. I don’t know if I’ve ever quite been the same since, but it was quite entertaining. She was a huge fan of him when he was alive. He’s an interesting writer. I thought I had to get that one out there to begin with because you do have a cool name. You have a great background in the area of private equity and understanding how to invest in real estate. A lot of the readers have a basic understanding of it, but they may not understand the whole economic impact and some of the things that you deal with on a daily basis. You talk about economic data points. Maybe that’s a good place to start. What is an economic data point? Let’s start with that. Let’s go with the basics.
When it comes to investing, most people are trying to look for predictability of outcome and cashflow to pay off their expenses. When you look at things like that, you try to find a vehicle that most directly accomplishes that goal. The challenge is that the most common vehicle of the stock market is not a great vehicle for accomplishing that, especially when you consider some of the major economic data points that are out there. I am not a fan of, “Economics,” in general because there’s so much data that you can create whatever storyline you want to create and then it’s basically a useless field. What I find compelling though is looking at data points that are unarguable. They are large and objective and therefore can’t be manipulated.
I’ll give you an example. There are about 10,000 Baby Boomers hitting the age of retirement every single day and many of them have little savings. They’re, for the most part, relying on Social Security as a source of income. The challenge with that is the average Social Security check in the US is about $1,300 a month and the average two-bedroom apartment rents for about $1,200 a month. You look at that data point and that is the case. There’s going to be a tremendous amount of demand for affordable housing in the United States. There’s going to be a lot of downsizing and there’s going to be a lot of moving. There’s going to be a lot of demographic shifts which will result in people moving from A-class apartments to B-class apartments from C-class apartments down to mobile home parks. From taking all their stuff that’s in their three-bedroom, two-bath property, moving some into storage and moving into a smaller apartment. We build investment theses around data points like that which are easy to identify. You have to know how to get through the weeds of what’s in the media in order to understand what’s going on as opposed to where the stock market’s going. What the Fed’s going to do and all this stuff that’s incomprehensible to most people, including me.
I remember when I interviewed John Tamny about why we don’t need the Fed. I remember reading his book and he wrote it in a way to make it easier for people to understand, but it is complicated to know what you listen to in the media. There’s a lot in the media. What things do you think are out there that we shouldn’t be listening to?The worse the economy does, the more demand there is for that business. Click To Tweet
I’ll give you a great point. This is something that I’ve spoken about publicly before, but for me, I was excited about the opportunity that took place in 2008. I know a lot of people shudder when I say that. I wasn’t involved in the financial sector back then. When I saw what took place and I saw the significant price declines that were taking place, I knew that was going to be an opportunity whether it’s in stocks or other financial assets. I started investing in stocks in 2008, experienced some gains, but there was all this volatility in the market. I had my last straw moment in 2010. 2010 is something that most people in the US don’t necessarily focus on, but for me, it was a massive moment. That was when the European debt crisis started to take hold.
It was similar to what happened in the United States, but it was in Europe. A lot of the European banks froze up. They had liquidity challenges. Greece was one of the major examples. I remember watching the media obsessive about what people were saying about this, that, and the other thing because it would make a huge impact on the price of each stock. Every pundant was focusing on the Greece bond yields and they were saying, “If the Greece bond yields stay below 7%, the US stock market basically was going to be fine. If the Greece bond yields went above 7%, the S&P 500 was going to collapse.” I remember thinking, “How in the world is it the case that the Greece bond yields are playing any role, let alone a significant role, in the wellbeing of my portfolio? How could I possibly have predicted that or mitigated that challenge?” I don’t want my portfolio to be exposed to those types of risks. That’s regardless of what the media is saying, but the point is how it is the case that this is a major factor in determining my financial wellbeing?
I was in subprime lending and different aspects of lending before things went sour. I saw that after I’d gotten out of that industry and I thought, “Why didn’t we see this?” There are many things that we probably should pay attention to or have foresight regarding. It’s hard to keep up on everything, every factor that impacts the stocks. That’s why I’ve had a lot of people say it’s smart to go into real estate, but then people are a little hesitant because of what happened in 2008 and so on. Everybody would like to have passive income, especially with the Baby Boomer issue when your Social Security is not going to cover anything that you need to do if you ever want to do anything again. Are you saying you want to have some form of passive income or are this passive investment that you help people do? Can you explain what the passive factor is and what you do?
Essentially, after that experience I had, I was trying to find a vehicle that will help me accomplish that goal of getting that predictability of outcome and that passive cashflow. I was quickly entered to the world of syndications. This is basically pooling investors together to buy high-quality assets. As opposed to purchasing one $100,000 property, we could get twenty investors together, everyone invests $100,000 and you can buy a high-quality commercial property. This is how most apartment buildings are purchased or self-storage facilities or retail buildings and office. Now, because of the popularity of the internet and the crowdfunding vehicle, it’s possible to invest in these high-quality assets online or at least with relationships that you’ve started online. That was my entrance into the world of commercial real estate was through that syndicated model.
