Episode Transcript
[00:00:00] Speaker A: Welcome to Create Wealth Through Franchising.
[00:00:03] Speaker B: I'm your host, Kim Daly.
Whether you're a CEO, a military vet, a real estate investor, or simply in career transition and ready to take ownership of your future, with each episode, you're going to learn valuable insights and hear inspiring stories from within the franchise industry.
On that note, my guest stories are their own. And as a franchise consultant, I do not make personal brand endorsements or earnings claims, but I do educate, motivate, and inspire dreams.
Now onto the show.
[00:00:44] Speaker A: Welcome back to American Wealth Strategies here on Create Wealth Through Franchising. I am your host, Kim Daly, and in my studio today, a longtime friend and an amazing guy. His name is Paul Moore. He is of Wellings Capital. Paul, welcome to the studio.
[00:01:00] Speaker C: Kim, it's so great to be here again. Thank you so much.
[00:01:04] Speaker A: It is a pleasure to have a friend in the house. So for those listeners, I want to bring you back to this American Wealth Strategies idea. So the idea is that I meet a lot of people who sometimes are not ready for the full active investment of a franchise, but they are eagerly looking for a place to put money outside of the stock market. So I thought, why not create a little playlist as a resource for ideas that are more passive, that often come with lower cash requirements than a franchise does. So even if you're out there and you're like, I can't yet afford a franchise, maybe there's something here for you at American Wealth Strategies. But then also, Paul, I have created nearly 1,000 small business owners in the United States over the 20 years that I've been a franchise consultant, which is an amazing, amazing blessing. And oftentimes they come back and they're looking for diversification. They have cash flowing assets, they've diversified their franchise, maybe they own multiple businesses, and now they're like, what do you do with all your cash, Kim? So that was the second motivation for creating this American Wealth Strategies playlist. So Paul is an investor or he has an investment fund that I am a part of. But that's not bias. I am not saying invest with Paul because Kim Daly is invested with Paul, but he's a really good human, too. So I'm going to let Paul kind of open up and tell his story about what he does. Now, I'm going to lead with this and it might bias you. So I have a diversified portfolio of assets I've been working on since, about, I don't know, 2019. And here we are at the time of this recording in 2024, in the moment that we're in right now the economy that we're in. All of my real estate syndications have stopped paying me, except for Paul Moore and Wellings Capital. So there's something a little bit different about this amazing man. And with that lead in Paul, tell the fine listeners of Create wealth through franchising who you are, what you do. And let's get to the punchline of why you haven't stopped paying me.
[00:03:10] Speaker C: Well, first of all, I'm really sorry that's happened, Kim. It's the experience of a lot of people, a lot of syndicators who weren't around in the 2008 crash and who didn't study history, or maybe they did and they just had other priorities. But you know, they weren't ready for interest rates to go up at what was probably a record level from 2022 to 2023, and then just hold on for all this time. So a lot of people have had a lot of problems and we can circle back to that in a little bit. You know, maybe you had heard before, maybe you as a listener have heard that some of the wealthiest people in the world, many of them, most of them and in history, have bought commercial real estate. They invest in commercial real estate. The problem is most people can't imagine how they could do that. Most people can't imagine how they could, you know, have enough money to invest in commercial real estate or if they understand how to do it through a syndication, if they're really thinking through it, they realize that, like you, Kim, they might pick one that doesn't continue to cash flow through difficult times. And there's always difficult times, there's always cycles. It's just how it is. So what we've created at Wellings Capital is a way to help investors, in theory, safely, nothing completely safe, but reduce their risk and hopefully increase their income, their appreciation, their tax benefits in what we'd hope to be a fairly safe way. So let's back up and talk about why we love commercial real estate. If you know anything about residential real estate, most everybody does. You know, your value of your home is based on comparables or comps. That means if you buy a house for $100,000 in a $250,000 neighborhood, you might get a great deal, you might be able to improve it. But if you over improve it, let's say you put in $250,000 in improvements, you build out the basement, build out the attic, put in gold plated fixtures, expensive fencing and all kinds of other stuff. And that's very possible to Spend that on a really nice flip house. You might have $400,000 in it, but the neighborhood might limit the value to, say, 250. That's how residential real estate's value, but commercial real estate's