Episode 363

The Complete Picture of the 1031 Exchange with Mark Hamilton

Mark Hamilton is a veteran real estate investing expert, and founder of Hamilton Zanze, a real estate investment firm with a portfolio of over $4.3 billion that specializes in multifamily investments. 

The company is one of the nation's largest privately held multifamily syndication companies with over 20,000 apartment units under management.

Mark has really positioned himself as the expert who has seen ins and outs of multi-family investing. One of the things Mark is really passionate about and expert in is the 1031 Exchange tax program, and he joins us today to give my audience a complete picture of the process. 

We chat about:

  • Real Estate Investing as a personal financial savings strategy. 
  • The value of the 1031 exchange tax mechanism as a means of accumulating wealth.
  • Growing his real estate investment company over the past 20 years.

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"You can invest 10,000 hours and become an expert or learn from those who have already made that investment." - Jack

Transcript
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Welcome to the REI Mastermind Network where host Jack Hoss gathers amazing stories from leaders in real estate investing.

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In each episode, our guests will tell you what they're doing that works what they've tried that failed, and best of all, you'll learn actionable steps to take your real estate investing.

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To the next level now, here's Jack with another value packed episode.

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We have Mark Hamilton with Hamilton Zanze, and you can find them and and their contact information and a bunch of resources on their website.

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So, head over to hamiltonzanze.com in order to get some more information here, but Mark has been in this business way longer.

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Then than I have so this is going to be a great conversation.

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He's been in the business now for 20 years.

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end some time on the value of:

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Well, Jack I appreciate.

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It, and I appreciate you inviting me to be on your show today.

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And notwithstanding, the kind reference to 20 years, it's actually much worse than that. I banned the business for 41 years. I've been.

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Holy cow.

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Yeah, I've had this is.

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with Tony Sanz. We started in:

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Were told.

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Old dogs and but we are old dogs now.

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And yeah, yeah, we've.

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We've had a really good run, done some good things for ourselves and the people in the organization, and a lot of clients.

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Yeah, wow, 40 years.

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In in the business I.

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What you know now, do you wish you knew back then?

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You know that's a really.

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Interesting question.

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You know we all have a common fantasy that if we could only.

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Travel back in the.

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Past to a certain day, then we we'd have the winning lottery numbers, and we could.

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We could buy that lottery ticket and our lives.

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Would be different, you know.

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I've had anybody that's my age has had some ups and downs and real estate I can at times be a little bit?

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Like riding the tiger.

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But I would go back.

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It's been really good for me.

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I know something different every year, if not more often than every year.

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And certainly, your perspective evolves.

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As you old as you age or old.

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But yeah, no I wouldn't go back if I knew then what I know now.

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Things would be different.

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But you know, every day is its own day, and the things that come along come along.

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And I'm just really delighted and.

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And I'm grateful.

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For the life that I have and.

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I don't think I would, I don't.

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Think I would change any of it.

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Well, you know I'm just really curious.

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Just because you know we could spend.

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I'm sure an entire episode just talking about how you got into real estate investing.

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And but I'm sure everybody has asked you those type of questions in the past.

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In fact.

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In fact, if you'd like to know more, Marx background.

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I'd have you direct you to his website.

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I I'm actually more curious really.

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As you know I have a lot of real estate investors who are just getting into the business.

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You know they're there.

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That's why they listen to these pods.

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Yes, is there one thing that.

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You wish you would have known.

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Or right when you got started.

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You know, I answered the question slightly differently.

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I'm gonna kind of trying to choose a point in between your two questions and I'll just.

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I'll just reflect back on an episode.

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Back in the.

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RTC years, which were the late 80s and early 90s.

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There was a lot of reckless lending, savings and loan lending primarily that had taken place.

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During that time and it turned into a big mess and.

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The federal government.

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Basically, swooped in and cleared the decks and they.

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Cleared the decks by.

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They shuttering insolvent savings and loans and taking over their balance sheets, taking over their assets and their liabilities, and they were not set up, and they knew it to own real estate, and so may not have been quite a fire sale.

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There was a lot of property they got put back on the market.

