Seth: Hey everybody, how's it going? Welcome to the REtipster podcast.

You're listening to episode 179. Today I'm talking with Ben Nadelstein from Monetary Metals. So Monetary Metals is a company that operates the gold yield marketplace. They offer investors a yield on gold, paid in gold.

The company's mission is to unlock the productivity of gold by providing new incentives for the world to rediscover the use of gold as money. And this company offers a unique approach to gold investment, allowing investors to earn interest on their gold and silver hold.

And you might be wondering, what are we doing, Seth? Why are we talking about gold and silver now? I thought this was a real estate investing podcast.

And I'll admit, when I first heard the idea, I kind of thought the same thing. Like, does it fit? Like, does the REtipster audience want to hear about this? I don't know.

But then Ben, our guest, was explaining to me how there are some key similarities between the two, precious metals and real estate, and some benefits of earning income from precious metals that real estate can't deliver.

So it's almost kind of like an alternative that's definitely worth being aware of. And I think you'll agree as we get into this. I also had never even heard of this kind of thing, earning lease revenue on gold. It took me a second to wrap my head around it, but as real estate investors, one of our primary concerns is investing in tangible assets that produce a return.

And if we can do the exact same thing in some ways that are even easier with different asset classes, we probably ought to know about that, right?

So today, Ben is going to explain how Monetary Metals works, and I'm going to grill him with all kinds of questions. We're going to get a really deep understanding of this. And once we get to the bottom of it, we'll show you how you can get involved with this if you're interested.

So, Ben, welcome to the show. How's it going?

Ben: Seth, thanks so much for having me. I'm a longtime listener and I'm super excited to get grilled by the one and only Seth Williams on the REtipster podcast.

Seth: I'll just say I met Ben at FinCon and I was kind of blown away at like how good he is at explaining this stuff. I'm sure you'll agree as we get into this.

So my first question, why does everyone around the world, for thousands of years, why have we assigned a universal value to gold and silver? Why did people collectively decide that this should be used as their money? Why not copper or bronze or any other metal out there? What's so special about gold and silver?

Ben: Well, actually, it's a really interesting question because the answer is it hasn't always been gold and silver, but for a pretty long time, it's been gold and silver. And the real way to think about this is let's start way back when we were in in a barter economy.

So people add stuff, they brought it to some marketplace or some bazaar, you add cattle, I had fish, someone else had butter, someone else had beer, someone had bread, and we all kind of just traded with each other, right? I'll give you some bread, you'll maybe give me some eggs, and you'll pretty much notice right away that there's some issues.

Some commodities are just better for trading than others, right? Fish goes bad pretty quickly. And so, you know, maybe trading that for salt, which doesn't go bad really quickly, is kind of an unfair trade. You might need more fish to get some less salt.

And so over time, you can imagine this kind of barter economy where people realize, wait a minute, certain commodities just trade way better. The bid-ask spread between those commodities is much tighter than other commodities.

And so over time, the more you come do this trading, you get a sense of, wow, this commodity not only has value as whatever it is, let's say salt, but also as a trading good, right? It has a tight bid-ask spread. And once more people recognize that, a network effect happens where where some people know that salt's good to trade, so they trade for salt.

You may not even personally want salt, but you realize, wait a minute, if I have a cow and I can't sell that to the guy who wants shoes, I can sell the cow to the guy who has salt, and then I'll use that salt to buy shoes. And over time, people just kind of started finding certain commodities that had a money aspect to them, right? A tight bid-ask spread.

So some of the first monies recorded in history were things like cattle, right, as well, salt in the example. Now, what's interesting about the two different things, you'll notice that problem. So over time, people didn't want goods that went bad. So food is not really a great money. You didn't want things that rusted. So that could be metals might not be a great money. You also didn't want things that were not easily divisible. So think of something like a pearl, really cool, not easily divisible.

What's another problem with something like salt? Well, salt's great. It doesn't go bad, easily divisible, right? You can make more or less salt. You can weigh it. So that's really great. And one piece of salt is just like every other piece of salt. Problem with with salt is if I want to pay you for a house, that's a lot of salt, right?

And so people realized we need to have commodities for the big and commodities for trading in the small. So the first monies were actually cattle, which could be walked, right? Really heavy, lots of value, and low weight because it can walk itself. And then for smaller transactions, things like salt.

Now, over time, the more trading happened, the more commodities like gold and silver became the monies, mainly because they had all of those attributes that salt and cattle did, but they were easier to trade. Gold doesn't ever go bad. It doesn't rust. A small amount of gold has a lot of value, so you could trade maybe one gold coin for a house or dowry or something like that. And salt then became silk, which had an easier way to trade in the marketplace.

Let's say you want to buy a sandwich or a loaf of bread. You're probably not going to shave off a little little bit of gold, we're going to use silver. So over time, gold and silver became the commodities with the tightest bid ask spread. And over time, they became the monetary metals, the metals that were money, unlike steel, copper, or bronze.

And on that, on that whole thing, this is probably a whole other discussion, but like the value of gold compared to like the value of the U.S. dollar is always fluctuating and going up and down. And, you know, similar thing for all other currencies, I'm sure.

Seth: What makes that happen? Like if you have an ounce of gold, I don't know what that is worth today, but like, where does that number come from? How do we decide this number of dollars is worth this much gold and vice versa?

Ben: Great question. So like most commodities, there's supply and demand, right? There's people who are beating on the price of gold and then people asking for a certain price to sell it. And that's like all commodities.

Gold is no different. Gold does have some monetary aspects that other commodities don't. So for example, most people aren't storing something like oil as money, right? First of all, it's toxic, it's flammable, it's smelly. It doesn't have a great weight or volume to actual currency ratio. So you could have a whole pools full of oil and that same amount of value is maybe a small gold. coin or bar.

The reason that gold is valued the way it is, is in part for its jewelry uses, right? So let's say you're a jeweler, you need gold to make rings or, you know, necklaces, and also other industries like solar panels or, you know, wiring and computers or phones. They use some gold, as well as dentists. My dad's a dentist, he used gold in filling.

So gold has some uses not just as money. People aren't hoarding this as a wealth-saving device. But the rest of that premium, the price of gold, is from people who are holding or hoarding gold in terms of wealth saving or wealth management tools. Right?

I have a currency, let's say the U.S. dollar, which is actually the strongest of all the currencies, but I want to kind of hedge against either something like inflation or a debasement of currency, something to hold actual physical gold. And so part of that value is decided by people who say, “You know what, I want to check out of the system. I don't want to be a creditor to a U.S. dollar or a creditor to the Argentinian peso or a creditor to the real in Brazil.”

And that's pretty much where a lot of the price comes from. People saying, I want a flight to safety, and I want something that has no counterparty risk. When you think of something like gold, it has no counterparty risk. Gold is gold, right? You don't have a slip of paper saying, trust me, we will honor this slip of paper, whatever it says, whether that be a dollar or a ruble.

Versus something like a currency or a pension fund or a other type of promise on paper. It's a paper promise that can either be devalued over time, something like inflation or currency debasement. Or it can simply just be reneged on entirely. “Hey, Seth, I know we said we owe you a pension, but unfortunately, we just don't have it anymore.”

That is really not the case with gold. So that's why people buy it. Just like real estate, it's a hard asset. It's a commodity that you know is not a promise or a liability of someone else. It's just an asset.

Seth: So if there was like an apocalypse, I've heard people say like, what's really going to be worth a lot in that situation is like guns, alcohol, tobacco, these things like that. Do you think gold would be useful in that case?

I was going to think of maybe the reason gold is useful is because it is a very useful metal that can go into a lot of different things. And it's soft, it's easily moldable, it doesn't rust, that kind of thing. I'm sure that plays a role as well, right?

Ben: So a couple of answers to that. In a really, really bad apocalypse scenario, Ppople probably aren't going to be worried about things like gold. If anything, they might even want silver just because the way we're going to be trading for stuff, you're probably not going to be buying huge capital assets in the $100 million range.

In an apocalypse, the whole point is that, you know, the capital structure has broken down. There probably won't be a stock market where you can buy $10 million worth of stock. It'll be more like, hey, you know, I want some bread or food.

And so in that scenario, yeah, honestly, probably silver would be probably a better monetary metal. But you're right. I mean, it could be something like information, weapons, food, you know, guns. My brother always says you can download all of Wikipedia into a USB drive. So it would be, you know, sharing information.

But in such a bad scenario, I think which of the monetary metals will have more value is kind of a more theoretical question. I think right now that people are jumping into monetary metals like gold and silver is mainly because of currency risk.

So if you live in Argentina, it's not an apocalypse has happened there, it's not like there are no capital markets anymore or that the rule of law has broken down. It's simply that the government has stolen your wealth through things like inflation and currency debasement, where they just don't trust the currency to hold value and for good reason.

So in that case, I think it's somewhere in between, right? It's not, hey, everything's perfect and the government's great at managing the economy. And it's also not, hey, we're in an apocalypse, can I barter for your weapons?

That goes back to that original thing we were talking about, which is the reason barter economies weren't good is because they were really inefficient, right? There's huge spreads, and huge spreads are a sign of discoordination, where things are hugely inefficient.

What's incredible about our current system and our current economy is you have really tight spreads and huge liquid capital markets, where you can truly trade hundreds of millions, trillions of dollars in value across borders pretty much instantly.

Seth: I've actually heard a very similar thing about real estate in terms of what makes a good real estate market or what makes this real estate investment good in this country. And a lot of it actually does have to do with the country and how well they respect real estate laws and property ownership and that kind of thing.

I mean, there are countries in the world where you can buy land and who knows, maybe the country is going to get overthrown tomorrow and you're going to lose your property or if the government will just seize it from you. Whereas in the U.S., I mean, we take property rights really seriously, and there's a pretty reliable way to figure out who owns what.

So I don't know, it just kind of reminds me of that when I heard you talking about that. The government does play a pretty big role in that.

Ben: Yeah. Thomas Sowell is one of my favorite economists and his book, Basic Economics, if you haven't read it, you have to read it. You can even pause this podcast and stop listing me, just go read Basic Economics by Thomas Sowell. Everything he's ever written, I love, but that book is just a great primer on all things economics.

And I really don't have anything original to say. I just kind of learned from people who are smart, Thomas Sowell being one of them. And one of the interesting things he was saying, and particularly for a real estate investor, this is important to think about.

So if the government says, hey, just letting you know, you live in New York City, you are no longer allowed to rent out your real estate as an Airbnb. Well, pretty much what the government has done is confiscated some of your wealth through other means. They didn't send a guy with a gun. They didn't actually use a bulldozer and to destroy your real estate. But what they did is they took the value of that.

Let's say you were planning on renting it out as an Airbnb, and that's the only reason you bought it. Well, now your asset is suddenly worth much less. Even though the government hasn't physically done anything to the asset, they've now made laws, restrictions, other kinds of regulations that have now made your asset worth less money. So it truly is something to think about in terms of wealth and value creation.

How can I make sure that the assets that I own really aren't subject to government edict or government law? For example, I know you've had some guests talk about solar panels and subsidies for the solar and EV industry. Well, if tomorrow the government says no longer do we care about solar or wind and actually they're bad for the environment because we're polluting with the solar panel waste, now we're going to charge you to have solar panels in some ridiculous scenario.

Well, you can see how quickly those subsidies which worked in your favor now can be working against you. So very important point to think about your assets and how much of that value is tied up with some external liability that you have no control over, which goes back to gold, right?

Gold doesn't have that counterparty risk. It's not waiting on someone to say, hey, you know, we've decided that you can do X, Y, and Z with gold. It's a global asset, something to think about.

Sth: Now, speaking of government stuff, so I know it was back in 1971 when Nixon took us off the gold standard. So prior to that, you know, every US.. dollar was literally backed by gold. And all of a sudden that went away.

So why did he do that? Like, what was the rationale behind that? And was that a good or a bad move? Like, what are the implications for that decision?

Ben: Yeah, great question. I think it's a complicated history in terms of what the gold standard was, right? It had different kind of modifications and slow regulations on top of it. So by the time we got to 1971, a true gold standard was already kind of gone. We were still on a gold standard of some sort, but it wasn't like the past.

Now, what Nixon did specifically for good or for bad, was because he realized that essentially the government had more liabilities than it had gold to back up and other countries were draining our gold reserves.

So here's kind of an interesting part. So in the US.. for long periods of time, actually owning gold as money was illegal. You could own it as a dentist or you could own it as some like numismatic coin if it was some collectible, but you couldn't own gold just the way that people had owned gold for thousands of years as money. The government made that illegal. They made people actually hand in their gold and give it up to the government in exchange for paper dollars.

Now, the interesting part, so foreign central banks could actually still redeem their gold for dollars. So only inside of the United States could citizens not redeem their dollars for gold. So before that time, a U.S. citizen could go to a bank, they would slide their dollar across the teller window, and then that teller would then be able to redeem their dollar for a physical amount of gold. And a dollar was just a description of a certain amount or weight of gold.

But when the gold window was closed for U.S. citizens, that was no longer the case. So they could only use U.S. dollars, even though they still had some gold backing. The only people who could redeem that gold through a window would be foreign central banks.

So for example, after the war, we had lots of debts, right? And debts owed from one country to another, France to the U.S. The French decided they wanted to redeem paper dollars that they had for physical gold, which was their right.

Long story short, we had lots of devaluations of the currency. So we said, hey, a dollar is worth this much gold. And since the U.S. decided, because the dollar was pegged to the U.S. gold reserves, you could simply say, hey, we're only redeeming a dollar for a certain amount of gold, which is essentially theft. It's devaluation. It's like saying, hey, Seth, I owe you 50 bucks, but I'm just going to decide it's going to be 25 bucks now.

Well, that's that, right? You took 25 bucks from me. So the French decided they wanted to redeem their paper dollars, their promises for physical gold.

And Nixon realized that the US would be in big trouble if other countries continued to redeem their dollar currencies for gold at the pace that they were doing. And so actually through Milton Friedman, who's a big free market guy, was persuaded to stop that. And what most people thought would happen was that Nixon would devalue the dollar.

What does that mean? It would mean that he would say the dollar is just now worth less gold than before. We were going to redeem it for, let's say, 35 ounces. Sorry, we're just going to redeem it for 25 ounces. That's just a devaluation of dollars.

But actually what Nixon did is he closed the gold window entirely, which means that it was now impossible for central banks of other countries to take their paper dollars and redeem them physically for gold.