entirely different. It's based on math. Now, your mama told you to do good in math class, and perhaps this is the reason why, so you could understand this simple formula. Commercial real estate's value is this. It's value equals net operating income divided by the rate of return or the cap rate. Without going to a lot of detail, the cap rate or capitalization rate is the expected rate of return for an asset like this in a location like this at a time like this. And so it used to be that people demanded or wanted a 10% return so there'd be a 10% cap rate. That's an unleveraged return with no debt included in the mix. And now they've gotten to a place that's become so competitive that people want something like a 5% return or a 5% cap rate, meaning they've lowered their return expectations, meaning the price has effectively doubled to buy the same income stream. So its value is the income divided by the cap rate. You're basically buying an income stream. So if you buy an empty building that has no tenants and no income, technically, according to this formula, the value might be zero. And of course, then you have to figure out another way to value it, and that's beyond the scope of this conversation. But because of this math, you can drive or force appreciation. So with the cap rate being constant, if you buy something for $1 million that has $50,000 net income, that's a 5% cap rate. If you can increase the income from 50,000 up to, say, $80,000 by doing various value add strategies, then you now have a building, $80,000 divided by a 5% cap rate. That asset is valued at much higher than the million you paid for. So you basically forced appreciation by doing different things. So, for example, I wrote a book on self storage. Self storage. Sometimes you can buy a facility and you can add units to it, or you've got an extra one or two or five acres out back. You can gravel it or pave it and put in RV and boat storage. You can add retail items like locks, boxes, tape and scissors. You can put a billboard out front or a cell tower in back, or put a propane filling station. All kinds of things you can do to add value, add income. You can put, you know, rent u hauls out of it. So by doing all that you're increasing income. And we've seen many, many instances where buying a commercial real estate asset, you can double or even triple the net operating income and therefore double or triple the value. So that's why people love commercial real estate. The problem is it's hard to get in. There's a lot of competition. Lenders, brokers, sellers, they're all against a newbie getting into this. And of course, I was a newbie at this at one time, and I found out when they didn't return my calls how hard it was to get started. But syndication, being a syndicator, meaning that we have an asset that we go out and get passive investors for, that is a way in for a lot of people, including Kim Daly.
[00:08:55] Speaker A: So, yeah, let's bring the listener in right now to different levels of investment. So I think you make an awesome case. Like, so you're obviously the company that figures out how to add value to the commercial property. Right? I'm guessing that's where the story is going. And so I give you my money. How much money does it take for somebody to get involved in one of your investments and how much time?
[00:09:22] Speaker C: Yeah, so the time is tricky, but the money. Typical entry price for a syndication is 25, 50,000 or $100,000. And for our fund, it's $50,000. It's limited to accredited investors, typically. And that means people who make either a certain income level or they have a certain amount of net worth, not including their primary residence. So you can go Google how to be an accredited investor. You may be accredited and not know it. Some people don't even know that they already meet the qualifications. As far as the time, it's deceptive, Kim. A lot of people, they go and invest in something that their friend did or their neighbor did or their coworker did, and they assume somebody did the due diligence, but that coworker, neighbor, or might not have done the due diligence. They may be relying on another person that invested and that person have invested because of the slick glossy brochures and the shiny podcast host or shiny, you know, reputation of the individual. The problem is, in that case, no one's done the due diligence. And you could be into that investment with only a few hours of looking at their brochure or hearing their podcast. The problem with that is, as we talked about before the show, Warren Buffett has quoted, you know, yes, the rising tide has lifted all boats in these last 11 or 12 years since the great financial crisis. But someday that tide's going to go out and then we'll see who's skinny dipping. And that's exactly what's happened in the last two years. From 2022 to, as we record this in 2024, the tide has gone out and a lot of people are in trouble. And that's why due diligence is so important. So while it doesn't take much time to do it, to do it right takes a whole lot of due diligence. And the best investors I know spend dozens and dozens of hours researching, finding out more, asking hard questions, even taking a trip to the location before they'll send a $50,000 check.