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That got deleveraged and went down in.

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Value on when it got taken by that.

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Taken by the federal government.

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Government by the Resolution Trust Corp which is RTC.

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That was really good.

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Time to buy.

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You know Sam Zell bought, bought hard and probably long during those.

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Years they were.

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They were good assets that that.

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Just couldn't just that, just couldn't.

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Live with the amount of financing they had on them, and it dropped.

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They dragged those institutions down.

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You know it would have.

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Been fun to be a little further along in.

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My career at that point.

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So that I.

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Could really get my arms around some of the RTC stuff.

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And you know, I.

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Went to a meeting with.

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A with a banker.

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Who's a fellow?

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I still know and.

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He said you should.

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Just be you know you should just be buying trust deeds.

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You know buying loans.

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Before they default.

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And that just sound like last thing in the world I, I thought I should do I.

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I wouldn't have known how to do it.

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I didn't feel I wouldn't have felt confident that I that I knew how to get through.

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The foreclosure proceedings and all.

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That kind of stuff.

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So, you know you do.

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Have to stick your neck out a little.

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But you have to.

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To really, I guess it comes down to three.

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And you have to.

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You have to like.

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The work you have to be willing to do.

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They work.

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Thoroughly every day and some and there are times when you're.

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Really gonna have to work.

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Hard and you also have to look for.

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Opportunities to think outside.

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The box.

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And that was, you know, if I had known more about what.

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It meant to buy too just.

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Basically, buy loans at that point it probably would have been different, but we've always been on the.

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Solidly on the side of being equity investors, you know, we, we pull equity.

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We contribute our own equity and and and very generally it goes into partnerships that we form.

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And then we go in and we buy the assets with that equity and and and and, uh.

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Being new conventional debt, so we're fairly mainstream in terms of our equity and financing strategies, but I do think you have to.

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You have to know how to look outside the box, and you have to be.

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Willing to look.

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Outside the box and there, there's certainly things that that that we look for now that I wouldn't have known.

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We have to look for.

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Or 20 or 30 or 35 years ago.

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Sure, well could you give us an example like what are you looking for now where you wouldn't have before?

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Well, you know, buying loans would be one thing and and and to this day we don't do that.

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But when Hamilton Dan started, we were it was me and Tony and one other.

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Person the first property we bought was a.

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A 16 unit building and ended up becoming part of Oakland, CA and.

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This was right after.

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911 and we bought it for a million 150, and we're happy to get started. And then the next year was bigger, and the following year was bigger and so on.

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But we've kept our monk.

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We've kept ours.

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We've kept our eyes open.

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2 two different operating platforms, and after about 10 years we put together our own property management company.

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After seven years, we made our first office building investment and then eventually grew that into a platform.

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After about 15 years we put together our own commercial property management company and then there are some other.

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There are some other smaller organizations.

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That we've put together.

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So being open minded about opportunities and platforms, it certainly is certainly something you have.

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To do but also last year in December after working on it for probably nine months, we closed a very large acquisition of a very large portfolio in the Bay Area that had gone into bankruptcy, and it was it was.

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Is it real?

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Chore I mostly played console Gary and sounding board.

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The team worked really hard.

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And we bought 39 apartment communities and 21 suburban office buildings, and that's something we just wouldn't have even dreamed about five years ago.

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ive to go alongside our other:

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We've formed our own captive insurance company.

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We've done 10 small funds and we just did our first discretionary fund that was larger, materially larger than any of the others.

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Or and so you have to be open minded to doing new things and you know Once Upon a time I was the tip of the spear in terms.

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Of doing new things in my own little way and and that, you know the invention that goes on in our office for the most part these days is driven by other.

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Senior members of the team.

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So, you know it's it sounds like you're spurring off a lot of other businesses out of your core business.

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You know you talked.

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About not only collecting these, you know these assets, but you have the property management commercial property management you mentioned insurance you're buying.

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Buying paper is were these all out of you.

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You saw a need and you were just trying to fill those gaps or did you or these like you use specifically like you mentioned?

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You saw the opportunity and you took it.