Now, this was a temporary measure, and you can actually go on YouTube and listen to Nixon say, “Hey, listen, I've directed Secretary Connolly to temporarily close the gold window, but it's been closed ever since, which means that we now are on an irredeemable currency system.”

So what does that mean? Your dollars are no longer redeemable for anything. So if you go to a bank and you slide over an $100 bill, the teller will say checking or savings, right? He won't say, you know, here's your $100 worth of ounces of gold.

Now you asked, is that a good thing or a bad thing? But I would say a bad thing, and I'll just point to two kind of big problems. So when a currency is redeemable, that gives people the ability to check and redeem their money from an institution that they no longer want to hold their money, right?

So if I give you my car, I can say, hey, Seth, you know, I need my car back, right? I can physically redeem that asset versus something like a promise. It's much harder to redeem a promise. You can't really do that as easily.

And so when the currency became irredeemable, that caused two big problems.

Problem one is that the government could print or borrow more currency, more dollars, than they otherwise could because there was no one to stop them and say, “Hey you guys have been borrowing lots of money and i don't think you're ever going to pay it back, so I'll take my gold back.” There's no way to do that anymore with paper dollars.

The other problem is that interest rates are now completely unhinged. So in the old system interest rates are actually stopped on top and by bottom by the marginal borrower and the marginal saver. What do i mean by that so let's say you're business, right?

And you realize in my land business, I can make 7% a year return. Okay. What amount of money would you stop saying, you know, I'll borrow at that rate? Probably 7%, right? Maybe even a little bit less at 6.9999%. There's risks, right? I might not make that seven every single year. So I'm only going to borrow at something like 5%, right?

And so when the interest rate rose too high, businesses said, hey, you know, that's too much. They walked away. So that set an an actual ceiling on the interest rate.

And on the bottom was the floor of the interest rate because I'm a saver.

And if someone said, hey, Ben, I'd like to offer you 0.0001% on your savings account, which might be what it's like today for you. Well, you would realize that's really not worth the risk of you holding my asset, right? If you said, hey, Ben, I want to borrow your car and I'll give you $1 to the year for it.

That's not really going to do it for me. So I would say, you know what? I'm just going to take my car back. I'm going to redeem it.

Well, in an irredeemable currency system, there is no floor. And that's why you can see savings rate or federal funds interest rates being literally 0% or 0.0001%, which just never happened during a gold standard because people could take their marbles home.

And so in terms of things that have gone awry, your two major problems are exploding debt— exponentially exploding debt, not linear, but actually exponentially exploding debt since 1971.

Seth: You're talking about U.S. debt?

Ben: Well, really, all debt outstanding. It gets a little bit complicated to see total debt in terms of public, private, corporate, household, and then of course foreign debt, but if you look at specifically U.S. debt you will see an exponentially rising trend starting in 1971. And the reason is that the government could borrow with kind of no one watching.

And so the two main issues and especially for real estate investors to think about is one is that debt will exponentially increase, it has to, with the way the system works. That's one thing to think about. Debt will increase exponentially.

The second thing to think about as a real estate investor is that interest rates are unhinged, meaning that there is no stable interest rate. They can shoot the moon like they did in 1971, and they can fall toward zero since 1980s. And we've seen pretty much zero interest rates until this most recent attempt at a hike.

But the incentives to bring us back from a zero bound just aren't there because, again, there is no kind of economic anchor through gold holding interest rates stable.

Seth: Wow, man. That was a great explanation. I never really grasped all that, but appreciate you putting together those pieces for us.

So when I think about this as a real estate investor, where we are today, like why not just buy more real estate? Like why own gold? Because real estate can pay me gold, at least up until this point, as far as I knew, gold just kind of would sit in my safe or would sit with somebody else. And it was kind of maybe like a hedge against inflation and that kind of thing.

But with what Monetary Metals does, is there some reason to intentionally take some of my funds and divert them to buying precious metals instead of real estate? What's the upside there?

Ben: So here's the upside. Just before we even talk about what Monetary Metals does with gold, pretty much everyone on the planet, and again, I'm not a financial advisor, but everyone on the planet should own own some amount of gold. That's just insurance on the currency, right? And if you have no insurance, you're just kind of asking for issues.

And the greatest thing about insurance is that you never use it. Everyone wants to have fire insurance, but never use it, or life insurance, and somehow never use it. And gold is just insurance on your government, and not on the money. The people in Venezuela, Turkey, Argentina, they really could have used that monetary insurance.

So that's the first thing, is everyone should own gold regardless if you're a a real estate investor, stock investor, just not even an investor at all, you should own some amount of gold, kind of regardless of it.

As in terms of a real estate investor, why real estate investors should own gold, is mainly because of diversification and non-correlation.

So a lot of people say, well, I'm a real estate investor, but if I need to diversify, I should buy something like stocks, right? They pay a dividend. Well, the problem with buying something like a stock or a bond, something to kind of diversify your portfolio, is that they need to be uncorrelated assets. So buying correlated assets doesn't really helpfully diversify you in any way.

So for example, let's say you buy a piece of land and you put all of your wealth in that piece of land. A lot of people would say, that's probably a risky move. I mean, if that doesn't work out, you're in big trouble. So why did you diversify?

Well, what if you bought just the adjacent piece of land? Yeah, it's technically different, but it's still land in the same zip code in the same area, right? If something bad is to happen, like a flood or a fire or just, you know, economic malaise, your investment could really tick.

So that's why you shouldn't put all of your money in Tesla stock or all of your money in one piece of land. You should diversify.

But you need to diversify something that's uncorrelated. If you buy assets that are completely correlated with each other, like, Bitcoin and Ethereum, well, if they move in tandem, they haven't really correlated that much, If crypto falls, in general, you're in trouble.

The reason people should own gold is that gold is the most uncorrelated asset. Gold is the most uncorrelated asset to stocks, bonds, and real estate.

So if you own real estate, you want something that goes up when real estate goes down. That's a counterweight, right? But if you own stocks, bonds, and real estate, oh, great, I'm diversified. You're actually not, because they all move together in tandem.

One of those big drivers is interest rates. The other big driver is the stock market and in the general economy. So if the general economy is doing really badly, what are the chances that your real estate is doing really, really well? It's possible, but kind of unlikely. They tend to be pretty correlated.

So owning gold, period, is a good idea because it's uncorrelated to the rest of your assets. When gold goes up, usually the rest of your assets aren't moving so high. And when the rest of your assets, stocks, bonds, and real estate are just killing it through the roof, gold is going to hang in there and say, hey, whoa, whoa, whoa, I'll be that little counterbalance.

So if you are into investing, you'll know about the Sharpe ratio, which is just kind of about volatility and smoothing out the returns. Gold is an awesome asset to smooth out returns over time because you don't want a big drawdown.

A lot of people say, well, the stock market increases at 7% a year. That's great, but that's on average. There are some years when it's down a bunch. And if you were planning on retiring that year or having a wedding that year or just needed a lot of capital in that specific year when there's a drawdown, we're kind of in big trouble.

So gold is that asset that smooths our returns, limits those drawdowns, and it's incredibly, incredibly liquid.

Another reason to own gold as a real estate investor is the liquidity. So let's say you have a land or an asset that you're planning on selling. It's possible that literally the next day someone said, hey, Ben, I want to buy that piece of land from you. But I mean, sometimes it can be six months, a year, or potentially never that that asset gets sold.

Gold is a global market, which means that people all over the planet are bidding on gold, which means it has incredible liquidity. You will always be able to sell gold in a bear market or a bull market, which is important for real estate investors because oftentimes it's very easy to sell in a bull market, right? Prices are growing up, easy to sell, lots of buyers, maybe even cash above asking price.

But in a falling market where you just can't find a bid on that land or on that real estate really difficult. And that just will never happen with gold because it's such a liquid asset.

Now, lots of people and famous investors like Warren Buffett have said, “What's the point of owning gold? I want an asset that produces something that actually has a cash flow. It gives me income.”

Gold doesn't have an income. It actually gets dug out of the ground. We pay people to watch it, to store it in a professional vault somewhere, and then it just does nothing. I can open a drawer and 60 years later, ta-da, there's my gold. If I have real estate, I can get rental income. If I have stocks, I can get dividends. I mean, that's actually a company that has cash flow and grows over time.

The company is called Monetary Metals. And what we've done is we've made gold produce an income paid in ounces of gold. So I'll jump into that real quick to explain kind of in a real estate terms, how that works.

So just like any asset, without any risk, there's no return. So if you have real estate and you don't rent it out, which is, of course, a risk, then there's no return. It just sits there. You can live in it. It'll go up and down in price. But that's not a return. That's just a speculation on the price of the asset going up and down.

But if you rent it out, you'll have renters, sometimes tenants or business, whoever that may be. And they'll pay you that dollar income to rent that asset from you. You still own the asset, the title of the house, for example, or the title of the building or the land is still in your name, but someone gets to use the asset, maybe for farming or solar panels or just living in, and then they pay you an income every single month. And it's denominated in your local currency, usually dollars.

We've done the same thing with gold in something called a gold lease. So everyone's familiar with how a lease works. How does that work with gold? You would want to rent gold. So here's how it works.

Gold is your asset. Something that doesn't do anything unless you rent it out or lease it out and have some risk to get some return. So you lease that gold out to a company that wants to rent gold.

Now, what company would want to rent gold? That can be businesses in the gold industry like jewelers, refiners, mints, manufacturers, bullion dealers. These businesses have gold work in progress or gold inventory, which means they buy gold raw. Usually they slowly turn it into something, let's say like jewelry. Then that jewelry sits in their inventory from let's say six months a year. And then someone comes in and says, Hey, I'd like to buy, you know, a gold ring. And then they sell that ring.

So what they're doing is trying to kind of arbitrage their gold price and the value add and buying it for less, selling it for more. But you'll notice there's a very big problem with this business. Is that they buy gold, and then lots of time goes by, and then they sell gold.

Gold can go up and down in price. So if gold drops 5%, by the time you go to sell your gold six months later, you're just going to have to take a 5% hit unless you're doing something complicated like buying futures contracts, which bet against the price of gold.

Well, I mean, a jewelry company is now doing futures contracts and rolling futures on gold prices. It gets complicated, but that's not even the only issue.

The other issue is that precious metals are very expensive. So remember, we were talking about copper and bronze, hundreds and hundreds of of tons of copper really aren't that expensive. You can actually buy that pretty cheaply versus hundreds and hundreds of tons of gold. It's going to be quite expensive. It's a precious metal.

And so that means that business is going to tie up working capital on precious metals. So that can be tens, twenties, hundreds of millions of dollars just owning that asset class while they slowly turn it into something like jewelry or literally just sits in inventory, which means they have to write a check every year that just sits in inventory.

So what we do at Monetary Metals is we take that entire supply chain and we lease it to the company. So that means the title, the actual gold is owned by the client of Monetary Metals, but the use of it, the location is at a jeweler, a refiner, a mint, a bullion dealer as their inventory or as their work in progress.

Now everyone's first question is now, wait a minute, Ben, I remember you saying that the jeweler sells a gold ring at the end of this process. So aren't they selling my rented asset? How can that be?

And the answer is, although their business needs to sell gold and silver, they don't need to actually sell that rented amount. So let's say someone's renting as a jewelry business, a thousand ounces of gold and a wife walks in and says, oh, I love that ring. I want to buy it. And it's a one-ounce ring. It's pretty heavy.

So instead of the business selling one ounce and now only having 999 ounces, what they do is they go into the market, they quickly buy an ounce and sell it. So that they always keep that 1,000 ounces as the rental amount, but you can buy and sell as much gold as they need.

So if someone walks in and says, I want 1,000 ounces of gold, great, they buy 1,000 and quickly sell 1,000. So they're not exposed to the price, but they can still fill that need while having that full work in progress and inventory in the spot where they need it.

So pretty much what a gold owner is doing is saying, hey, take my asset, rent it out in a a lease to a company that needs work in progress or inventory financing, and in return, I want to be paid an income.

Now, the specifics in Monetary Metals is that that income is paid back in ounces of gold. So if you had 100 ounces, you rent it out at a 5% interest rate, you could end the year with 105 ounces of gold.

That's regardless of whether the gold price goes up or the gold price goes down or just stays sideways. So the gold price can go from $2,000 to $1,900, or you go from $2,000 to $21, you still get the ounces no matter what.

For a gold owner, this is really beneficial because not only do you pay zero storage fees because our gold's not being stored. You pay zero storage fees, you have insurance on the gold because now someone's watching it, there's actual controls to make sure, hey, wait a minute, this jeweler isn't selling the gold or running away with it.

And you get an income statement every single month denominated in ounces, which means if the gold price falls, you actually get a little bit of a cushion because you've earned a couple ounces that month. If the gold price rises, that's just extra gravy for you because you got a couple of ounces that month as well.

So it's a way to have a long gold position to own gold, still have that physical aspect, right? It's physical gold and you're getting paid in physical ounces, but you get income every single month denominated in ounces of gold.

Now, of course, if you want to sell some gold and make dollars, great, you can always do that. Or if you just want to keep those ounces, let them grow and compound, you can do that as well.

So what Monetary Metals has done is just said, hey, everything that you understand about rental income from leasing, let's do the exact same thing, but for precious metals, gold and silver.

Seth: Yeah, so a bunch of questions came up as you were talking, and you may have told me the answer, but I just didn't catch it or I didn't understand it, but I just wanted to verify some things.

So let's say I've got a precious golden ring from my great-great-grandfather. It's a one-of-a-kind item, but I want you guys to take it and make me some lease revenue from that. So where am I sending this thing? Like, where is it stored? Or who, like, does that actual ring get consumed by some jeweler and made into something else and I lose it forever? Or does it just sit somewhere and somehow it's like used as collateral for this? I'm not sure if I totally followed that.

Ben: That's a great question. And we get it a lot, right? Someone will say, hey, I have this coin from 1902 or my grandfather gave me this beautiful ring or this, you know, necklace made out of silver. Can I use that as collateral?

That's a little bit of a different product. We're not doing collateralized loans based on some asset. People do that all the time with boats and houses. This is actually the physical rental of a physical asset, in this case gold, in an actual physical location…

So if you're turning your gold into something called pool gold. So what does that mean? So if you have a ring, a nugget, or a bar or a coin, that's actually some sort of product. It's a bullion product.