[00:11:29] Speaker A: What if you don't know the questions to ask? Paul, Is there a good book like, where do you learn? How do you know? Because I was that investor in 2019. I certainly know now. But when I first got started, I was laughing because I was like, you know, my mentor, I had a mentor. He was leading me down this alternative path. That's how I actually got to you. And he was like, put your money here. Put your money here. The problem is that, like, he's worth, like, $50 million. And so, you know, a level of investment to him in something he can afford to lose. Right. I wasn't quite at that net worth, still not today when I started. And so I just was like, okay, if he says to do it, he's pretty wealthy. I'll just do it. And I learned really hard and really fast that was not a good strategy for Kim Daly.
[00:12:17] Speaker C: Yeah, I understand. Well, the funny thing is, the more you know about due diligence, the harder it becomes. Isn't that ironic?
[00:12:25] Speaker A: That is ironic.
[00:12:27] Speaker C: It's really true. So I'm going to give you a quick resource. This is for your listeners. It's Brian Burke, B U R K E. Brian wrote a book for Bigger Pockets Publishing called the Hands Off Investor. The Hands off Investor is 350 pages of grueling questions and research. And most people who read it are depressed and discouraged because they realize there's so much more I didn't ask or need to ask before I ever invest again. And so kind of to cut to the chase for time here, I can tell you that Wellings Capital took many of the principles in the Hands Off Investor. And for the last seven years, we have been helping investors by we do the due diligence for them. So you made a comment early in the show about the fact that we must be a syndicator who adds value on behalf of investors. We're actually not I nodded. Because that's the function we perform in the eyes of our investors. But actually we're out there picking what we believe are the best risk adjusted opportunities. So we've gone out and we do heavy due diligence. We have a team of three and a half people in our company who go out and do extreme due diligence. We ask all the questions, most of the questions in Brian Burke's book and many, many more. We do end net operating income audits. We spend thousands and thousands of dollars, tens of thousands, honestly, in due diligence before we'll send them a dime. But what we do is we put together a portfolio and our current Fund has about 13 of these operators and deals in it. It's for, like I said, accredited investors and they can invest with us and they can get instant diversification across different asset classes like self storage, mobile home parks, RV parks, multifamily industrial retail. They can get instant diversification across operators, like I said, 13 different operators that were handpicked by us. Instant diversification across strategies. These different operators and deals have different timeframes and strategies and different places in the capital stack that's getting kind of detailed here. But we actually offer, we actually have common equity and preferred equity inside of our investments. And so investors who invest with us, they can give us as little as $50,000 and they will spread it across all these different asset types, providing the due diligence, providing the diversification and allowing them to sit back and hopefully there's no guarantees, but hopefully. Just walk to the mailbox every month and get a check from us as you have.
[00:15:10] Speaker B: Hey, Daily Coach fans, if you're ready to begin your own journey to find the perfect franchise, please email me right now at InquireimDaily TV. My services are totally free for you. That's InquiremDaily TV. Now back to the show.
[00:15:32] Speaker A: I love it. It's like a mutual fund. It's like the difference between being invested in one stock. Right. Versus investing in the mutual fund where you're diversified. Wellings Capital is the only group I'm connected to that invests like that. And so I'll leave it there.
[00:15:47] Speaker C: Thank you. That's very kind of you.
[00:15:49] Speaker A: Okay, so what else can we teach our listeners about what you do and the benefit to them about what you do?