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It's the second.

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Yeah, we really saw the opportunity.

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I mean everything in this business.

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If you're an investor is driven by an opportunity that presents itself, that is that suits.

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The investment objectives of an investor at that point in time, you know there are lots of people that buy triple net long term.

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Tenant properties the returns on that are usually going to be more pedestrian, but it suits a need, right?

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There are people who buy land and build.

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It's not going to be pedestrian at all, and on the returns are going.

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To be at least.

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Prospectively material very significant but you take more.

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Risks right so?

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Real estate investors come in different shapes and sizes.

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They buy land they build; they do subdivisions.

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They buy triple net retail.

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They buy apartments, they buy mobile home parks.

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They buy shopping centers, they buy industrial, they buy office, they buy highrises, they buy suburban and so the temperament and the basic objectives are going to run.

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With the invest.

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Sure, but every investor is going to have an opportunity that they're looking for, and it may be as modest as getting a 3 or 4% return for 20 years.

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But having security.

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You know having a high credit tenant like a bank or a McDonald's or Walgreens and and and they're willing to accept a more modest distributable cash flow.

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But they may want it for a stay.

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State purposes they may want it for continuity of income purposes.

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They may want it for completing a tax deferred exchange.

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So, I do think it all comes.

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Back to opportunity there.

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Are some people who are inventive, you know, despite the ups and downs, some would look at that.

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We work for example.

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Which went out and at least just mountains of space nationwide.

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And I mean.

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You could pretty.

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Clear that you cook.

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Pretty clearly tell them by.

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Looking at their strategy, they were looking for.

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Or need and they had an idea of a need that they could fill in the universe and you know; despite the turbulence they did fill.

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Out a need.

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But I think by and large people who are professional real estate investors are looking for an opportunity.

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Sure, well, you know this kind of leads me to my next questions is that you know you.

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You mentioned that a lot of people start off in those single-family homes and and frankly, a lot of what you're doing.

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It's taking you 40-year career if well.

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It doesn't sound like.

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This portfolio has been accumulated in over the past 20.

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But it's almost more aspirational, you know?

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They, they see it almost as a big monopoly game.

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You buy a bunch of single-family homes and then you trade them in to get that multi family.

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Do you think?

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That is the right strategy for a lot of people.

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Or should they consider just jumping right into multifamily investing?

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That's Jack, that's a really great.

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Question and again it's.

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Going to come back to the person.

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There are lots of ways.

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To invest in real estate, you can buy a home.

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You're a.

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Real estate investor.

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You can buy.

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e and and sell, and then do a:

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You can buy.

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These days a common strategy is buying high end condos and then putting them into Airbnb pools.

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So there.

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There's many different ways that you can start investing.

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You know if you want to buy a small apartment building with a friend who's a Carpenter, or a plumber or.

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Or a CPA or what have you and and and.

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Have a plan.

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For that investment, you can certainly do it.

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I would say that the first thing to do is to have a sense of on your long-term goals and to have a sense of the amount of patients that you have.

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You know the first property.

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The first property that.

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I bought.

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My wife I bought a property in.

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In San Francisco in:

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Before we bought this property that this property was.

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Close to being.

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A fright and you know the 1st.

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Time my mother-in-law saw it.

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She broke into tears.

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Because it was gonna.

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Need a lot of work and and you know I was probably naive.

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But it worked out.

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Uh, and you know we worked hard.

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We did.

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My wife and I did a lot of the work ourselves, nights, and weekends.

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But we caught.

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The book right and and kind of you know.

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Once you, once you've been once you've.

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Been bitten by.

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The bug it's.

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Hard to leave it behind.

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But you know 2 units and then and then my boss at the time saw what we were doing and was interested in it and it kind of sponsoring us as an Angel investor.

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And then we went out and bought a 3 unit building a 3 unit building in a four unit building and and those had good outcomes back then.

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San Francisco was still kind of rugged.

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It hadn't become San Francisco.

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I mean, it was decades away from San Francisco.

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Facebook, you know, Genentech and Apple it was.

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It was it was rugged.