What we do is we melt that down and then it becomes pool gold, which is just the most liquid form of gold possible. So it's not a ring, it's not a coin, it’s called pool gold. And that's the most easily transferable and manageable for companies like mints, refiners, and jewelers because they need it for different purposes.

Now, when you want to actually redeem or sell your gold, then it becomes a product just like anything else. If you said, I want Krugerrands, I want Eagles, I want a bar, totally fine. We'll redeem it into some physical product and we can ship it to you. Or if you just want to sell it as gold, you can sell it as gold.

What I always tell people is similar to if you ever got out your first dollar from working and you hang it up on a shelf somewhere, you have it framed, you would absolutely never take that dollar out of the case, put it in an ATM, and then come back a week later and say, oh, thank God I got my dollar back. That's definitely not the same dollar because dollars are fungible. One dollar is the same as any other dollar, right?

Gold is the exact same way. Gold is fungible. So if you had a product with some sentimental value or it was like something like a ring or a coin that you really cared about, probably not a good idea to send that in simply because it's going to be turned into pool gold.

And if it can't be turned into pool gold, it's not going to be usable for a lease. So the answer is absolutely send in bars, coins, just regular products that you own, but understand that they're going to become pool gold. You can get them back as products. They're just not going to be the same one.

So if you had one from 1902, probably best to keep that one on you.

Seth: So you do officially lose whatever that unique physical item might be. And say if I got five bars of gold worth hundreds of thousands of dollars. Do I just drop it in the mail? Is there some secure way to make sure it's safe in transit?

Ben: Yeah, absolutely. So if you live in the United States, we cover the shipping and the insurance.

And of course, we want to be working with companies that are keeping an eye on the gold, right? We don't just say, hey, you know, walk it over to us. It'll be assessed, of course. And then depending on what type of product you're shipping in, if it has some value over par over the stock price, you'll actually get more in ounces in pool gold than you would as just the actual amount.

So let's say you had a one-ounce Krugerrand, there could be a chance that depending on the product, you'll actually get more than one ounce of gold in the program because you're getting a little bit of premium there that's being liquid.

So the answer is that, yes, it's shipped, it's insured. And of course, it's got to be shipped in a certain way. We'll help you with the shipping and handling and all that stuff. And of course, we'll pay for it. But yes, absolutely. It's not something that you just kind of say, oh, I'll walk it over. We make sure that it's secured and also insured as well.

Seth: So I guess I'm mailing it to your office or something or a location that you tell me to send it to, and then you or somebody melts it down, and that gold gets sent to whoever that lessee is as they need it. They say, hey, we need this much gold this month, send it to us. And what they're getting is part of the gold that I send in. And then they use it and pay you cash or something?

Ben: Yeah, it's a great question. So you'll probably ship your gold to a vault partner. It's not going to go to the office. We're in Scottsdale, Arizona; we definitely don't have any gold at the office.

But in terms of how the lease works, great question. So each lease is usually a one-year term.

So the same way that you rent a car for a year, the lease is usually for one year, which means your gold is being rented in a specific lease for one year. And they're fixed income products, which means that the rate of the year is fixed. You get a certain interest rate, anywhere from 2% to 5% interest on gold and silver in leases, and every month you will get those ounces deposited into your account.

So you will look at your account statement and it'll say you earned 0.04 ounces this month. And again, with bull gold, it's super easy to do small fractional amounts of ounces, which you'll be earning every month.

And then, over the annual period, let's say January 1st to January 1st of the next year, you will have earned those ounces at that specific fixed interest rate. So if you have 100 ounces at 5%, that's 105 ounces at the end of the year that you'll see in your account.

Now, if you wanted to liquidate all of your ounces for dollars, totally doable. You can say, “Sell my gold, wire me the dollars.” Or you could say, “Sell just some of the gold. I want you to sell only the interest payments. I want you to sell half of it because I need some dollar liquidity.” Totally fine. And the income is always paid in ounces. So you get the upside or the downside of the gold price.

So the gold price increases, the dollar price of the gold that you own, plus the interest income also increases as well. It's for a one-year period. So you're kind of locked into the lease for a year.

And then every year, there's an option usually to roll that lease, which means the person leasing the gold says, hey, can we have that gold for another year? Because we really like this financing option.

And you get to say, opting in or opting out, whether you want to keep your gold or silver in that specific lease. Each lease comes up about once a year. You decide, is the interest rate good for me? Is the risk good for me? Is the company good for me? Or do I need some liquidity? I'm going to step out of this lease.

We're not a bank, so all of the options to opt in or opt out are totally up to you. Versus in a bank, you give them your dollars, they’re like, “See ya. We're going to give you the interest rate. If you don't like it, sorry, we're going to fund mortgage-backed securities. We're going to fund ESG. We're going to fund whatever, and you just get the rate that you get. You're upset? Take your business somewhere else for an even lower interest rate.”

So in Monetary Metals, going back to the interest rate discussion, there's a floor and a ceiling on the interest rates. Because if we said, “Hey, Seth, send us your gold and we'll pay you 0.00001% interest on it,” probably not worth the small risk, right? There's always risk, but it's probably just not worth it for such a small return.

Now, on the other hand, if we said, “Hey, Seth, we're going to pay you 10,000% interest on your gold.” You would be knocking over your grandma to try to pull out her gold teeth to get us the gold, right?

But obviously, no business has a business case to lease gold at a 10,000% interest rate. For them, they're like, well, we might as well do futures contracts and just take the risk of hedging and tying up that capital.

So there's actually a beautiful economic reason for a ceiling and a floor on the interest rate of Monetary Metals, and it's stable. It's not going to be that the one-year interest rates are 50%, the next year they're back to 0%. Which is very interesting; you're seeing a monetary experiment in real time. Dollars have interest rates that can swing violently and stay at zero for a while. Versus at Monetary Metals, it wouldn't even make logical sense to have a zero interest rate because there's risk, but no return.

And of course, on the ceiling, businesses don't want to rent at exorbitant rates. So there's kind of that beautiful band that's very stable and kind of remaking this gold interest rate system through a private business.

Seth: I mean, right now you can put money into a money market account. You probably probably hear this all the time and make like five-ish percent, which is pretty high. So I see that option.

And then I see gold where I could make at the most 5%, probably less than that. There's also the upside or downside if the value of gold goes up or down. So there's that little question mark. We don't really know what that's going to do.

So is the main reason to consider doing gold anyway, even though we'll make less right now than a money market account might make, would the reason be just for the sake of diversification and the possible upside if value goes up?

Ben: Well, I think there's actually lots of reasons. And one thing I'll mention that we can get to right afterwards is there are two different products we have at Monetary Metals.

One is called the gold lease, and that's what we discussed, rental income from gold.

There's also something called a gold bond, which pays much higher interest rates. The last gold bond paid 19% interest on gold. I'll explain how a gold bond works.

So let me quickly go into a gold bond, and then I'll answer that kind of interest rate question, dollars versus gold. So how does a gold bond work?

Remember the gold lease, you had physical gold, it was rented out, we pretty much changed the location, the title, the ownership remained with you, it was always physical gold, and it got paid every single month to rent it. Pretty basic understanding once you get how the mechanics work.

A gold bond is actually a different product. It's for accredited investors only, which means you have to actually meet a certain threshold to even invest in the product. And it's different than a lease.

In a gold bond, gold bonds usually finance mining operations. So what does a mining operation need? Gold bond financing.

Let's walk out you through how mining operation usually works, and then we'll explain why gold bonds work.

So a gold miner has a super basic, easy business model. Get gold out of the ground for less than it costs you to do it. Sell for profit. Pretty simple. One big problem. Gold miners often need lots of financing, right? They don't have $10 billion to just create a new mine or pay for labor. They got to get a loan.

And that loan is a dollar loan. You'll notice there's a mismatch. They have a gold income, a gold asset, but a dollar liability, a dollar loan. Well, you'll notice, like we said, if the gold price moves up and down, they're kind of just speculating on the gold price. They're taking out a million-dollar loan, hoping that the gold they get out of the ground is worth more than a million dollars by the time they have to pay back that loan, which is kind of scary bets to them. They have to take on the gold price risk.

Now everyone says, why don't they just hedge? I never put the word just in front of any financial move, but definitely not the words “just” and “hedge.” Hedging is incredibly complicated. It's very expensive, and it's also very risky. The gold price can move and you can be underwater just on your hedging program.

Again, these are gold miners. Their core competency is not hedging the gold price. They're not a hedge fund, right? The reason they went into the gold mining business is because they understand everything about gold mining, not everything about hedging the gold price.

So that means usually an outside expert, a business that they're just sending money to to try to hedge the gold price, which means more money, more complexity, and just something outside of their main business.

So what Monetary Metals does is we offer them a gold bond. This is gold financing. So it matches their gold asset to a gold liability.

Here's how it works. We give them, let's say they need $1 million worth of financing. We would give them $1 million worth of ounces. They would take those ounces, sell them for dollars. Now they have $1 million, but they have a gold ounce liability, right?

They owe us those ounces. They take that $1 million dollars. They use it for labor, equipment, machines, whatever they need to get that gold out of the ground.

And once they do get the gold out of the ground, instead of looking at the gold price and selling that gold for dollars, they simply take that ounce amount, let's say it was 100 ounces, they pay back the 100 ounces plus whatever that interest rate is. So at 10%, it'd be 10 ounces; 20%, 20 ounces. And it matches their asset to their liability.

Gold in, gold out. You'll notice it doesn't matter what the price of gold is. The gold price could go up 10%, down percent, 10%, not moved at all. It doesn't matter. They owe gold and they give back gold from their gold profit.

The same way that if you have a business that makes U.S. dollars, but you have an employee who's in the Philippines, I got to pay him something in local Philippine currency. I don't even know what the currency is. It would be much easier if he said, oh, I'll accept dollars. Then you don't have to worry about the price, right?

So a gold bond simply matches the financing for what a gold miner has, which is a gold income.

Now, you'll notice that it's very different than a gold lease, because in a gold lease, the client of the gold, it's always physically present, right? We can do checks on it and do inventory reporting. It's always physically there. There's insurance for theft, loss, all those things. In a gold bond, your gold is sold for dollars.

And now you take the risk that that mining company doesn't actually get the gold or silver out of the ground. Now, of course, we're only going to finance companies that are either currently getting gold out of the ground or just one capital infusion away from getting gold out of the ground, because we want to make sure that there's actually a chance your gold will very likely be paid back the capital plus those interest payments. But because that risk is different from a gold lease, the interest rates are much higher.

One other thing to think about in a gold bond versus a gold lease, which real estate investors will know very well, is that jurisdiction matters. For example, having a high-rise condo in New York City, whoa, that's crazy. Having a high-rise condo in maybe Oklahoma, okay, maybe not so crazy.

Same thing with a gold bond. A mining operation in Chechnya has much different risks and returns than a mining operation in Colorado. Not to say that one is better or worse. They have different risks. But then you'll just notice that the interest rate is going to have to change.

So our first gold bond paid a 13% interest on gold. So that was with an Australian company called Shine Resources. They're an Australian mining company. They bought a gold bond that financed their operation. And when they got the gold out of the ground, they paid interest rates in around the 12% area. The latest gold bond is paying 19% interest.

And we said, whoa, that's a real big number. Well, the reason is because the actual jurisdiction, although the company operating the mine is called Acobo Minerals, they're a Norwegian company, they're on the stock exchange, the actual mine itself is in Ethiopia. Well, Ethiopia has many more risks than a place like Australia does. There's jurisdictional risk. There's all these risks to the continent that just aren't present in Australia. And to pay investors, you have to to pay them for that risk.

Some investors say, I don't want to face that risk. It's not worth the return. Others say, great, 19%. I love the bond. So that's where you can see different rates on gold.

So for investors who are very conservative, they can do something like a gold lease, always physically present. There's insurance, inventory reporting, tracking the physical gold.

Or for investors who want higher returns, they can look for options that have higher returns through other financing vehicles, which just have different risks to them. All of those options are present it to the investor, and then they get to decide just like in a free market.

Seth: Is there a minimum investment amount if you wanted to invest in a gold bond?

Ben: It's 10 ounces of gold or 1,000 ounces of silver, which at the time we're talking is about $2,000 an ounce, so about $20,000.

But the gold bonds, it kind of depends on each bond. So sometimes there will be a minimum, other times there won't be a minimum. But usually, about 10 ounces for a bond is about right.

But yeah, it just depends on each bond. The leases you can obviously, what we do at Monetary Metals, is we put your ounces into all of our different leases. So not all of your ounces are on a jewelry lease in Ohio. There'll be in a jewelry lease and a mint lease, a bullion lease, a refining lease, just so that your ounces are not only spread to get the best rate of risk, but also the best rate of return, so you get diversification across the leases.

Bonds are different since they come one at a time, they're securities, and then investors just decide whether or not they want to join.

Seth: And did you say what the general duration is of that? Like, is this all happening within a year or two years or five years or how does that work?

Ben: So bonds range in duration. They can be anywhere from two to five years. Bonds just have different durations simply because mining operations have different kind of times to them, right? Interest payments come a bit differently depending on the bond versus a lease.

And that's just simply because of the nature of a business, which is another reason why financing through Monetary Metals is much better than financing through a bank for these businesses, because we understand the gold business. We understand, hey, you didn't get gold out of the ground this month because you're doing some sort of survey or different mining process. We understand that. And maybe we can, let's say, push the payments, frontload them or backload them.

Or in a lease, we can say, let's make sure that before we do this lease, you have certain risk parameters or insurance to make sure that no one steals the gold by accident, or it gets damaged or lost.

And we present all of that to the investor in the slide deck, and then they get to choose.

So depending on the duration, there's also risk as well, because you have illiquidity. You might say, hey, I like this idea, but in a year from now, I'm having a big capital raise, or I might need capital to buy a new property. I'd rather do a lease, even though there's lower returns, but I know I'll have that liquidity.

So it just depends on the preference of the investor.

Seth: So like this Ethiopian gold mine, for example, let's say it takes three years for this all to happen and everything goes according to plan. Do investors earn that 19% back like one time at the end of those three years? Or is it like once a year, it's like, “Here's your 19% payment. Let's keep going.” How does that work?

Ben: The leases are paid monthly. So every month you'll see in your statement balance, hey, you got paid this much ounces from all these different leases.

Bonds, it really just depends. So sometimes the payments aren't every single month, but they're much more closer to monthly than they are to one big year. And again, that just depends on the bond and the way that the mine operation works. But that's disclosed up front. And for some people, they're like, hey, if it's not monthly, that's not going to work for me. You're probably going to want to do leases.