[00:15:56] Speaker C: Yeah, we have so many stories. Let me just come up with a few that help people just put some real numbers and real teeth into this type of story. One of our operating partners went out and they found a self storage Facility in Las Vegas. It was actually a suburb of Las Vegas in Henderson, Nevada. And it was built in 1982 by a lady and her family. And she operated it for 41 years, all the way through 2023. Her rates were only 48% of the going rate in the market. She was charging $60 for a 10 by 10 unit. The going rate, I hope I did this math and hope my Memory's right, was $148 for a 10 by 10 unit.
[00:16:46] Speaker A: Everybody loved her.
[00:16:48] Speaker C: Yeah, they loved her all right. But it was run down. She wasn't keeping it nice. She had all handwritten records. Her collections weren't great. Her marketing was terrible. And illegally had homeless people living in some of the units. And she had friends and family keeping stuff there for free. And so it was really poorly run, which would be an understatement. And this poorly run facility was acquired. And if you think about it, you know, just basically beautifying it, adding some marketing, putting a real sign up, getting a website, just getting rates up to market level. Let's just say they were able to double the rate. And let's say just for our discussion, that the costs, the ratio of operating costs, because they added marketing, they added beautifying the facility, they probably did some pay per click marketing. But let's say operating expenses doubled. They didn't. But let's say they had doubled. Then the net operating income just doubled. Okay, and again, I'm just doing math on the fly here. And it's rounded, but doubling the net operating income. Back to our formula, value equals net operating income divided by cap rate. Well, if the cap rate remained about the same, then in theory, the value of the facility just doubled. And again, I'm talking theoretical. They haven't sold the property yet. And the property value could go up or it could go down from here, but it's better than that. So you think, wow, these investors, if they would just have invested in that and there were no other fees, costs, expenses, et cetera, they could have potentially doubled their money. Well, it's actually better than that in a sense that they use leverage as well. So by going in and using let's say 50% debt, that means the equity that's remaining is leveraged by, let's say 50% debt, which we think is fairly conservative. That means the equity in the theory could have gone up not 2x but 4x in value. And so by doing that, it could provide a superior return for investors. But I want to be really clear, there also are bad deals. Everybody Experiences bad deals. You don't know at the beginning which deal will be good or which deal will be bad, as we kind of alluded to earlier. So let's say that same operator in that same portfolio had another property that was in St. Paul, Minnesota. This is another real example. This property was acquired in, I think it was November or December of 2019. It was a self storage facility. It was acquired for about $1.8 million. The improvements were being made. And then the George Floyd tragedy happened really close by to where this property was. And as we all remember, there was Covid in 2020. There was civil unrest, There was issues with the police force. And this operator realized, hey, I'm not going to be able to profitably and safely get people in and out of here. I'm going to sell this to a local operator who can just really focus on it. And he sold it for a slight loss. In fact, there was a 9% loss on that property. And by the way, if they had used leverage, I'm trying to be fair and balanced here, that 9% loss could have turned into, using my same example, like an 18% loss. It turned out it wasn't, but if they had, it would have. Now, if you would have just invested Kim in that one in St. Paul, Minnesota, you might have been really excited up front, but really disappointed with a 9% loss. But if you were in a portfolio where you had your money invested across, let's say, 30 assets and one of them went bad and then several others went well, you would have likely not missed a beat. And that's exactly what happened to investors who were invested in a portfolio with us. They didn't miss a beat. They never lost any money. That $2 million or so that the property was sold for was reallocated to other profitable deals, and investors didn't miss a penny along the way. And that's the benefit of diversification. Whether you get that through a fund like ours or just whether you go out and do your own diversification, it's really important to diversify.