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But we became partners with another married couple from her hometown who were doing the same thing.

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We threw our lot.

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And together and formed in a small company and we're just really working hard doing transactions.

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And you know, so slowly climbing the mountain, you have to know.

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How you're going?

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To do this?

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You need to be able to spend a lot of time and have an income at the same time and and we were able to make income and still do it because.

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There was opportunity there.

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You know a lot of the opportunities have gone by.

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It's harder to get into the market.

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Now the prospective returns are going to be low.

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Or because it's just so competitive there's so much capital out there, and I think there's fewer you know.

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Almost every stone gets turned over every day, so there's fewer.

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There's less low hanging fruit than there used to be, and there's an ocean.

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Of capital out there competing for it.

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But I you know; I think if you're a patient investor.

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And you want to harness a:

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You, can you?

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. The REITs certainly use the:

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They see fit.

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Yeah, you can buy and that can be publicly traded or private REIT stock.

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You can buy.

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You can go into a small syndication or partnership with other people you know, perhaps as few as one or two other people, but you can also throw your lot in with other professional investors such as we are and.

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You know you just have to be; I think.

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At this point in time, one of the.

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Things that's called.

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For in addition to hardworks patients, we Antonio.

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Thank became partners. After our first five or six years, we could see that we were holding assets for about, for about 3 1/2 years.

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I think our average hold back then was about.

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42 months.

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So you go, you can you raise the capital.

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You're going to make the acquisition you do the asset management, the project management, you do the heavy lifting.

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That's the thing.

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Put it back on the market and sell it and go look.

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For your next.

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Opportunity well, if you if you took.

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The so let's just.

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Say that that was that was kind of the time cycle.

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Of the investments we made in the first five years, if you take the time, if you look at a time cycle for the to transact the properties we've acquired in the last five years, the arc of ownership or the period of ownership will probably be much longer on those it'll be 7 to 10 years for sure.

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We do have assets that we've.

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That we really like that we've, you know, we've kept for 10 or 15 years, but I think shorter time horizons are shorter durations of ownership.

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That were certainly in propelled in part by falling interest rates, and I don't know.

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Where interest rates have to go.

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But up from here so.

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We're not going to get that.

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You know we're not going to get the same.

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Kind of cap rate compression going.

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Forward that we've that we've seen over the last 20 years and again.

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There's a huge amount of capital out there.

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But if you can.

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If you can buy something or invest in something that's going to be profitable, that's going to pay you some return as you go.

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That has every good reason that has every good.

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Justification for being profitable and and you're going to.

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Enjoy the benefit.

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Of out of a 6-to-8-year ride.

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And you're young and can and can turn that over the number of times during your you know your remaining investment years.

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You have an opportunity to grow that capital and defer the taxes on it for as much as 30 or 40 years.

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So, well, you know.

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You can actually if you go to your website and I'm going to point everybody there again. Hamilton zanze.com and I'm going to like I said I'll it'll be in the show notes.

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But you can actually see a lot of what you're talking about the roots of your history, because you're still looking for value added.

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You have a value-added approach to your multifamily investing today, right?

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You bet and to our suburban office as well.

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And you know, the biggest, the biggest engine, the biggest driver in our business has always been value add, but I have some partnerships that are still ongoing after 30 years and in any one of those is probably owned on a 30-year partnership.

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That partnership has probably been invest.

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So then, in at least five or six different transactions and and and, we've moved when we've sold and then repurchase, we've been able to defer the capital gains for the investors by doing new a new acquisition and and, you know, we have, you know, my history goes back.

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Before Tony and I became partners and and.

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A lot of.

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Those old partnerships are still on ours.

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System so you know you have to have somebody who's going to mind the store and there's a lot of care and feeding that goes into apartments like you know one of the old adages about apartments is the three teas which are toilets, trash and tenants.

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And that's you know that's shorthand for just saying there's going to be a lot.

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Of work to do.

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But you have to have someone who's going to be able to mine the store and put in the care and feeding.

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And and allow you to still have an income to support yourself, so you know, unless you have, unless you can do it while you're moonlighting, or unless you have a spouse that is content to be the primary breadwinner.