If you're saying, hey, I like that 19% return and maybe a little bit different of the payout structure or how often that fixed income is paid to me is totally fine, then a bond is for you. But yes, the answer is generally monthly. It's just on certain operations that does need to be tweaked, but you'll know that as an investor going forward.

Seth: I always wondered, how do miners know where the gold is? How can they accurately predict this? Is there some kind of technology that can go underground and figure that out? Or is it like, well, we see a vein here, maybe there's something, let's blast it open and see what happens. Maybe we'll get lucky.

I have no idea how they know that and how risky is it that you'll invest this money and like, oh, sorry, we couldn't find anything. Thanks anyway.

Ben: Yeah. So that's a great question. And a lot of people say, wait a minute, how do I know that they're going to find gold?

And we do a really good job of doing due diligence on these companies to make sure that they're either already producing gold or that they're just one shot away from producing gold, which means that they have gold in the ground, that they can see it's right there. They just need $5 million to get it, right?

What you're talking about is something very different. That's gold mining. What you're discussing is gold exploration or gold assaying, where people go, wait a minute, we see a gold vein here. I wonder if there's more gold beneath the ground or if it's just this one small vein. Or, this land is huge; I wonder if there's any gold here at all.

And so there's different levels kind of on a spectrum from all the way to mining to just exploring. And so if you want to think about a risk-return spectrum, people who are producing gold are much less risky. It's just like a business operation like anything else. They have pretty regular flows versus something like an exploration company. I mean, they might never find gold. Now, as an investor, you take the risk of them never finding gold through the potential of a huge payout.

So let's say you invested a dollar in an exploration company. And they hit big, oh my gosh, your dollar might be worth $20, right? Because they found gold and this could become a real mining project. Versus just buying that same miner 50 years later, it's probably not going to be a huge return.

The issue is that there's a huge amount of risk because most gold mines either don't come operational, never find gold, or just aren't profitable. So that just opens up the risk-return spectrum for gold owners.

Again, it's just a little bit of a different asset because you're buying a business. You're not buying an asset. If you buy physical gold, you're buying a commodity, right?

You can still go up and down in price, but you have the actual physical asset versus buying a company, you're buying managers, people, and just outside risks that really aren't there with something like a commodity.

Seth: In terms of the risk, how often do people lose money on gold bonds or at least get less than the projected return was going to be? I have to imagine that happens. So how frequent is that or what would be more likely to cause that?

For example, this Ethiopian thing for 19% sounds like that would be one where there's a higher risk of it not panning out to 19%. But just trying to figure out like, does this ever just completely go sideways? Like, people invest the money and they get nothing back. They lose it all.

Ben: Yeah, it's a great question. The first thing I'd always say is that there's no such thing as a return without risk. If you hear anyone say that, run as fast as you can, either lying to you, scamming you, trying to steal your money, or just a total moron. So we don't say that and we don't believe that. There is always risk if there's some sort of return. The spectrum differs, right?

So in a lease, that gold is physically present. We can do inventory reporting. We can do insurance. We can actually see in weight where that physical gold is the entire time. Is it in a safe? Is it in a vault? Is it on the jewelry floor? Is it in inventory? We can actually track it.

And if some reason they were to say, hey, we only have 90 ounces, we could pull that lease. We could physically go to the property and literally scrape up all the gold and take that lease back. If something were to happen, you as the client, are named as the lost payee, right?

So there's all these different before and after restrictions that we put on the person leasing your gold to make sure as best we can that nothing actually happens, that they don't just take your gold and take it all to a non-extradition country. I'm not saying it's physically impossible. It's just we do our best in terms of due diligence beforehand and procedures afterwards to make sure nothing will ever happen.

And so far, between leases and bonds, nothing has ever happened. Everyone has gotten paid exactly the ounces that they were expecting in their fixed income products, and there's never been any pressure either way.

Now, bonds are, again, different, right? There's that jurisdictional risk, there's that mining risk, and there's just the risk that the management, you know, messes something up. We, of course, have different collateral and different financial tools to make sure that we're as protected as possible for the investor, but it does just kind of depend on the bond.

Not all bonds look alike, and not all collateral looks the same, versus leases look much more streamlined. There's that similar insurance, the title remains with the owner So leases look a bit more similar. Bonds, again, they have different returns and different risks. You just need to read as an investor to say, does this collateral really make me feel good and sleep at night?

The one thing I always say is, if you can't fall asleep at night because of your investment, you probably invested too much, whether that's gold, stock market, or real estate. And not to to say that you should never take any risks. I think that's probably not advisable either. But you want to do something in your preference range.

And what I like while we're doing that at Monastery Metals is we're just really expanding that range. Because before our company, if you owned gold, you pretty much had two cruddy options.

Cruddy option number one, store your gold professionally, which means you got to pay every single year to store your gold in some far-off place with some far-off company that hopefully is trustworthy. And it calls basis points every year. It's kind of eating away at your gold, and it's not even doing it, right?

Another option would be an ETF. This is an exchange-traded fund that holds gold or has kind of some connection to the price of gold, but it's not physical gold that you own. You can't really redeem it. It's not like you can say, hey, you know what? Can you ship that gold that I have to my house?

And again, it's just a different type of asset that still has fees. You have to pay ETF fees to own that asset, so it still has fees. And then the option with kind of no fees would be to store it physically at home.

And for land investors, I really did do some digging into this because I thought this would be interesting for you guys because a lot of people say, hey, Ben, if you don't hold that gold, you don't own it. I don't want to take any risk with my gold whatsoever.

I totally understand. If there's no risk you want to take with your asset, that's totally fine. No one's forcing you to become a client of Monetary Metals. You don't need to do anything with your gold. And a lot of people hold gold as insurance, right? It's that emergency stash. They're like, wait a minute, if I'm leasing it and the apocalypse happens or a nuclear bomb goes off, where's my gold? I totally understand.

I always recommend that some people have some gold that they own at home, an emergency gold that they tell nobody about, that they bury even, and then some gold that they have in return, the same way that you have some cash under the bed in a safe and other caches in a bank or in stocks or in a real estate deal, just kind of getting that full range.

So if you are a land investor or real estate investor and you own gold, you say, I want to do some gold with Monetary Metals. I want to get that return. I want to get some income, but I do want to have some gold at home on my property.

I would just have a couple of recommendations.

First of all, if you're going to have it in your actual physical house, a professional safe would would be a good idea. You want to store it so that it doesn't get damaged or lost. You want to make sure that you know the code to your safe, and you want to make sure that no one else knows it, right? Maybe your kids, you can write it down somewhere, maybe in your will.

But you want to make sure that you're not just throwing gold coins around under the sofa or just in the basement somewhere where they can get damaged or lost, and God forbid someone steals from you. You don't want it just being out and about. So that'd be my first recommendation.

My second recommendation would be for the people who want even more protection and more security, which is saying, hey, I think at some point they're going to come, you know, confiscate gold like they used to or, you know, demand that people redeem or hand in their gold.

Some people have done something back in the day called midnight gardening, which is where at midnight they went and did some gardening where they dig maybe six feet down and made some seed plant that they put there that looked very similar to a shiny gold coin.

My recommendation is if you're going to do that again, make sure you know exactly where you've planted it. You don't want to be digging up your entire acreage trying to remember, where did I put that gold again?

And then for the people who are really looking for that extra security, I call it maybe like the 80-20 rule, which is like put 20% of your gold coins six feet deep and the 80% like 15 feet deep so that if someone started digging, realized you had some gold, they maybe dig, say, oh my God, here's a stash and then head out. And so the rest, the 80% will be 15 feet deeper, maybe even at a different location.

And then the final thing, which is just for that extra security, have some metal or something that'll beep off a metal detector just around your land so that it's not super easy to just go over and say, boop, there's the gold, and dig it up.

But again, this is just for all the different levels of risk to return. There are people who want the most security. They don't want it lent out. They don't want it loaned out. They just want it on their physical body, duct taped to them, or 60 feet down. Totally great.

And then on the other spectrum are people like you mentioned, who are kind of speculating on gold miners or gold exploration companies that don't have physical gold. They just are taking a big bet on a gold company all the way now in the middle, which is what I call in Monetary Metals, risk-return spectrum, in gold.

For the more conservative investor who wants to just do a lease where it's physically present, they have insurance and other kinds of security procedures on their gold, but they still get a return every month all the way to a gold bond, like you said, in Ethiopia, which has higher returns and higher risks.

Seth: In this conversation, you said that we should all own some amount of gold. How much is “some?” Is there like some ratio we're supposed to aim for? Like if you are worth, you know, $500,000, then have this amount in gold somewhere. Do you have any thoughts on that?

Ben: Yeah, that's a really good question. I mean, it kind of depends on your subjective goal, right? Like or your preference.

So if you're just trying to diversify a portfolio, if you're trying to find some insurance on, you know, the monetary system or inflation, if you're looking for returns, if you're like, wow, gold has increased 7% on average a year, adding anywhere from 2% to 19% interest on the gold, that really just adds to my return, maybe you want to do that. Then it kind of just goes on to a subjective thing.

The one thing I'd say is you should own some gold. Zero is not really a great option, in my opinion. But also owning 100% gold, probably not a great idea either, simply because you're not diversified that way either. I mean, just owning 100% gold, if the gold price falls and you need to send or get your kid to college, well, that's not so great.

But one thing I'd say is that anywhere between 5% all the way to 20% is totally fine. Nothing bad is going to happen. We've actually written a white paper, which you can have in the show notes, called The Case for Gold Yield in Investment Portfolios. So it's specifically kind of as an investment tool.

The question has always been, how much gold, right? The Seth Williams question, how much gold should I have? And the answer is just really dependent on the Sharpe ratio. How kind of smoothed out can you get those returns without sacrificing returns because you're all in on gold?

And so we did an interesting paper because most people outside of Monetary Metals say you should absolutely own gold, let's say 5%. But they're not exactly being honest because they're forgetting gold has fees. If they own gold as an ETF as part of their portfolio, that has fees every year. And most of the time they forget to add those fees. Just funnily enough, they forgot to subtract those fees every year. Same with professional vaulting.

And of course, if you have it at your home, there's probably no fees, but there's probably some cost, right? You have to buy a safe or whatever it may be.

What we did on Monetary Metals is we said, let's actually factor in those costs and then put that up against gold with, let's say, a 3% yield every single year. A conservative amount. But how does that actually affect the Sharpe ratio and your returns?

And I won't ruin it for anyone that wants to read it, but it really makes your returns smooth down and increases returns as well.

So in terms of how much gold someone should have in a portfolio, and I'm trying to never say should, but I do kind of warn people on the dangers of anywhere from zero to a hundred. Zero is too little. A hundred is probably too much. You can always call me and ask me and say, hey Ben, you know, here's my kind of specific situation. Here's what I'm looking for. And I'll give you my opinion.

But at the end of the day, um, you should have some, but you shouldn't have all.

Seth: When you were talking about the fees or the ETFs and that kind of thing. So if I ever want to withdraw my gold from Monetary Metals, I'm assuming there's some kind of fees involved with that, right? What does that look like?

Ben: Yeah. So there's not going to be fees exactly. There are no storage fees. There are no vaulting fees and there are no ETF fees because we're none of those things.

The only thing to just be aware of is let's say you have a hundred ounces and you want to, let's say, Hey, I want some bars. I want you to send me some coins. It's going to go from pool gold back into a coin or into a bar, right?

And those products have higher premiums. So it's not going to be the spot price of gold. It won't be, let's say $2,000, it'll be, let's say $2,050.

So you will actually see probably a coin with, the same amount, but what you add in pool gold would be much higher or potentially a bit higher than when you actually liquidate it into a physical product of some sort.

So it's not exactly a fee. We're not charging you to do that, but to actually turn pool gold into a product, there is some premium involved. So that's the only thing to think about in terms of fees.

I'll quickly explain how Monetary Metals makes money because I think a lot of people are going, wait a minute, no storage fees, no vaulting fees, no ETF fees.You're barely even charging me when I'm converting from product to pool because you get a bonus on the way in and, of course, back on the way out.

So how the heck are you guys making money?

Which is always a good question to ask. Always, no matter what you're investing in, you should ask how they're making money and how you can get screwed.

And so the way that we make money is by charging a spread in the interest rate. So let's say, Seth, you want to do a lease with a jewelry company and that lease pays 5% interest. We would be charging that jewelry company 7% interest and taking, let's say, a 2% interest fee for ourselves. So for you, net, you're still getting no storage fees and a 5% interest, and we're making that 2% spread, and they're charged 7%. So as the investor, as the client, you're not actually being charged. We don't make money from you. We make money from the spread. So always a good idea.

I think I would just kind of end this section by keeping an eye eye on how businesses make money and their incentives. I'm pretty young and I've already know that the gold business kind of has the scammy or kind of screwy air to it, which people feel like they're getting screwed over, or this is a bad investment, or the dollar's going to zero, you got to buy gold.

And the way I would think about this is like, how is the person on the other end of the phone making money from this? So if you get on the phone with a bullion dealer and they're saying, hey, grandma, the dollar's going to zero, you got to buy this coin from 1802, they keep confiscated and it's going to increase in value.

How are they making their money? Well, the way they're making their money is usually on the premium of that coin, right? They're trying to sell you the most expensive coin possible with the highest premium so they can get a really large cut. And then there's lots of fees associated with it. And then they ship it to you, delete your number, and never hear from you ever again.

It's not really a great relationship, right? Because the only way they make money is if you spend more.

At Monetary Metals, the incentives are completely different. We want you to get in at 10 ounces of gold, which means the cheapest gold that you can possibly get, which is full gold, charging the least amount over spot. And we also want to make money by making you money, right? When you earn interest, that means you were in a lease and we made money through a lease fee.

Versus other gold companies like a storage company or a bullion dealer, you just got to be aware of how they're making money. Not to say that there's never a reason to professionally store your gold or never a reason to buy a bullion product. Just something to be aware of when you're doing it.

Seth: As I keep hearing you talk about gold, I think about the land business. And part of what makes it so beautiful is that there's a repeatable, systematizable way to go out and buy lots of land at a pretty steep discount, like just notably less than what it's actually worth. And you basically just get a bunch of free real estate equity when you close on these things. And it's not that hard to make money on them, assuming you buy them, right?