From my perspective, I like investing in commercial because there’s a huge market advantage you get if you have a large company as opposed to a mom and pop property. A lot of people, when they think of investing in real estate, they may want to buy a house, a single-family residence, which can generate, let’s say $100 to $300 a month. The benefit of this is the relatively small barrier to entry. Basically, anyone with $20,000 to $100,000 can buy a property depending on which market you are in. The challenge though is that because of the low barrier to entry it’s competitive and you don’t get incredibly favorable risk-adjusted returns.
In the commercial sector, there are all these complications that go in with dealing with a high quality $20 million or $50 million property especially in an asset class like self-storage where there are tremendous ways to make the property run much more like a business than a commercial real estate asset. With those complications then become a huge discrepancy between an everyday owner that may own one property and a best in class owner that owns 50 properties. With the syndicated model, you’re basically relying on other people’s time, energy, and expertise and you get the benefit for your capital. When I say when I invest passively, I rely on other people to do the actual management as opposed to myself or hiring a third-party manager that’s making $50 or $100 a month. These companies are making million dollars every single year.
Are you talking about limited partnerships of how you are involved in the investment? If so, how do you get out? Sometimes I’ve heard that that’s a challenge if something’s not working well? Once you’re in, you’re in.
This is something that we want to be extremely cautious about with our investors. These are illiquid investments. Unlike the stock market, if you want to jump out and jump in, it’s not possible with a high-quality commercial asset. Typically, not only is there that illiquidity, but you’re also in a limited partnership so that you don’t have full control over the asset. Going back to the example where it’s a single-family house, you personally could decide when the asset needs to be sold. If you need money, you can sell the property usually 30 days, 60 days. With a partnership like this, you are putting a lot of control into what we call the operator’s hands. This is the person who’s the expert in their particular niche. That for some people is a deal killer because they want to control the entire investment vehicle. For someone like me, I am much more focused on diversification than I am in control. I’m willing to exchange some of that control for that diversification. We do invest in limited partnerships where my voting rights are limited, but I rely explicitly on the operator who has decades of experience only focusing on that one particular niche. That’s how they get that market advantage is there’s the extreme focus. For me though, my real goal is sleeping at night knowing I’m well-protected. The way that we achieve that is diversification.
If you want to get out, is it hard to get out though?
Technically, there are mechanisms by which we allow investors to sell their shares. It doesn’t mean that they necessarily will be able to get out, but the key is we want them going in with the intention of holding the asset through the entire term, which is usually seven to ten years depending on the structure. Having said that, we want to be conservative. There are companies or properties we purchased in 2014 that we sold in 2016. We went in with the seven to ten-year time horizon. We were able to execute the business plan faster than we originally anticipated.
When you talk about these specific asset classes that are well-positioned for the upcoming recession if there is an upcoming recession, what are they exactly? Is it these commercial properties or is there something more specific than that?
The one that’s most obvious, at least from my perspective going back to some of those data points we’re looking at earlier, I find the mobile home park business compelling. The worse the economy does, the more demand there is for that business. That doesn’t paint the entire picture. It doesn’t mean the worse the economy does, the better the investment is going to do, but at least the demand is inversely correlated. Demand does not paint the whole picture, but it certainly is an important factor in terms of that cashflow. If you’re able to invest in an asset class when the economy’s booming, you can raise rents significantly. You can buy and sell the property at favorable valuations. When the economy turns around, there’s a lot of demand for that product. You may not be able to raise rents as aggressively, but you certainly aren’t going to have a problem filling vacant lots.
You can use that strategy to balance out your overall portfolio. Similarly, though not as obviously, the self-storage business is also compelling because people use the product when they’re going through some economic change or lifestyle change. They use the product when they’re downsizing or kids are moving home from college. They’re having some layoff or job change or moving because they need to find someplace that’s less expensive or something like that. All of those are more common during recessions. Those are the main driving factors for why people use the self-storage vehicle. There’s a variety of other reasons I find those assets compelling. In terms of the recession-resistant component, that’s the big picture thesis. That thesis makes sense to me, but also the historical data is very much aligned with that thesis. Both in 2000 and 2008 rental rates, both the asset classes were stable if not increasing.
A lot of people probably are thinking in terms of capital gains of what they know that they can relate to in terms of stocks or other things that they’ve had short-term, long-term gains. How does it differ if you invest in commercial real estate or if you’re in a limited partnership in this type of situation? What’s the tax situation like?