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It's probably going to be hard to give up your salary and do this unless you're already pretty.

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You know of independent needs.

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Well, let's go to the:

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You know we used the term:

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Love it.

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Of course, if an investor buys a property or an investment group buys a property for $1,000,000 and they pool, let's say they pool $300,000 of capital and team financing of $700,000 and their financing package there.

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Financial resources allow them the funds to work on a property and add value and increase in value.

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And then they sell that.

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Let's say they sell that five years later for a million five, at least a million five net.

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Maybe they sell it.

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For a million sticks and then have commissions.

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And costs of sale and they like to bring.

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It down to.

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Only taught by.

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Five years your loan is.

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Probably amortized, you know it's probably amortized down some. Maybe instead of 700.

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1600 and.

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$75,000 and your basis the investment basis.

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That an investor has.

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Is the $250,000 that.

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That excuse me the.

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$300,000 of capital that was invested.

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It adjusted for depreciation and distributions, but let's hold depreciation and distributions out of it for a moment and just assume it's in vacuum that you that you invested 300,000 in cash. You took out a $700,000 a sale event and you come out with proceeds.

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Of a million five and you retire your financing of $675,000 and then you have $825,000 in proceeds.

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That can be distributed from your closure or your title company, depending on how they do it in in your state.

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Uh, if you direct the closure or title come to send those funds to an exchange accommodator. And again, we're here for the moment we're pretending it's $825,000, then the exchange accommodator could sit on that money you're not allowed to take what's called constructive receipt of the fonts that you take. If you have that.

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To you, you will not be able to do a 10.

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31 but you'll.

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Be determined to have sold the property rather than exchanged it, and you'll be taxed.

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you domicile those funds, the:

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From the time that you sold your, they call it relinquished property in shorthand. We call out the down leg. You have 45 days from the time you close your sale.

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Fail to locate 1.

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Generally speaking, one to three properties that you would love that you would that you would content yourself to purchase and then you do what's called.

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Designate the designating is completing a form that your exchange accommodator will provide you.

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And you.

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List the particulars.

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Of the properties that you're looking at, and so within 45 days you've basically constructively told the IRS. I'm completing my designation by designating these three properties and then from there you have 135 days to close a purchase on one of those three properties.

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And your mandate for the sake of a full deferral of capital gains taxes, is to reinvest all of your proceeds, in this case 825,000 to $825,000, and two you can add cash to that.

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But it's 800 and.

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$25,000 or more.

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And to replace your financing, which was $675,000 or more.

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And it's not on.

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Common for people to upsize both of those amounts you might well if it's a partnership, you might well have the wherewithal to invest $1,000,000. You know to top off your 8:25 with another $175,000 and have $1,000,000 of capital to reinvest. And then it's also very common.

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For people to upsize their debt, so you might go in in two steps basically or 2 1/2 steps.

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You might go from 300,000 in capital 700,000 in financing. Purchase a property for 1,000,000 bucks. Sell it for a million five.

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Reinvest the proceeds of securing financing.

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Upsize them both and and discover that now you've bought a 3.

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$1,000,000 asset?

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That kind of that kind of footwork is not unusual.

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The math of every different, every exchange is going to be down, but generally it's an opportunity to take a whatever the sum of capital is that.

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Those one or more investors.

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Out invest it, make it produce an event.

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Use financing as you see fit.

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We always believe that.

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It's best to.

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Use intermediate leverage.

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We don't. We're not believers in severe leverage, and we're not believers in under leverage. But you know, 65 to 70% leverage is a good is a good spot to land.

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And you know, after two or three successful cycles, you might be you. You might be sitting on one or more buildings that are now worth 5 to $6 million. It's not going to happen.

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And you know it's not going to happen in a.

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Few years but it.

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Could happen in 10.

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And and all that, prospective capital gain will be deferred.

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Different states have different capital gains rates. I believe the Federal Capital gains rate for long term gains is 20%, but then the IRS will also charge you for what's.

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Called recapture, which is depreciation.

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You've been using the depreciation to shelter your income and defer the gain on that.