And it just makes me wonder about gold. Have you ever heard of a systematizable, repeatable way to buy gold at a steep discount in a way that's not super risky? Any ideas come to mind when you hear that question?

Ben: Yeah, well, I think the first idea that comes to mind is simply just buying the cheapest form of gold possible. And land investing is a great kind of analogy. You can buy raw land and try to get a discount on the raw land because it's raw land. And there's nothing on it, right? It's much harder to value because there's nothing attached to it.

Gold is very similar. Buying cheap, raw pool gold is going to be your cheaper option as opposed to a numismatic coin from 1875.

Well, does that have value on it? Well, you know, that's much more speculative because people are buying. All these kind of things are just on top of the value of gold, which is just a bunch of atoms, right?

And so kind of the same way with land. Land is just land. It's that land mass that you're buying, which has potential on top of it. But the way to get a discount is going kind of bare bones and starting there and then realizing that potential and other opportunities.

I think of gold the same way. I want to buy gold as cheap as possible. I'm not trying to buy some numismatic coin or some product that I don't need. And then I want to leverage that gold in some sort of income-generating opportunity, whether that be a lease, whether that be a bond.

And of course, I think people do use gold in other kind of ways that are just less official. Like say, hey, I want collateral, right? Well, I got 100 gold bars here for you. That's some pretty good collateral, right? Or for example, you want to move and you need lots of wealth. I think gold is really useful there to say, hey, listen, let's melt this down and turn this into jewelry, and let's ship this to grandma in Argentina.

I think gold has lots of opportunities. I think there's going to be gold in the blockchain. There's going to be crypto gold. But I think the easiest way to get that discount or just get started is trying to buy the cheapest gold possible.

One other thing I'd mention, if you're going to buy a bullion product, call around. Don't get on the phone with someone and immediately buy something. Call them, hear their price, go online, check other prices, talk with this person. They want you to quickly make a decision and pay them and then never hear from you ever again.

That's a really bad way to buy something. The same way that if you went onto a property and someone said, come on, man, you got to buy this. This property is going five seconds from now. That's really not a great way to make a decision. You're emotional. Things are moving rapidly. It's hard to kind of take steps and processes to say, am I really doing the right thing?

So if you're going to buy a bullion product and not spot gold or the cheapest form of gold possible, or look at a lease, or look at a bond presentation, or have someone walk you through it, at least look around, right? At least see other options.

Because again, gold is fungible. That land, that real estate, that opportunity isn't probably very fungible. That one condo in Minnesota, that's not the same as a condo in Miami. But gold is the same as gold.

So just be careful when you're doing that and really try to make sure that you're getting the best deal for yourself. So if you are going to buy a bullion product and you are going to get gold, make sure that you're looking around to make sure you're getting the best deal.

Seth: So, I mean, given that you guys don't really care what form the gold is in, you don't care if it's a coin or just a rock or scrap gold or whatever. Is it safe to say it's not smart to take all of your gold bullion and send that to you instead? Instead, finding just the cheapest form of gold you can and send that. Is that an accurate thing to say?

Ben: Partially. So we do somewhat care what the form of gold is. You would need to be able to send in some recognizable bullion product, whether that be a bar or a coin. You probably can't just send in a piece of jewelry. We'll definitely not accept a necklace that has some gold in it.

And so it does need to be somewhat of an official bullion product, but it can be a Maple Leaf. It can be a Krugerrand. And it can be, you know, pretty much any recognizable form of bullion product.

I just wouldn't recommend trying to ship in jewelry because that won't be easily turned into pool gold. There are ways to do cash for gold or liquidate that to actually get the physical gold out of it or get the cash for that gold. But yeah, I usually wouldn't recommend sending in something like jewelry. I just usually stick to something like an easily recognizable bullion product.

And I also recommend that for buying as well. Well, usually speculating on the gold inside of some other asset is much more difficult than just buying an easily recognizable product.

Seth: And when you say easily recognizable bullion product, does that include like a bar of gold?

Ben: Absolutely. So coins, bars, they'll usually have a stamp on them. And you'll see that in the movies. There's always that stamp.

What does that stamp say? It'll usually say something like “Perth Mint.” It'll come from an official mint. It'll come from the U.S. government. It'll be a Krugerrand. It'll have some kind of marking on it. It's some official product, usually from a government, that'll say, you know, this has X amount of ounces in it. It is this type of product.

One thing that’s interesting, you know, some gold has other kind of metals in it just to keep that durability. So sometimes you'll measure it and it'll be, whoa, the weight on this is different than what it says on the coin. Understand that that's probably just dependent on the coin, but you should always check and make sure.

But yeah, absolutely. Anything like a bar or a coin can be an official bullion product. And you'll just check and see, hey, does it say Perth Mint?

Again try to stay away from things that are really weird. Like, Wombat Coin from Uganda. That's really not a highly liquid gold coin or gold bar. Mostt people are going to be like, I don't know what the heck this is, I gotta check to make sure this is real. You don't want someone to do that. You want to be saying, “Hey, I got a silver coin or a Maple Leaf,” that everyone knows, everyone recognizes easily, sellable, easily liquid, and that you're not going to be worried, wait a minute, is this going to be worth something in 20 years from now?

Seth: So I can't send in my kids’ chocolate coins and hope that you don't figure that out, right? You wouldn't accept that kind of thing?

Ben: Well, actually, it's interesting. So Hanukkah has just happened and you'll notice there's something called Hanukkah gelt which is those little gold coins with chocolate in them. And theIsraelii currency is called the shekel, and what's kind of interesting, just a fun fact for nerds out there, is that “gelt” is the old word for gold and “shekel” is the old word for silver.

So you can see that gold and silver have been money for pretty much forever as long as we've been people in a civilization.

So Hanukkah gelt is gold, right? That's why they're gold coins. And so you can just see why, over time, people have just been fascinated by these monetary metals, not only in terms of they're beautiful and they're shiny and they're cool and they're fun to collect, but also they have this real economic reason as to why we chose them instead of something like copper.

And it's kind of interesting to see like, wow, for thousands and thousands of years, people have found gold and silver, not only interesting, but monetarily interesting.

And I find that Monetary Metals is that kind of interesting monetary science experiment in the current day where you can say, whoa, it's cool. I find gold and silver interesting, not just as collectibles, but as money, and money finances things. Money pays interest, right? It should.

And so it's kind of interesting to see that gold standard plumbing start to reemerge as a private business has realized, wait a minute, we can incentivize gold to flow.

I think one thing that I found very interesting studying economics was most people thought incorrectly that the regulator of flow was price. So people said, wait a minute, the gold price is being manipulated by the governments. They're trying to hold it down because then people will realize when the gold price rises that the dollar is worthless.

And that's just obviously, empirically, not true because the gold price has risen quite a bit. And people are no closer to using gold and silver as money than they were 20 years ago. And what's the reason for that? Well, the reason for that is because price is not the thing that is arbitrating whether gold flows or not.

It's interest. It's income. Because when people can earn income, then they're likely to actually take their gold hoards and stop hoarding it and use it to produce and use it for finance and then earn an income.

And when you use it for finance, earn an income, then you're more likely to spend it. And then businesses, economies, and plumbing happens all around that interest. But it's unlocking of interest, that's why it's unlocking the productivity of gold and monetary metals, that is actually the regulator of flow.

An easy example of this, if dollars all of a sudden had zero interest rates. What would be the point of putting your dollars in a bank? You might as well keep them at home, right? You might as well have them in a safe somewhere or have them physically on you, because what's the point of risking them in a bank somewhere if you're not getting any return?

And actually, there's empirical evidence in places like Switzerland and Japan where interest rates were technically negative, where it would actually cost you money to store your dollars in a large enough amount in a bank.

Then what did businesses do? They weren't stupid. They didn't say, yeah, whatever, I guess we'll just lose 50 basis points this year. No, they said, it actually will cost us less money to buy a huge storage facility, a huge vaulting facility, and just physically plant our cash there because $50 in vaulting fees is way less than 50 basis points every single year.

And so people respond to incentives. And it's very interesting to see that the real incentive in our economy is interest. That's why it's so detrimental that the Federal Reserve took over interest rates and centrally plans them instead of doing what we do on Monetary Metals, which is have a marketplace where interest rates naturally rise.

Seth: Now, before we wrap this up, so you guys deal with like silver and platinum and other kinds of metals too?

Ben: We absolutely deal with silver. So we've had gold leases and silver leases. We've only done gold bonds. We haven't done a silver bond yet, but absolutely be on the lookout out for that.

And we have done a platinum lease. So one of the bullion dealers also sells platinum, and so they wanted to lease platinum products for us. So we did do a platinum lease, but generally just the monetary metals, which are gold and silver.

So if you own gold and you own silver, or if you're interested in owning gold and silver, those are going to be your two main income products. It's potential that there could be another platinum lease in the future, but generally gold and silver are the two main products.

Seth: Yeah, it sounds like if you're someone who likes to have gold or silver and keep it at home, there's not much of a reason not to send it to you guys. But I guess maybe the question is like, what is the minimum account size? And how can I fund my account? Like, what if I just have like a bunch of cash and I want to get started with this? Can I send you cash or does it have to be metal?

Ben: So if you have physical metal and you meet that 10 ounce minimum, you can totally send it in. You can ship it in. We'll help you do that.

Or if you're like, I don't have any metal on me, but this sounds awesome and I want to do it. Great. You can wire us $20,000 and we'll buy the gold for you. And then you'll have gold in your account, which you can be used at a lease or in a bond.

So we try to make it as easy as possible to fund your account and get started just at 10 ounce minimum. And you can meet that either with a thousand ounces of silver, 10 ounces of gold, or of course, wiring us the cash equivalent.

Seth: Okay. So if I'm going to do silver, you said it's got to be a thousand ounces of that?

Ben: Yep. A thousand ounces of silver, 10 ounces of gold, or again, the $20,000. And then you can split that in some silver, you can buy some gold, totally fine. People kind of like to do some silver deals, some gold deals.

And of course, the leases, you get to opt in and opt out of which ones you want to do, but we try to make it as easy as possible. So you're opted into all of our deals, unless you choose otherwise, you can opt out.

So you'll fund your account. Leases will come up. If it's in your lease yield account, it'll just go into all those open leases and you'll get a kind of amount placed in ounces into each of those deals. So we try to make it as easy as possible.

When leases come up, we'll show you the slide deck. You'll be presented with the risks, the returns, the way the business works, the flows, and then you'll decide, hey, this works for me. Kind of similar in a way to like a rental. So imagine you had a piece of property and a bunch of people said, hey, we'd like to rent your property for the year. We're willing to pay X dollars a month. And you could say, yeah, totally works for me, and just snooze it off.

Or you could be really active and say, no, I hate people who sneeze funny or anyone whose name is Jennifer, I have an ex named Jennifer, fine, whatever. So you can choose to opt in or out.

The difference with Monetary Metals to remember is that the income is paid in kind. So if you have a gold lease, you're getting paid in ounces of gold every month. If you have a silver lease, you’re paid in ounces of silver every month.

Unfortunately for land investors and real estate investors, you can’t get paid in more land. Not that I know of, at least, but it's kind of an interesting way to get paid, right? Like all of your income, this is one final thing to mention here, is that almost all of your passive income, if you're making passive income or income of any sort, is denominated in currency.

And that's a problem because that means that your currency is also, you know, in some ways, a risk to your government keeping that currency valuable. Because if you, let's say, lived in Argentina, like my relatives do, well, the government did a very bad job of keeping that currency valuable. They were tasked with it. Their central bank is tasked with keeping inflation low and all this stuff. And their currency is pretty much useless. It's a garbage currency.

And so if they had passive income from real estate and from stocks and from land and from a business and from a side hustle, that's awesome. You're really diversified across your assets that pay you passive income.

Problem is, is that your passive income is not diversified at all. It's all paid in a single currency, whether that be pesos, reals, rubles, dollars, you're kind of stuck into that one funnel of the currency. With gold passive income, you're getting paid not only in gold every month, which is great, but it's diversifying your income.

So if your ruble income all of a sudden becomes much worth much less, your gold income is probably going to to be worth much more. Because in a lot of ways, gold is just valuing the currency. It's not that the dollar is worth a certain amount of gold. It's gold is worth a certain amount of dollars.

And so kind of changing your understanding, I'll pitch this website. It's called pricedingold.com.

And what it does is it shows you over time, all of these different assets, US real estate, stocks, oil, other currencies, priced in ounces of gold. And so what that does is it actually shows you the true value of something. Wages, housing. You can see, wait a minute, was my house actually going up in value or was my currency devaluing?

Because if you live in Venezuela, oh my God, this is awesome. My house is worth a hundred times more. Oh, that's actually not the case. It's that your currency is worth a hundred times less.

So using gold as that constant, it's always there. It's that economic constant. You can can actually measure whether or not you've increased your wealth or decreased your wealth and not guessing whether it's the currency inflating, deflating, or devaluing over time.

Seth: Yeah. Awesome.

Well, Ben, I totally appreciate your time and helping me understand all this, helping the REtipster audience wrap their minds around it. Hopefully, if the listeners out there were able to make sense of it.

If anybody out there is interested in checking out Monetary Metals, REtipster does have a referral link to them. It's retipster.com/mm. And you can check that out. There's also a show notes for this, where I'm going to include links to a lot of stuff that Ben mentioned. Also a white paper they put together called, what was it? “The Case for Gold in Real Estate Investors or Investment Professionals?”

Ben: Yeah. So we've got tons of white papers actually specifically for your audience. We've got “The Case for Gold Yield in Investment Portfolios.” We've got the “Earn Passive Income in Gold” specifically for real estate investors, where we break down why earn passive income in gold, if I'm already a real estate investor, just like you asked. And then we've got tons of other white papers, like “How Not to Think About Gold.”

And we'll include all those in the show notes. And of course, if anyone ever has any questions, I'm always online and happy to chat because I'm in the REtipster forum, which you should absolutely join.

Seth: It's awesome to have you in there, Ben.

Again, show notes for this episode, retipster.com/179. That's where you can find all that. Appreciate everybody listening.

If you want to go ahead and text the word free, F-R-E-E to to the number 33777. You can stay up to date on everything else going on in the world of REtipster. I'll talk to you next time.

Seth: Hey, everybody. How's it going? This is Seth Williams and Ajay Sharma, and you're listening to the REtipster podcast. This is episode 177. Today we're talking with Logan Fullmer.