It’s compelling. Generally speaking, real estate is a great vehicle for deferring taxes and it’s one of the reasons why it’s so popular, at least in the United States. With the mobile home park business, it’s even more so than the typical assets. One of the benefits of investing real estate is depreciation. You get appreciation, which is typically the land value, but it’s a write off that you get every single year as the physical asset itself is depreciating. That’s something you can write off in your taxes. The longer the depreciation scale, the smaller amount of depreciation gets to write off every single year. With commercial assets, it’s typically 39 years. With the mobile home park business, it’s fifteen years. That’s a short depreciation schedule. What that means is that a more significant amount can be written off every single year as a loss. It’s common for us to issue $500,000 of cashflow to a fund and the tax exposure will be a net negative. That doesn’t matter how much capital you receive on a proportional basis, you basically will have deferred taxes until the property assault. Then that’s when the long-term capital gains come into effect, but that’s usually at a much more favorable rate than let’s say your earned income, for example.Most people are trying to look for predictability of outcome and cashflow to pay off their expenses. Click To Tweet
That’s how they deal with the taxing situation. I’m used to regular real estate where you get the 1031 exchange and you switch this one for that one. You don’t do that thing so much in commercial real estate. You do it through depreciation.
If you’re investing in syndication, it’s challenging to take advantage of 1031. I’ve had a lot of attorneys on my show talking about different ways to do that. You can use these complicated vehicles, Delaware Trust, for example. That is something that you can do, but in most of our investors they’re investing, let’s say $50,000 or $100,000. When the property is sold, they simply experience that taxable gain. That’s a conversation for an attorney and a CPA to have. There are ways to do it but typically when you invest in syndication, you’re giving up that type of benefit, but you do get that depreciation pass through.
I was talking to a friend of mine who’s selling real estate in New York. It’s residential versus what she was going through there. I have an Arizona real estate license and the difference from state to state was stunning to me. I couldn’t get over how much hoops she had to jump through there. How is it different in commercial real estate from state to state? Is it that different? Are there certain states that you think are better to invest in than others?
With the mobile home park business, I’d say the majority of the opportunities in the Midwest. The main factor you want to look at when it comes to mobile home parks is making sure that there’s a big difference between the lot rent of a mobile home park and a nearby two-bedroom apartment. That tends to be the most important competitors. There are markets where it’s unbelievably compelling. For example, Austin, Texas, where a mobile home park may rent for $450 a month and a nearby two-bedroom apartment may be $1,800 a month. If that’s the next best option, you can be extremely aggressive with raising rents before you’re going to get pushed back from the tenant base. There are a lot of interesting things about that business.
When you invest in mobile home parks, you basically only invest in the land itself and the tenants own the homes, so the tenant base is sticky. If you have a big differential there, you can raise rents aggressively. With the self-storage business, I like Florida in particular. You have the Baby Boomer population there, which a lot of them are downsizing. The state is physically surrounded by water, which means there are limitations on where you can develop. When you have a combination of a lot of retirees and water, you have affluent markets that are water facing. People want to have jet skis. People want to have toys. People want to have boats. That requires storage and so that also makes it a compelling state or geographic location for the self-storage business.
You’ve listed a lot of things that people could do to make sure that they understand the investment market. Is there anything else we can do to protect their investment in anything they invest in terms of capital? Have we covered all the steps they can protect themselves?
I have spent years going through different strategies for doing this because this is what I want to do and this is what I want to help investors do. We have multiple processes, endless software, onsite visits, and hundreds of hours of diligence. It can all be summed up like this. If you’re going to be investing in a deal in which you’re deferring significantly to someone else’s expertise, every bit of your due diligence needs to be focused on the sponsor or the operating partner. When we go through the onsite manager, loan and refinancing, pro-forma, market, due diligence, and the legal documents, all of it is looking between the lines to see who we’re making a bet on. What is their experience in the business? Who are they as people? When you’re looking at a long-term illiquid investment, I want to know are these people going to be going to bat for me in seven to ten years when it matters? I can go into many lists of the processes we do. To keep it as simple as possible, it’s all about the person you’re making a bet on. If you invest in a 100% occupied property in Beverly Hills and the manager commits fraud, everyone’s losing money. That’s the mentality we go into. Everything else is there to make sure that’s not the case.
If you have your investment and say you pass on, what do your heirs have to deal with? Are they automatically one of the unlimited partners? Do they have ease of leaving at that point? What can they expect?
Every deal is different. We want to make that process as simple as possible and basically, it’s a matter of transferring to their heirs. In some people, the legal documents are written so if someone dies or they declare bankruptcy or go through a divorce, they’re automatically liquidated out of the fund. I don’t think that’s advantageous because many of our investors, the reason they’re creating these passive investment vehicles is so that when they do pass their heirs have cashflow to live off of. The entire point is setting up that passive cashflow stream. We want to make sure that’s honored and doesn’t require some actionable event that exits them from the offering.