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And then when you liquidate, you have to pay the government back for the benefits of the tax shelter that you've gotten.

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So, it's quite.

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Efficient, it's a viable long-term strategy.

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And it can be hard to get away from, because if you've, if you've been, if you've done successive exchanges, you know a string of exchanges like we've done with some of our partnerships.

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The gains and recapture can be significant.

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The capital gains tax and recapture can be significant.

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And it's generally going to be more severe the longer you've held on an asset.

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But if, wherever you live, if you have a good you have.

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Good real estate.

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Agent and you have a good closure or title or escrow company they're going.

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To be able.

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To educate you to the basic footsteps of getting an exchange done and you just want to make sure to get everything done in time and you want to be aware that if you choose to invest.

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Less than all of your equity proceeds or pull out less than all of your or replace less than all of your finance.

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Saying you will be taxed on any shortage or any downward difference between the amount of capital that you have or any financing that you need to secure and that gets that's.

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Called Boot beat just.

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Like you know, just like footwear, and you're going to be taxed at capital gains rates and or recapture rates.

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So, it pays to.

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Fully reinvest and to replace all or more of them.

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Sure, so you mentioned, locate one to three properties.

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Would this also be the case regarding partnerships and syndications like that so people could invest in in projects such as yours.

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Same rules.

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Yeah, it doesn't matter if it's you know, for all intents and purposes it doesn't matter if it's an individual or a partnership or corporate holder.

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I believe publicly traded REITs, you know, use the strategy just as we do, just as mom-and-pop investors do.

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And there are some other nuances.

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There is other.

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There are other sets of rules that you can follow.

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You can do what's called a concurrent closing, which means have your sale property in escrow or under contract and have your acquisition.

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Property in escrow or under contract and close them at the same time, and so that's a simultaneous closing.

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And if you do that.

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You are really the need of doing the other paperwork for the most part goes away you should.

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You should get guidance on that.

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Uhm, you should talk to your CPA or tax lawyer or whomever to be sure that a simultaneous closing it's going to obviate the need for any and all.

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The rest of.

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It you can also simply acquire a property within your designation period.

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If you sell a property on January 3rd.

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1st and buy a property on February 1st.

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You've probably met your designation burden and then there are other ways there.

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There are other parts of the rules that may allow you to designate more than three properties, but it also comes with the bird.

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It can come with the burden of responsibility to close.

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More than one of.

::

and sell properties with the:

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Sorry, Jack can you, can you say that one?

::

More time please.

::

When that person does a:

::

have to go through the whole:

::

Great question, great question. If you were, if you invested cash with us and let's just go back to that hypothetical of the $1,000,000 bill.

::

Let's say that you and I and a few other people pooled $300,000 capital. You know, we can all be. We can all be equals if we're all. If it's kind of a one for all and all.

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For one approach, or there might be a project sponsor involved which is.

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The role that we play that.

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We organized and and manage the entirety.

::

Of the process, but if you're a cash investor.

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And let's just pretend there are ten of us and we just put in 30 grand. Your $30,000 is now the inside is now inside of a partnership.

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The partnership owns you own.

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Shares in the partnership you earn interest in the partnership.

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The partnership owns the property.

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And so, when.

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We sell that property.

::

All ten of those people certainly have the right.

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As long as they're also getting along to go out and do another to acquire another property.

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Other we say often do and and that that means the test of an exchange again as long as they manage the details and and administrative aspects of it.

::

If it for us, if people you know it's been great, right?

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I'm happy to have gotten the gotten the economic benefit.

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Of it, it felt it.

::

Felt good, I liked.

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The income I like the growth.

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But I really.

::

Have other things I want to do with my money so can.

::

I can I cash out with us; we always cash out anybody that wants to get.

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Out when we sell a property, it's very easy to identify to put a bright light on it and put a bright.

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Line down and.

::

Then just precisely identify you know they're allocated share.

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Of the equity and and any profits that we've made so you know, people can get out of that.

::

There are a couple of.

::

Different we this this will.

::

Get a little more complicated and I'll try to keep it simple.