So Logan reached out to me recently about coming on the podcast, and when I heard more about his experience and his story, he seemed like a really great fit. Logan is an investor in land and commercial real estate, and he deals with some of the toughest title issues out there and uses them to kind of find some incredible opportunities. And these are three areas that I have a lot of interest in, and I know a lot of other people in the REtipster audience do as well. We're going to talk all about that and learn everything we can from him.

Logan, welcome to the show.

Logan: How are you doing, Seth?

Seth: Doing great. I appreciate it. Thank you. So why don't we start from the very beginning? Why don't you tell us about your real estate investing story? How did you get into it? What did you start with? How long ago was this? And then when, how, and why did you make your foray into the land business? How did that come about?

Logan: Well, about ten years ago, more or less, I'd kind of gotten my first real job. I inherited a little bit of money early on, and I was a poor steward of that, so I spent it as fast as I got it, just about. And it was a substantial amount of money.

After that, I thought, oh, my gosh, I got to figure out how to be an adult. I thought the $1 million was going to last the rest of my life, and it lasted, like, three years. So I went up and worked in the oil field, and after a couple of years, I started saving a little money and thought, okay, let me try this again. And I knew that I had to invest, otherwise, the salary that I made wasn't enough to get me much further in life. I bought some low cost vacant land just outside of downtown San Antonio, just outside of the MSA.

And those lots I was buying for between $5,000 apiece back then about ten years ago, and I'd already lost. I already had an experience with risk and loss and poor choices, and I went in with a bigger concern about my downside risk than more people usually do. Usually, folks are looking at how much money they're going to make on the upside, and they completely forget about all the risks. And this happens. A large part of the people, even after their experience, it continues to happen.

When I looked at this, I thought, what have I seen in the past? How did people make money? And I saw folks buy land and buy houses in older parts of town. And as those parts of town would turn around over a ten-year period, they would get some value, not just rental income, but just truly appreciation. And I remember seeing a couple of different big cities in Texas.

So I kind of had this thought in my mind. San Antonio was very close to where all the oil field areas I was working in. And San Antonio is the 7th largest city in the United States, but it's very undervalued. So I could buy these lots, literally. There was a highway that divided the central business district from some of the lowest values in San Antonio, so you'd have big time value and then nothing.

And I thought, boy, if the value spilled over that one highway, we're in good shape. So I bought a couple of dozen lots with a couple of years of my savings. So $5,000 to $10,000 dollars apiece. At that time, I was thinking, how much lower can the value go? They can't get that much less valuable than $5,000 apiece.

But if they do anything like the other downtowns in the big cities in Texas, they could go to hundreds of thousands apiece. So I've got a good shot at a lot of upside, but the downside risk is very low. So that made me feel comfortable spending every nickel that I had at the time. And the neat thing is, that segment of the story is very short, because within about two years, the market moved. I got really lucky and put all my chips, pushed them across the line there, and bet on black.

Thank God black was the color and the values just started skyrocketing. And the way I found out is I got a call from a realtor that said his client wanted to buy one of my lots for 200,000. And I was all in the whole portfolio for about 300,000. So you can imagine what changed in that moment.

Seth: You didn't learn about the land business from some land flipping course or something like that. You just kind of figured this out on your own, is that right?

Logan: Right. So this was ten years ago. So what we had on YouTube, that's just at the time, the guys, like all the guys that we look at as the old timer guys now, they were just starting to play with YouTube or hadn't even had a channel yet.

Seth: Yeah, that's kind of unusual. I do come across people like that from time to time who figure out land on their own, like, without somebody prompting them and kind of showing them the light. But it's not that often.

I mean, usually people hear land and they just are kind of turned off by it and they walk away. But it sounds like you kind of figured it out on your own and put the pieces together. It's pretty cool.

Logan: My dad was a CPA, so I'd gotten to see his stories about a lot of wealthy people because he got to see their taxes. Now, my dad wasn't wealthy, but I got to hear these stories about folks. And I realized folks usually made their money investing. It was a lot fewer people made it in just some kind of special career. And I realized that I couldn't afford a lot of the investments that were out there at the time. So I kind of defaulted to land because I just happened to be in a situation where someone said, oh, wow, land is cheap in San Antonio.

And I thought, I don't have a lot of money. Land is cheap and it's stable, whereas stocks, I don't understand that. And that'd just be a bigger risk than I took. So that was something that was affordable, it was close and I felt like I understood it because the lot that I bought was right there and no one could move it and it couldn't go up or down in value overnight like a stock. And I thought, this is the easiest thing I can get close to in my proximity and timing.

Ajay: Super interesting, Logan, because I feel like you interpret risk very differently than most. I think a lot of investors and folks listening get super excited at the prospect of doing massive deals, which I do too. I like doing deals where you can add some zeros at the end.

But I want to highlight your philosophy as you were getting started You essentially said, well, it can't go any lower. So if I'm investing five grand, I can't lose more than five grand a pop. But these things can go to the moon, essentially, right? And so they're not really going to go down to zero because their land in San Antonio, this is a great area, but I have a lot of upside here and I think investors talk a lot about asymmetric bets. But you basically figured asymmetric bet out on your own. Just reasoning through, let me throw some money at this thing.

I'm curious, is there a reason as to how you thought about risk back then and why you perceived it that way or anything kind of ingrained in how you grew up?

Logan: I didn't grow up with really much, just middle class, whatever, nothing really special, but neither up here big into investing or any of that stuff. But when I inherited some of that money, I didn't realize it was nearly a million bucks, and it was just the largest amount of money I’ve ever seen. I never had more than $10,000 or $5,000 in my checking account at one time. So when that kind of money came in, I thought I was rich for life. I was young, I wasn't paying attention. And when I lost all that or just blew through it, basically, I remember thinking, oh, my gosh, money can go so quickly. I need to respect it more. I had a good shot at it and it's all gone.

And I remember the next time when I worked to earn a couple of hundred thousand dollars. I remember it took me several years, three years to earn and save this after my income, after my expenses, after my taxes. And I remember thinking, gosh, it can go so fast. So I was really worried about losing it.

Seth: Yeah, for sure. I know a lot of people who went through the last big recession in 2009 and all that, myself included. It kind of scarred me to this day. I kind of have a hard time going out on a limb because I always see the world through that lens. I mean, that's how I entered the real estate investing market. Just saw it, it's very risky.Things can go wrong, things can go terrible, which they can. But that was kind of an unusually bad time back then, and that was not an appropriate way to think over the past ten years, as things have been going up and up and up.

So, it's kind of a blessing and a curse, I guess, when you have that sort of scar in your upbringing, right?

Logan: So there's an interesting balance. I met a guy, he's a local CPA. We started doing business together a couple of years into this. And it's interesting because I still had this care for the downside and risk mitigation. But he is ultra conservative. So there were times where I was willing to push the envelope more, although not near as risky as some people. I kind of helped things grow and expand, but he was always there to remind me, if you screw up, this is how bad it can be.

And I always remember thinking, man, I can swing for the fences like some of these guys that take on huge amounts of debts and take on projects that are real risky, that might have massive multiples, but if we screw up, we have to start all over again. And I remember thinking I would rather grow aggressively, but in a manner that I could control and felt comfortable with than looking for that one in a million shot. But I have good odds that I'm going to lose it all or bankrupt. I would rather be stable and consistent and grow in the long term than keep swinging for the fences.

Because I met guys like that the old time. A lot of developers have been bankrupt multiple times. They've been divorced a couple of times. They've had to move back into that small apartment multiple times from some lavish life. And man, that's stressful, dude. I didn't want that.

So anyway, that mattered to me a lot. But that was an interesting part. But to me, what was more valuable than that particular chain of events was when I went back to the market after I'd found that my lots had gone up in value and I sold several of them. At that point I said, great, I'm going to go buy some more of these $5,000 lots. And I realized there were no more $5,000 lots.

Ajay: Yeah, where'd they go?

Logan: Yeah, there's a really unique situation though. One of the lots that I bought, I got sloppy and I didn't buy title insurance. I was going through this slow process of going to title company, getting a commitment, closing, blah, blah, blah. And this one guy would sell me his for $5,000 or $4,000, but he said, “I'm not going through all the title company stuff. Just come pay me for it.”

So I gave him a check and he gave me a deed that recorded it. But later on I found out that I bought one of five deeds. That's why I didn't want to go to title because he would have to share the proceeds with four other siblings. And I went through this process that summer of calling lawyers, asking them how to fix it, making calls to property, the other owners trying to get this thing in front of a probate judge (it turned out I only need an affidavit of heirship), just all these steps.

And I figured out how to fix that. I picked up the other shares and then I also found there were some judgments and liens along the way. And I had to call these creditors and negotiate them. Some of them were so old that they were no longer valid. I learned a whole lot of information about that property. And I remember when I went back to the market to try to find those $5,000 lots that were no more, they were $100,000, $500,000. I remember thinking, “Wait a sec, there were a lot of people that couldn't sell because they had problems with title.” And I thought, I bet they haven't sold still.

So I called some of those people back and none of them had sold. So I remember thinking, well, there are problems but if I can figure out how to solve them, maybe I can get a deal. And that's when I started offering people just pennies. Like, literally, I'd still offer them the $5,000, but the difference is, I said, hey, you can come to the lawyer's office to pick up the check, and I'll get a deed from you.

I know we got multiple owners. I know we have title problems, but I'll basically inherit your issues. And that's when I started buying the land with problems in tow and figuring out every possible way to solve the problem. And that more or less became the basis of my business model for today. That was eight years ago.

Seth: Maybe that's a good segue. Tell us about your curative title work. Is this like a separate company you have where you help people solve title issues? Let's get into that a little bit.

Logan: So it basically has become the basis of a lot of my companies. It's kind of the feeder to my portfolio. It became the feeder to my cash flow machine. But at the end of the day, everybody's out buying property from wholesalers, sourcing their own deals, figuring out any way to acquire real estate. And I realize I'm looking at the downside risk.

If I can buy something for substantially less than it's worth, I can make a mistake valuing it. I need to liquidate it real quick and get some cash and still make money. All the things can go wrong, and I can still do okay because I got such an extreme discount on it. And that really mattered to me.

So I started acquiring properties with these problems, and it started translating. Into big ranches, I bought apartment complexes with problems like this. I'm talking industrial sites. You'd be absolutely amazed how often this problem exists in the rest of the commercial world.

Seth: If I understand right, are you intentionally going out and trying to buy properties with title issues? Is that what's going on? Or you're helping other people solve their problems with title issues, or what is it you're doing in that?

Logan: My goal is to buy them with the problems, I guess, inadvertently solving other people's problems along the way. But I'm the one that most of the time gets the bigger financial benefit out of that. I'll pay them some amount of money for their share, and then I'm taking on their problems. Then I've got to solve those problems that now become mine because I've got the land.

So at the end of the day, I'm looking for something that's got trouble. It may have judgments or liens, like an IRS lien or a creditor lien that's more valuable than the property actually is. As a result, these folks cannot sell with title insurance. It doesn't work. I'll buy it for a very small amount of money and then at that point I'll go in and negotiate with the creditor, sue the creditor, I'll deal with all the title issues. Maybe I have to open a probate. Maybe I've got to go find some owners that are lost or disconnected, things like that.

And once I get through solving those problems, now I have an asset for $0.30 on the dollar and I can decide, is this development land? Is there something I'm going to go sell to the market and capture my equity? What am I going to do with it?

Seth: So it sounds like the big advantage of buying properties with these title issues is basically you can get them at a huge discount. I think you just said $0.30 on the dollar, that kind of thing. It makes me wonder, though, what kinds of issues are we talking about and how costly and time consuming are they to fix those problems?

Logan: Yeah, I'll say one of the most common ones is multiple owners in unresolved estates. I call them kind of “orphaned estates.” That's one of the big issues.

Another issue is a break in the title chain, meaning someone didn't file a deed 40 years ago and then the next person that bought it sold it to the next person. They didn't get title insurance, but there's this chain of transactions, occupants, users. There's just this gap in the title chain for an unrecorded deed 30 or 40 years ago. Maybe you'll have an unreleased mortgage that's 70 years old and there's no release. And the owners can't find a mortgage company because they're out of business.

Sometimes you'll have a bad deed. Sometimes someone will sell this property and they'll write the legal description wrong. But that deed is from 60 years ago, maybe. That's a problem that has to be solved or the property can't sell the judgments or the liens. Maybe somebody didn't pay their child support liens. They have 250 grand in child support. The properties are 200. That doesn't make sense. All of these problems that prevent a property from selling.

I'll give you an example. Somebody wants to sell an apartment complex. He contracted to sell it. And the guy who was the seller changed his mind and did not close. He backed out. But the person who wanted to buy it still wants it. But he's in this spot. Well, I'll buy a specific performance claim from him and go sue that seller for performance, as long as there's enough equity in the deal. And I'll become the buyer of that after I win a lawsuit, basically.

So, in that case, you got to have millions of dollars at stake. I mean, that deal is $150,000 worth of legal fees. Took two years. I had a couple of million dollars in equity on the line there. So that is an expensive, long, high value-solve.

But some of these aren't so bad. I'll give you an example of a very common event. A property is worth 200,000. I'll buy it for ten or 20 grand from two or three owners. But there are half a dozen lost owners, and none of their probate, none of their heirship has been not. I'll just buy shares at a time and go find people one at a time, and we'll do a big affidavit of heirship or a declaration for heirship in the local probate court. That might cost… I might spend another 20 grand buying shares and doing a declaration of heirship. So that would be on the low end of the expensive side, and then the apartment specific performance would be on the high end of the expensive side.

Seth: In terms of these different issues that you're mentioning, some of them I understand pretty well because I've seen them many times. Some of them, I haven't seen them. But when I think of breaks in the chain of title or multiple owners and that kind of thing, can you just file a quiet title action to fix that stuff? Or is it way more convoluted than that?

And what happens if you take on one of these projects and you can't solve the title issues, and now you have a property you don't really own? Does it ever happen? And what's the risk of that?

Logan: Okay, that's a two-part question.

The quiet title lawsuit is not for multiple owners. That would be a declaration of heirship. That would be a different situation. So you need to be very sure that the share you're buying is legitimate. I've bought shares of properties before that were not shares of properties. So I got a deed for somebody from somebody, and paid them money, and that deed was worth nothing. So I've made that mistake. But I also bought six deeds to the same property, and I got those deeds for a good deal. And that last 7th one that I bought that was worth nothing. Didn't matter because I paid so little for them. I was still in the money.