How do you know when to exit the offering?
What we’re trying to do is sell anything for the right price. Going into the strategy, we want to be able to identify a property that’s mismanaged. That’s owned by a mom and pop owner that simply doesn’t have the systems, the processes, and the economies of scale to run the property efficiently. We buy the property immediately and start implementing value add strategies. Both the mobile home park and the self-storage business operate on 30-day leases so you can turn around a property quickly in 30, 60, 90 days by simply raising rents and kicking out people not paying on time. We go through the next stage which is adding value to the property. That could be something like changing standard self-storage units to climate-controlled units or turning the property from a B-class property to an A-class property in terms of appearance, safety, lighting, security, etc.
Once that’s implemented and we’ve pushed the rents not all the way up to where there’s no more room, but whether there’s enough room to make it desirable for a buyer. That’s the time we start looking to sell. If we’re a couple of years into the process and we get a right offer at the right time, we’re willing to liquidate because our best interests are completely aligned with our investor’s best interest. We’re willing to do that. There are some chances where like, “Give us another year. We want to maximize this property before liquidating.” That’s also happened as well. Generally speaking, it’s about buying the property, implementing the strategy, and then selling during favorable market timing. The challenge is that timing the market can be challenging. We want to have those seven to ten years to weather any storm and be able to execute on that.
I know it’s confusing for a lot of people and they’d probably like to know more about what they can do to research this. I’m sure you have some great information on your site. Can you share how people can contact you and find out more?
I appreciate you giving the opportunity to do so. You can learn more at CashFlowConnections.com. I have a free eBook. It probably takes about 30 minutes to paint a clear picture in terms of some of the data and why I find it compelling. Info@CashFlowConnections.com. Shoot me an email and say you heard me on the show and I’ll shoot you a couple of eBooks and some of our podcast episodes.
Thank you. Do you have a place where they can listen to your podcasts? Is it on iTunes and everywhere else?The best move that a human being could make is to bring their best self into the workplace everyday. Click To Tweet
Cash Flow Connections Real Estate podcast on iTunes, SoundCloud and Stitcher. Give us a subscription. It’s some pretty sophisticated content, but if you listen to ten episodes you’ll be farther along than I was after a year of going to a lot of networking events. I want to commend you for putting on this show because it’s such a great time to be a podcaster. I know you’ve had a lot of tremendous guests on the show adding so much value to your listener base. Thanks again for allowing me to come on the program.
Thank you. It’s been interesting and I hope people check out your site. I want to thank both Robin and Hunter for being my guests. We get many great guests. We’re on every other media site you could think of in terms of iHeart, iTunes. You name it, we’re out there. You can even ask your Echo device or Google Play to play us. It’s not hard to find the show. I hope you catch up with past episodes if you’ve missed any. If you’re looking for more information on Cracking the Curiosity Code or the Curiosity Code Index, you can go to CuriosityCode.com. If you have any questions and you’d like to talk to me, have any input regarding what you’d like to know about in terms of being certified to give the CCI or anything else that has to do with curiosity. Please contact me and you can reach me at Diane@DrDianeHamilton.com.
- Robin Sharma
- The 5 AM Club
- The Monk Who Sold His Ferrari
- John Ratey
- Daniel Goleman – previous episode
- Robin Sharma’s YouTube Channel
- Mihaly Csikszentmihalyi
- The 5 AM Club – app
- Cash Flow Connections
- Fear and Loathing in Las Vegas
- John Tamny – previous episode
- Delaware Trust
- iTunes – Cash Flow Connections Real Estate podcast
- SoundCloud – Cash Flow Connections Real Estate podcast
- Stitcher – Cash Flow Connections Real Estate podcast
- iHeart – Take The Lead Radio
- iTunes – Take The Lead Radio
About Robin Sharma
Robin Sharma is one of the world’s premier speakers on Leadership and Personal Mastery, and has been named one of the World’s Top Leadership Gurus. As a presenter, Sharma has the rare ability to electrify an audience yet deliver uncommonly original and useful insights that lead to individuals doing their best work, teams providing superb results and organizations becoming unbeatable.
About Hunter Thompson
Hunter Thompson is the Founder of Cash Flow Connections, a private equity company that invests in real estate. He has raised a total of 25 million dollars and control about 60 million worth of real estate. Hunter has been featured in Forbes, Globe St., Inside Self-Storage, was recently a guest on The Tom Woods Show (top 100 podcast in iTunes), as well as Cash Flow Ninja, Best Real Estate Investing Advice Ever, Real Estate Investing for Cash Flow, and many more.