::

But along the shorter of it is that.

::

You want to.

::

To mitigate to minimize tax exposure, you would probably want to have them remaining.

::

Nine people collectively buy out the one person or any one of the nine people could buy out that person, and that's that.

::

Sends that person on.

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Their way keeps the group together.

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It keeps from having to dissolve.

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Your entity there are also ways to allocate funds out of escrow and and distribute funds out so that that an ambassador can get out.

::

We don't favor that that that approach which you can do it, and so the answer to your question is that we're all investors together.

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Yes, we're all we're all doing.

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1031 exchanges together and and as long as we want to do them, then we're just going down the road. If you and I and and one other person went out and and bought a property.

::

Together and we didn't want to form the partnership, we would most likely go into what's called the tenants of common situation.

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And so, what that?

::

Means is your names on title my names on title?

::

There's another person.

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Involved and and his or.

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Her name is on title and if you look at the grant deed our names are right there, and it says that you own an undivided interest.

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As a tenant in common with more of an undivided interest as a tenant in.

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Common with this other person.

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And it's just terminology that means that that we.

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All own real estate together.

::

But we don't own shares at that point.

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Under the law.

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Under the tax code, we an undivided interest is an interest in a piece of real estate.

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It's not an interest in the partnership.

::

And so, if we.

::

Did the if we did the same transaction the same way and the three of us each put in $100,000 and we go downhill and we.

::

The same place, and so the same place is, we now have a.

::

We've now had a sale event that lands.

::

Us that lands us retiring our $675,000 loan.

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And uh, and producers for us. The benefit of now being in conceivably in receipt of 800 and.

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$25,000.

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And so that $825,000 is owned equally by the three of us. As long as we went as went in as equal Co tenants and I think.

::

I think I could still divide 825 by 3.

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And come out with 275 so now.

::

Each of us.

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Instead of having 100,000.

::

Dollars of invested capital.

::

We all have $275,000 in 10 in.

::

In an invested capital and what the tendency common structure does is it allows anyone in that in that crossroads.

::

To again make a decision on what they want.

::

To do forward.

::

Going and it.

::

Could be Jack.

::

That you and I decide that we want that we have something else that we want to do, but our third investor now wants to go different way and they want to go out buy a condo and put it in an Airbnb pool or something.

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So, then you and I turn around. We go back out and find something. We have $550,000.

::

Of invested cap or equity capital?

::

And maybe we you know.

::

Maybe we top.

::

It off with another 100 each and we now have 7.

::

$150,000 of capital.

::

And so, we go out and we find something for somewhere between two and two and a half $1,000,000.

::

We go through.

::

The same flood steps we domicile our funds with an exchange accommodator.

::

We go out and we arrange a purchase of a different asset.

::

We put our money in escrow. We line up our financing. We do our designation within our 45 days. We do our acquisition within another.

::

135

::

Days, and now we're owners of a new property.

::

Now let's just say it's valued.

::

At two million 250.

::

And and off we go again.

::

And you know, in another five years goes by or something.

::

And and now you have something you want to do, or I have something I want to do.

::

And but the value.

::

Of the property has gone up to three and a half $1,000,000 and when we paid when we paid 2,000,000 two fifty, we took out a million-and-a-half-dollar loan.

::

And so now we and that's been paid down to maybe a million full.

::

So now we have.

::

Sale proceeds gross proceeds at.

::

At 3,000,000

::

Five we pay off our loan, and now we're sitting on excuse me. 2,000,000 one of equity capital and again at that point in time.

::

Either you or I can choose to do our own thing.

::

We can.

::

We can re up and go out and do it again.

::

We can go.

::

Our separate ways so we can come to a sponsor like Hamilton's aunts and invest with Hamilton's aunts on.

::

Historically, we've done a lot of tenancy in common structures, but in the last five years we've done a lot of depth here.

::

We're doing more Delaware statutory trust structures.

::

They're easier to manage, and they're a more pedestrian structure for investors because the money just goes into a trust, and everybody goes into the same trust.

::

Nobody, untitled, the trust is on title.