So that happens a lot. But a quiet title action, a lot of times a quiet title or trespass to try title, those are two curative lawsuits that basically can catch a lot of different problems. A title break in the chain, that's a really common word that I'll use for that type of suit. And what you're doing is you're basically saying, this is my property. I'm saying it's mine. And unless anybody else comes to challenge that, the judge is going to rule in my favor and give me a full order for title. That works on some of these problems.

But when you're talking about the heirship stuff, the simple answer is you have to find everybody, and you have to have a bunch of people sign off on a genealogy report. And in Texas, we have a statute, an affidavit of heirship. And a lot of family members have to sign off on this after this big genealogy project has been done that says, this is my family. These are the heirs. Then an attorney compares the intestate succession chart in the estates code that says, these are the heirs. According to the law, if there was no will, it's a big document that gets filed in the land record, and that becomes your title chain instrument that connects all of those breaks in the title chain from all the owners.

To me, some of the ones I've done have been the worst. You're talking 60 and 70 heirs. So you have to find people all over the world sometimes. Sounds like an absolute nightmare. It can be. I made a million dollars on a 60-heir property. I spent $250,000 paying liquid taxes and buying shares. So I was all in for about 250. It took about six or a little less than six months, about half a year, when I got down the way and resold the property. Sold the property for a million.

So it is a hassle. But for a million bucks, I'll take that hassle

Ajay: Me, too!

Seth: It almost kind of reminds me of when you're trying to subdivide or get entitlements for a property where there's some. Risk there that maybe this won't work out. Like, I'm sinking a bunch of money in that maybe it won't come to fruition. It sounds like kind of a similar thing where you're doing a lot of this paperwork to put the pieces together. Has that ever happened where you went all in on this thing, and you couldn't get all those heirs to sign off, and you're like, well, I'm screwed. I mean, does that ever come about?

Logan: It's happened, but I'm not screwed. So let me talk about the entitlements for a minute there. You're saying you're going to spend all this money and you might not get the entitlements. There are tons where you're not going to do well in that case.

And I've got several, very large, I've got a 250 and a 450 lot subdivision happening right now, one in Austin and one in Dallas. But I bought each of those 30% below market. So I can screw up and spend a quarter million dollars on engineering fees and legal fees and all this.

And let's say I don't get the entitlements. I can still take the property to market, sell it for fair market, and I'm not going to lose any money. I'm going to make a couple of bucks, but I'm going to get reimbursed for my legal fees and my labor and time and the investment. I'm going to get all that back because I bought it below market.

Seth: And that's assuming we have a firm understanding of what market means, right?

Logan: I'm not going to spend three, four, five, 6 million unless I know what market is.

So there are times where I'll pass on them. When I'm looking at the 100 acres it was $7 million. I've got another one that's 200 acres, that's 450 lots, that's $6 million. So if I'm going to spend that kind of money, I'm going to figure out what it's worth and feel good about it, or I'm not going to buy it. So I'm not going to take that risk.

Some guys, they'll cut that check and say, go big or go home. I'm like, well, you might be in the courthouse one day and I might buy that land from the next guy at a price where I got the protection. You see? Different.

But that's how that'll play out of the land development deals. I don't want to take that risk there. But when it comes to the 60 heirs, I've had that situation where I get 40 people in and the other people say, “I'm not selling to you, forget it. I'm done.” In that case, in Texas, we've got section 23, which is a partition of real property. 23, the property code. It's an absolute right in Texas to access your equity and land.

So you file that judicial plea in your county or district court, and you ask the judge to sell the land and you get your share of the money, the partition lawsuit. So you're not ever going to be in a spot where you're just screwed and you can't get your money unless you bought a share that's not actually a share, then you might be. But if you bought a bunch of shares, that judge will sell it and give you your money so you can get out. I had to do that, too.

Ajay: Logan, this is super interesting, and I think most people are afraid to go through the quiet title process, and I think a big portion of that is truly, they just don't understand it. And so could you speak about, number one, who are you hiring to get that done? I'm assuming an attorney, right? But for those that don't know, just what type of attorney are you reaching out to?

Number two, how long does that time take, that whole process take? Number three, sorry, this might be like a four-question stack, man. Number three is, what court is that going through? What judge is ordering that summary of judgment? So I guess who do you hire? How long does it take? What's it cost? What court? Let me know if you need me to repeat that.

Logan: A real estate attorney that's experienced in this specific area. If you go to the doctor, you're not going to go to a quick doctor for a brain problem.

There are a lot of real estate attorneys. You need to find one that specializes in this stuff. I've got an attorney that works for me and he has a lot of this experience, but over the years, working specifically with me, he's kind of narrowed that down. Now I've got half a dozen other attorneys that don't work full time for me. I use them as necessary.

So an attorney that is experienced in this type of lit is what you've got to get.

Ajay: And what would I Google, “title attorney?” Or what exactly would I be looking for?

Logan: You're going to have to Google real estate attorney and start calling them and asking who takes on these cases, what their experience is. A lot of attorneys will say, oh, we do quiet title. And I say, great. How many of them have you done? How many have been successful?

And that second layer of questions, people like you and I are usually afraid to ask an attorney that, because the attorneys are condescending, you think they're smarter than you, you think they're richer than you, you think they know everything. When you take my annual income and divide it by the hours I work, I make probably four to six times what most of the best attorneys make.

So I had to realign my thinking and say, no, I'm the expert here and I need to find the best trade. It's a carpenter. It could be, I don't know, a plumber. In this case, it's an attorney. But there's still a trade to supplement my business. So when you think about it that way, all the questions you would ask a carpenter, you better be asking these to an attorney before you start dropping tens of thousands of dollars to hiring him, before you know what kind of work he can do. So you got to ask the right questions. But when you find that right attorney, then you get going.

Now, when you talk about, you could make a mistake and things may not go your way. You mentioned that earlier and you said, because you don't know what you don't know, is more or less what you're saying. In this case, we look at the statutes, we find out exactly what that is, we compare my fact pattern to that, and I look and decide how closely those line up.

If the fact pattern is darn near dead-on, and I really feel good about that, then I’m gonna file the case. But there are a lot of cases that I've looked at that I decided not to file and not to take because the fat iron wasn't convincing enough or wasn't close enough of a match. So I walked away and didn't take them because I didn't think I could win. I'm not going to take on that case and file that lawsuit unless I think I got a 90% chance or more. Otherwise, I had a really good track record in winning these things.

So it's kind of like that. You don't pick a fight that you don't think you can win. All the boxers do that. Now let me speak to the time. If you're going to get a default judgment, let's say you notice all these other parties that you have a plea and their name might be on an instrument of title chain. And I'm basically saying, hey, everyone, this is my property in this plea. And either you contest my ownership or you let this thing go. But if you don't contest it, I'm going to be the title holder according to the judge's final order.

That's what the summary is. If you get a default judgment and you notice everybody in the title chain and no one responds, you're going to get a default judgment in 90 days. But if folks raise their hands and say, “Whoa, that's my property, and here's why.” You have to litigate it a little.

Quiet title cases, unless you're dealing with a high value in a very complicated fact pattern, if you spend more than 10,000, $20,000, and it takes more than a year, be really surprised. These are usually relatively simple. So less than a year, less than 20 grand.

Seth: I got a question. When you were talking earlier about buying shares in a property, so are you talking about, like, a tenants-in-common situation where that's how the property is deeded to the existing owner, and you buy out one of the owner's shares in the property? Is that what you mean?

Logan: Right. Yeah. So you have co-tenants here in Texas. So what happens is most of these people that have multiple ownership situations, they didn't buy the property. It's not like all three of us went and bought the property, and all three of us are entitled together. That's very rare. That does happen. It's very rare.

It's typically Seth's daddy died, and Seth had four siblings, and Seth died and had seven kids. And now you have this congregation of 18 people. That's the most common tenants-in-common situation or co-tenant.

Seth: Okay. And that's what you're referring to when you talk about buying shares, right? Because otherwise there are joint tenants and that kind of thing. That's where everybody owns all the property together. And do you not deal with those types of properties as much?

Logan: Texas laws are different. We don't have rights of survivorship in our Texas laws. So when Seth passes away, if you don't have a will, Seth, the state's got a will for you. It's just a succession chart. It's in the state’s code.

And when you die, Seth, without a will, that section of the law, the codified laws, basically say who your heirs are. And there's this whole chart that you go through to pull out who says the heirs are.

Seth: It sounds like a lot of what you're able to do here hinges on the fact that you understand Texas law really well. If you were to try to do this in some other state, how much of this would you have to relearn? I don't think you'd be lost. But is there a lot of stuff where it’s like, oh that doesn't apply anymore. And neither does that. That's the Texas thing.

Logan: Yeah. I think once you understand the process and you understand how to read it, how to understand it and how it works, that's your biggest hurdle. Laws apply a little bit differently in each state, obviously, but it'll take you some time to figure that out. But as long as you understand the basis and civil practice and procedure, you'll be able to look at stuff and figure out the difference just by reading the common law or the statute and figure out what to do differently.

But what's neat here is Texas is huge, and I got no reason to go outside of Texas at this point. And I can talk through these projects with people on the phone like that without having to research.

Seth: Now, when you're working through these title issues, do you wait until the title issues are clear and then take title to the property, or do you just buy it and assume you're going to be able to figure it out and then deal with the stuff after that?

Logan: Typically, what I'll do is contract with at least one or multiple owners. I'll get a contract, and then I'll do some real research. And at that point, I'll make the decision to buy pieces of the property without title insurance or continue to work on solving them while I have a contract.

But I would say a large part of the time, I'll buy without the title insurance, and then I'll fix the problems. And the reason is, early on, I would trust people, and I would go fix all their problems. And then at the end, they would say, I changed my mind. And that's how I learned to do so well with specific performance lawsuits.

Seth: That's not cool.

Ajay: That's tough.

Seth: Are you putting down an earnest deposit or something to secure this? And how much time do you have to work through this stuff while it's under contract?

Logan: I do pretty low earnest money on stuff like this. A lot of times, I'll give somebody $500 for earnest, if I'm doing earnest. But because a lot of these are not going through a title insurance company, I'm going to send them a contract that doesn't include earnest money. And I'm basically going to tell them I'm going to close them.

The typical contract in our office closes between three and five days. So I only need enough time to run my own title abstract, get a third party title report to fact-check my work. My attorney and I look at it, and then it closes, usually within a week. So I don't have time to receive earnest money, get it receded, send out copies, everybody. I need to get them to sign that contract, and I'm going to pay them for their deed.

Seth: So it sounds like you are taking title to as much of the property as you can for as little as you can, and then solving the title issues after the fact, just based on what you said there.

Logan: That's right. A lot of folks watching this stuff saying, oh my gosh, that sounds so complicated. But one of the messages I like to explain to folks is it's a lot less complicated than you think because you don't have the right guidance and you haven't been around the right folks to figure it out.

But I'm going to tell you, I look at this and say, I can't understand why everybody is not doing it if they would just get a very small amount of education or read a little bit about it and invest very small amounts of money at a time. The returns are freaking astounding. I bet there's probably half a dozen people in the United States that are doing it at my level and they're all really open and really willing to share.

So if someone's got some, if, let's say they have a little bit more time than they do money and they're willing to invest some time but make exceptional returns, I'd tell people to seek these folks out, go watch all the stuff on the internet, call an attorney and pay them a couple of $100 an hour to explain stuff to you and go buy yourself a deed for $500. How much are you going to lose?

Seth: It sounds like there maybe is a systematized way to intentionally go out and find properties with these kinds of title issues on them. And it got me wondering, say if I want to go out and find a bunch of commercial properties with title issues so I can buy them at 20% or 30% of market value, how do you do that? Because a lot of times you can't really find title issues until you do the title search. And that's when you realize, oh, there's a problem.

Is there a way to, in DataTree or whatever your data service is, only show me these properties that are likely to have a problem? Or do you go to Foreclosure.com and look for those properties? It sounds like there's some special list somewhere that has all this stuff. Is that true?

Logan: Usually the property that have these kind of problems, the problems have been there long enough for the owners to be frustrated, are delinquent on taxes. So there are a lot of different ways that you can go find this stuff. In my opinion, that is the best distressed real estate list ever in the world and probably there will never be better.

Seth: When I hear that, I think, the distressed issue is delinquent taxes. There's a tax lien on the property or something like that. But it sounds like there's probably lots of other different issues on those same properties. Is that accurate?

Logan: Yeah. Usually once you start peeling those layers back on that onion, the first one is the delinquent taxes. But there are usually other layers in there. So let's examine that for a moment.

A property can only be delinquent on the taxes if there's no mortgage. Because if there's a mortgage, the loan servicer or the lender will pay the taxes and then shoot that bill over to the borrower and put them in default many times. So if there is no mortgage on a property, then the taxes can be delinquent. If there is no mortgage on a property, then it's very old ownership, or it's a very wealthy person that didn't use debt and they just bought it. The odds are it's old ownership.

So many times when there's old ownership, title problems exist. Because generally, if a mortgage is for 30 years long, most people don't pay mortgages off in their life. Some do, but a lot of people don't. So let's just say most people buy property and pay it off and live there. When they die, their children inherit it, may not do the right paperwork, and it comes without mortgage liability.

So many times you have second generation owners with title problems and they become delinquent on property. These folks didn't buy property and set out to be a property owner. They inherited it. They were given the property from their parent. So the folks that handled the title problems paid up the taxes and kept the property in good standing. They're not the person you're dealing with. You're dealing with that person that inherited it and really wasn't ready for it.

Seth: Well, this makes me wonder. Of all the different title issues out there, what one or two title issues would you say are the easiest ones to solve? Like when you're aware, okay, that's the problem. No sweat. We're going to take care of that. Just push-button easy.

And which title issues are like, the worst? Like, so bad they would scare you away. What would cause you to say, no, this isn't worth it, I'm running. Is there such a thing?

Logan: Yeah, there is. Or two things.

One of them is low property value. Almost any problem with the property. If the property is only worth 30 grand, I ain't getting out of bed for it. Not worth it.

The other thing is one of the owners is a minor. That's a nightmare. You're unable to buy a minor share for a discount to market, and you're generally unable to buy it for market value. You have to appoint an attorney for them, for the minor. You have to go get a guardianship of the real estate of a minor. You have the estate of a minor. Then the judge appoints an outline of attorney for the minor.