[00:21:06] Speaker A: Yeah, the same thing in a franchise, right? When you have multiple locations, the whole portfolio is safer. And I was just saying this this morning in a coaching call, right? Like, you may start and hit the home run, and then your second one is like a dud. You know, like, we all hope that the first one's the home run. But, you know, I've interviewed people on my podcast who've said it wasn't until my third store that things turned around and I found I had a good Cash flowing business. But, you know, and I've asked the question, why do you keep investing in the same franchise if it took till the third store? He's like, because other people were making money. I had the faith and you know, because I believe in business ownership, that the business flows from us, not to us. And so it really comes down to what the owner wasn't doing in the first couple of stores that they figured out by the third store. And then they can go back. But sometimes you also just get, you know, market differences, location differences that make things harder or easier. So it all aligns perfectly with my audience and how they're trained by me to think about investing in franchising. I love it. But the question that was sort of raising and was coming to my awareness was, what if there's some listener out there who's like, well, why would I give my money to you? Why wouldn't I just go buy that $1.8 million property on my own? Would it just be the answer be that? Because with you, you are diversified right from the beginning versus if you buy the dog, you might just cash in your chips and be like, I'm done. It didn't work for me.
[00:22:34] Speaker C: Yeah, well, so here's my answer. And I'm probably going to offend somebody. I hope I don't offend you, Kim. But it's really likely that if you do go and buy an asset like that, you'll turn out to be one of those mom and pop oper operators, one of those operators who's distracted, one of the operators who lets the value of the facility actually decline, who doesn't charge market rates, who allows homeless people to stay because you're not hyper focused on it. I'm actually convinced after almost 40 years in business that the people who succeed wildly are very, very focused on a narrow band of activities. And if they get spread out and they try to say, okay, this self storage will be a passive investment. It shouldn't be a passive investment for the operator. It should be for all the passive investors like you and me. But the operator should be hyper focused. They should be on site. They should be absolutely making it the best they can. And if you're not ready to do that, and if you don't have the experience, the team, the track record, the access to equity and debt, you're probably not well suited to go buy this. And even if you did, like you said, Kim, you wouldn't be diversified. Maybe you would have bought the next St. Paul deal that actually lost 9%. It's just a really losing proposition unless you're in the business.
[00:23:57] Speaker A: I want to be like, preach it, Paul. Preach it, Paul. The same thing in business ownership. Eventually you might be able to step back. But I love the hyper focus. I've experienced that in trying to add additional businesses on. And the one thing that was just the cash flowing king for me took a hit for no other reason than a diversified focus. Right. You have a candle in a room versus a flashlight. The candle is scattered, the flashlight is hyper focused. And so which one creates more light? Same idea. Okay, so this is great. So I want to do a little call to action because I want people to reach out to you. Look, I've led some of my franchoice friends to you. I believe in what you're doing. Again, I'm not trying to be biased. I just have personal experience. And so where can people reach out to you? What should they do if they want to learn more about your fund?
[00:24:52] Speaker C: Yeah. They can go to our website, wellingscapital.com that's W E L L I N G S C a P I t a l wellingscapital.com and if they want a free guide to investing in commercial real estate or specifically on self storage, mobile home parks, et cetera, they can go to wellingscapital.com resources. They can also get our phone number email address there if they want to connect and chat.
[00:25:20] Speaker A: And you should come to me first and I'll personally introduce you to Paul and his team.
[00:25:25] Speaker C: I would love that.
[00:25:26] Speaker A: I would love it too. Paul, you're such a blessing. Thank you so much for sharing your wisdom and your opportunity with my followers today.
[00:25:33] Speaker C: Thanks, Kim. It was great being here.
[00:25:36] Speaker A: It's so fun to see your face. It's been a long time. If you're interested to begin your journey into an active business of a franchise, please follow the link in the description below and I will reach right out to you right away. Thank you so much for listening until the end and I'll see you in the next one.
[00:25:55] Speaker B: You can find more more content just like this on my YouTube channel at KimDaily TV. And if you're inspired to take the next step to explore franchises matched to you, please email me right now at inquiremdaily tv. That's inquireimdaily tv.