::

Whereas in a tendency in common structure, everybody is on title and everybody on the loan and I think that that a lot of investors see the Delaware Statutory trust as a more conservative structure, so you know you could take your if we now have two million, one capital and each one of us has, so each one.

::

Of us has a.

::

As a million 50 and we each have.

::

A $700,000 debt replacement burden you?

::

Know we can.

::

Meet that by reacquiring either on our own or together, or with a sponsor.

::

We put it into a Delaware statutory trust.

::

And you just you know your CPA is going to want to make sure that you reinvest all of your capital that you received net of costs from the sale and that all of that capital goes into the RE acquisition of another property.

::

There are some other costs that are considered.

::

Real estate costs like brokerage commissions and the like.

::

Like consulting fees some there are some other costs that can be considered to be real estate purchase costs because they're essential to the transaction, but effectively you would need to reinvest your million won in in new real estate and you would need to be out.

::

You would need to receive a debt allocation.

::

Of at least $700,000 and you can upsize both of those numbers. You can add more capital you can take out more financing, but you usually cannot take those numbers down and you take those numbers lower. You will generally have tax exposure, sure.

::

Well, this this was.

::

Fantastic Mark, I really appreciate you giving this.

::

This is like the first time we've actually taken a moment and basically laid it out from beginning to end.

::

How this tenant? How a:

::

Because that really kind of makes things more concrete.

::

Again, head over to Hamilton Zanze.

::

I'll make sure to have that link in the show notes that mark this was a great conversation.

::

You're welcome back anytime, I hope.

::

You'll take me up on that.

::

I hope you'll invite me.

::

Back I've appreciated it.

::

But uh, before I let you go, I typically ask, is there a question you wished I would have asked you today?

::

Well, you know I'm gonna turn that on you slightly and say what, what two questions should a real estate investor ask if they're going to invest with somebody like us if they're going to invest?

::

In the sponsor.

::

Or what are the two biggest risks that you see?

::

And and I always feel you could cover a lot of risks with insurance with bigsound vendor selection by basically good due diligence and good acquisition decision.

::

But there are only two things that are that are that require vigilance to manage against in terms of risk.

::

And when people ask me what are the biggest risks of investing in real estate?

::

I always say.

::

Interest rates interest rate movement because when interest rates go up.

::

The value of assets goes down.

::

It's really pretty much that same.

::

And when interest rates go down, the value of assets go up, and so we've been, you know, we've been riding a 40-year wave of the falling interest rates and it's been really good for many of us who have.

::

Assets and it's.

::

It's propelled values and.

::

So, interest rates will always be a.

::

Risk and then I think if you're gonna, if you're going to.

::

Invest on you all you.

::

The risk is, are you really suited to it?

::

You know you really need to understand what's going to go with the real estate.

::

You know what?

::

What work what?

::

What hours of commitment every month is it going to require, and are you suited to it?

::

And if you're going to invest with us?

::

Answer that you know you want to do your due diligence on them.

::

You want to make sure they practice what they preached and that they have a great track record and that people that you know have done business with them.

::

But you also want to make sure that this the sponsor has a long-term plan and so when I when I meet with investors and people don't ask those questions, I ask those questions.

::

For them, I say, you know.

::

You should ask what the biggest risk.

::

If you know what I think the.

::

Biggest risk felt and you should.

::

Ask us about a long-term plan.

::

Because real estate is a long-term investment, and if you're not suited to long term investments with limitations on liquidity, you should look at other real estate types, but I thought you answered all, although you asked all the right questions.

::

Well, I appreciate that that and like I said, I really appreciate your time. Again, it is Hamilton zanze.com. I'll make sure to have that link in the show notes.

::

But I really, really enjoyed our conversation Mark and and like I said, I hope you'll come back sometime.

::

I did too.

::

Thank you having.

::

Me back, I'd love to talk.

::

You bet if you learned at least one actionable step to incorporate into your real estate investing.

::

If so, please consider returning some of that value by leaving a positive review, subscribing to our YouTube channel, or joining our growing network on Facebook and Twitter.

::

You can find links to all of our social media accounts in the show notes.

::

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