By the time you're said and done to this thing. You had two or three freaking attorneys for this dead gum minor. And if the minor has a very small share, like a few percent. You can afford to pay the premium on it. But if the minor has a large share, 20%, 30%, 50%, you can't pay the premium. So it's not worth doing it.

So if I hear there's a minor involved, I'm out. Unless they own a very single-digit share.

Seth: When you say minor, are you talking about somebody under 18 years old? Are you talking about like a coal miner? Because I keep hearing miner, like, what's the problem with miners? These coal miners, why are they such an issue? That's what you mean now, right?

Logan: Yeah. Somebody who's under 18, it's slow and it's a hassle. Some of these bigger problems, they're okay to deal with. When you're dealing with property, it's worth a couple of million dollars. You're willing to deal with it and pay the fees and take the test of time.

I did one earlier this year. That was about between $5 and $7 million community property estate. And I purchased the community property from the wife. It's worth somewhere around $3, maybe $4 million per share for. I'm not going to say how much, because this will probably end up in court one day. And we're not that far. But I'm going to tell you that you could buy a forerunner for more than I spent for this share of property.

And I believe the husband, who is going to say this is separate property. And we believe that it's community property. I think it'll be a substantial fight. Hundreds of thousands of dollars of legal fees. Many years worth of fighting. But on my side, I got $2 to $4 million on the law. So I'm willing to take that fight.

Seth: What are, like your bread and butter easiest title issues to solve. Like when you see it, it's basically not even an issue. Like you know exactly how to fix it.

Logan: A judgment or a lien that's almost ten years old, that's cake. That creditor is willing to negotiate. The debt is so old, it's almost worth nothing anyway. You give them 10 cents on the dollar, you're settled, done. I don't care how big it is. Good deal. So a low value judgment or a very old judgment.

And then when you have less than half a dozen owners, that's usually a gimme because each share of that property is worth at least 15% to 20%. So if you can buy that first share or two for a small enough discount, or big enough discount, small enough price, you're in the money. You're going to get those other shares from those folks.

And once I buy two, three, four, or five shares, even if the last person says, I'm not going to sell it to you because you want to give me small money for it, I just say, look, let's go sell it at market. I'm going to sell my 80%, you're going to sell your 20%. You'll get fair market value, your 20%, while I'll get my 80%. To me, that's cake. I'll get the three people of the five that agree in contract and close them. Let's go sell it at market together. It's easy.

A lot of folks walk away from a deal who only have four owners and two of them don't want to sell. They walk away from that because they don't know what to do. I just say, buy those two who do want to sell for ten grand or something low, record your deeds, call the others and say, let's go sell at market. You just replace those other two people, but pick up their equity for the discount you negotiate, and then it's a clean deal from there.

Seth: When you talk about low value judgments, that being an easy thing to solve or a judgment that's ten plus years old, is there a systematic way to find properties with just that issue? Or is it, again, back to the delinquent tax list, and just hopefully you'll come across something like that in your contact with those people?

Logan: I think the best way to do this is to start becoming very familiar with the basis of these half a dozen most common issues. Become familiar with them, how to spot them, what you think you might be able to do, and then go start fishing in the delinquent tax list. And once you start to find these and hear the problems, you call a guy like me, you call a local attorney and start to walk through those problems. You would be surprised how much easier you can really solve these.

But a lot of folks just don't want to put in the time. I look at it and say, I ain't about to go flip that house for a $19,000 profit margin and do all that construction and borrow hard money and all that for four months. I'd rather call lawyers and call property owners and make negotiations for four months and make an 80% margin instead of a 20% margin.

Seth: Well, on that thing, because I've seen this tons of times on the delinquent tax list, where there's properties that have a break in the chain of title or like a tax sale in the not too distant past. But I won't know that until I get it under contract and send it to a title company and they do their title search.

And now, at that point, I've already made an offer to them not knowing about this issue. How do you know this stuff before you make an offer? Or do you make the offer and then adjust it way down?

Logan: Well, it can happen like that. You make the offer and you adjust down, but that's really hard to do because the moment you tell someone, you're giving them $200,000, and then you come back to them and say, just kidding, you have all these problems, 20 grand, they don't trust you, and they walk away.

But typically, if you're buying from the delinquent tax list, these folks have already tried to sell. They know they have problems. I know there's usually a problem. So when I'm going through this process, we're scanning the delinquent tax list, especially on the tax sale list, we're plugging these people's names and legal addresses and land records and doing a five-minute title search real quick to see what we can find as we're talking to them.

So, in my office, people are in clusters. You have a closer and you have a researcher. So everybody works in teams of two with this kind of work. So I got somebody, a phone jockey. And he’s like a deal maker who loves to talk to people. They're gregarious or charismatic. They love making phone calls. They're doing that. And I got a super nerd sitting there on the computer running the data.

Seth: How are you doing that five-minute title search? Are you using certain software for that?

Logan: Most land records, there's a couple of iFile pages or websites that will allow you to search all of the land records together. But we're in Texas, we're pretty familiar with the different real property records. So you just get a login to the deed records in your county and log right in, and you can pop the name in and literally see all of the deeds that attach to that legal description.

Or you just go, grantor, grantee, and just keep swapping their names into the search and you'll pull out deed after deed after deed. So it is a skill. I won't say it's not.

Seth: Yeah, I've actually got a video I put together a couple of years ago showing how to do this with DataTree. You can do title searches right in there. It doesn't work everywhere. The county's data has to be available in their system, but assuming it is, you can do it pretty easily there, and there's a cost to that.

Logan: What's DataTree?

Seth: You know First American Data?

Logan: I have no idea.

Seth: So First American, it's one of the big three data aggregators around the country. First American, Corelogic, and Black Knight. They all basically collect this county data from the counties. And First American has a platform called DataTree, and that's where people like us can actually subscribe and get this data directly from them. And it's pretty convenient.

DataTree data is also hooked up to a lot of other resellers out there that kind of pretend to be their own data service, but they're just rehashing DataTree's data. DataTree has a way to do these title searches throughout the country, in most markets.

Ajay: DataTree is where us regular land flippers go to find deals at 50 cents on the dollar, where people want like 120 cents on the dollar pretty regularly. It's a great tool.

Seth: I was actually talking to the folks at DataTree not long ago, and they were telling me that apparently most users of DataTree are not real estate investors. Really, the reason any real estate investors use them is because, well, I don't want to take all the credit, but I started making videos about it and a few other people started doing it too. Most real estate investors use other stuff, like PropStream and that kind of thing. It's really tailored to them. But DataTree is like a catch-all. Like anybody who wants property owner data, you can use DataTree. So I thought that was kind of interesting.

Ajay: That's super interesting.

Logan: Is there a couple of providers that can provide a title report within one day? And they may be using some of this as a background source of information. But I've got providers that for $200 will do a title report and it's 80% of perfect, and it literally gets delivered in a couple of hours for $200, we do a quick report real fast, in a few minutes in the land records, and then we get to the point where we say we're going to do this deal, let's get on the phone, let's start finding people. We'll immediately order that third-party title report and it'll show up later on that day. And we have something to compare our work to just to make sure we're not messing out. It's kind of a fact check for $200.

Seeth: I've made several videos showing how to do this with several different platforms. I'll include links to those in the show notes for this episode at retipster.com/177.

I was wondering, Logan, so I was looking at your Instagram profile, and you got some really fascinating stuff there about some of the deals you've done, like this landlocked parcel that you bought and then put an easement and a road in there. And I think if I remember the numbers right, you said you bought it for $5,000, put about $150,000 of work into the easement and building the road, and then it was worth $500,000. And I saw another one about like an RV, a parking lot that you bought and then a metal building that you bought and turned it into storage.

Are these deals all coming from the delinquent taxes? Like, is that what you're doing right now when you find these deals? Or are they coming from other places, like referrals from other investors, or do you have some other secondary or tertiary source of deals you're getting?

Logan: I would say right now about a third of these transactions are coming from referrals. I really don't like to be the first one that calls to identify a problem because then there's no trust with me. And that's not an indicator of my pitch, that's more a human situation.

So I'm the first guy that shows up and says, I found you have a big problem, by the way, I'm going to buy it from you for nothing. I have a hard time there. But usually when I'm the second, third or 10th person that just gets brought to me at that point, it's real easy. They already know the problems. They've been down this road.

And it's funny, the shoe is down the other foot where these folks are referred to me by a realtor, or we have called them after they have had many years of problems. And I say, look, I think we've identified some problems. This may be the type of project that we take on often. I have a series of questions, and if it looks the way I think it might, I would consider taking on that problem and maybe doing a project like this.

So I'm kind of telling them I might do it, I might not. And at this point, they tell me, “We've been trying to sell this property for ten years. We hired our own lawyer. We've done it all, and no one can buy it.”

And that's when I say, great, would you like to come to my office tomorrow and I'll give you $10,000 in cash? It's a whole different thing, because no one's ever offered that and no one solved it. They already told me. So now I've got an answer for them.

But I would say a third of the deals do come from referrals. We are looking through the delinquent tax list. You can run a search for tax foreclosures in the docket search in your county, because tax foreclosures are judicial foreclosures. They're not like a mortgage, where it's a foreclosure on a deed of trust.

So lawsuit happens for about six to twelve months before the order of sale happens. So we can get into the docket and find hundreds of those.

Seth: Have you had to work really hard on just making it known? Like, “Hey, I'm a guy who deals with title issues. If you have those problems, come and talk to me.” Has that been a useful thing for you to do, given that you have the skill set of knowing how to deal with those problems?

Logan: Yeah, I mean, I've spent a lot of time on my social media talking about, know, my followership is nothing like a lot of folks, relatively small, but it's enough to drive a substantial amount of business over the years.

Ajay: Logan, in terms of foreclosures, so obviously you're dealing with delinquent, you know, a decent chunk of these are tax foreclosures. But are you ever negotiating with mortgage companies as lienholders or banks or people who might be holding first position liens of a mortgage that's going into foreclosure? And how is that different from a tax foreclosure?

Logan: It does happen. A lot of the time, I'll find that there are mistakes. If there's a title problem with the property, they'll have a situation where they made a mortgage with the husband and never got the wife, and it's a community property asset. She never signed that mortgage.

So, unfortunately, they only have half of the collateral that they foreclose. They will only foreclose on a 50% undivided interest, more or less effectively, not the entire share. So I go to the bank and say, “Guys, you only have 50% collateral, but in order to get to that, you got to foreclose and then you have to deal with the other person. Then you have to file a partition lawsuit. Now you're going to look like a monster because you did this. You're going to be in the news. Do you want to go through all that or will I? Sell it to me for a discount and we'll all settle today.”

Man, this is an interesting thing. You take everything for granted. You think the guy that wrote your insurance policy on your car did it perfect and didn't make mistakes. You think the deed of your house doesn't have any errors in it. You think the lawsuit that was filed against all these people, you think all the mortgages are out there don't have problems? Think about this for a minute.

If you fill out a 100-item questionnaire, you're probably going to make a few mistakes. It just happens. We're humans. If you look at every single document and every single process, you find a lot more mistakes than you realize. And those are opportunities.

Ajay: Seth, I feel like your skin's crawling at the thought of every property…

Seth: A little bit. I was actually talking to a different guy, David Hansen, from the last episode. He does fairly complex subdivisions and plat maps and all this stuff. And he was explaining to me all the costs that go into doing that and how much time it takes and the risk involved. And it kind of reminds me of this a little bit. Just in the time and money investment to solving these issues and making it a marketable title and all this stuff and then having a much higher value on the other side.

But when you're figuring out how much to offer somebody, is there a certain formula you're going into this with? It's like, okay, well, the market value is this and it's going to cost me this much and take me this much time to solve the problem. So my offer is this. Or is it just like no, 30% and whatever delta is there between that and the market value, I just could take that.

How hard do you think through that? Or is it just sort of the standard formula is 30% of market value?

Logan: It is case-by-case dependent. But I will tell you a number that sounds really good is $5,000. And another number that sounds really good is $10,000. The reason I like those numbers is they're big enough to be real money, but they're small enough to where if you're talking about real property that has any amount of value, those are small dollars.

So if I'm offering a person 5,000 or 10,000, it can be a very small fraction of the value of the property. But I don't care how much money you got or how much money you got, $10,000 is real money. And if I'm going to put it in your hand tomorrow, the next day, I'm worth a lot of money and I'll pay attention to ten grand, so it matters.

10,000 is a really good number. I use that number a lot, and that number can be used on a $200,000 property, or it can be used on a $500,000 property. If I think the problems are big enough that people are just done with it.

Now, I do, back in a lot of times, I don't want to be in anything for more than 30 or 40 cents on the dollar. So I've got to back into it a lot of times and say, these are the taxes, these are the amount of shares. Total 30,000, but I'm only buying 25% from them. Okay, I can only afford to give them this much, but I also kind of feel through it because you'll hear indicators during the phone call. We're sick of it. I'm done with it. I'll just let the county take it for the taxes. And when they hear that, I'm like, you'll give it to people.

Seth: Logan, I saw you post about a landlocked property that I mentioned earlier, where you bought it for five grand and put 150 grand into it, and then it was worth 500,000.

That struck a chord with me because I come across plenty of landlocked properties and I buy them a lot. I just don't do anything to fix it. I just buy them for super cheap and then sell them for super cheap. But when I thought about this idea of, man, that is a huge jump in value from putting in the easement and the road. I mean, that's just amazing.

And you mentioned in that video that in Texas there are four common law remedies to get access to your property. And I don't know that those laws exist in every state. In fact, I've come across issues where there definitely was not a way to solve the issue, or at least everybody I talked to didn't know how to do it.

And so I'm wondering, if somebody was trying to do exactly what you did and intentionally seek out landlocked properties with the goal of suing for access and building a road. That is the sole business model, only landlocked properties where we can do this. How would they figure out which states make the most sense to do that in? Like, what do they need to research and figure out and then what's the best way to filter a list or find only landlocked properties like that and only go after those? Any ideas on that?

Logan: Yeah, so I know for sure Texas has really good laws for that. We've got a lot of common law that gives you those four remedies. So I might spend a little time doing that research for those other states. But if you get an attorney who knows what they're doing, it's not as complicated as people think.

I mean, you can get into Westlaw or some of these, the programs that they have and type in landlocked, and you're going to find a bunch of case laws. So a lot of attorneys just say if they don't know how to do it, you can't do it. I heard that for several years, and finally I heard a different answer. I realized there's a big business case out here. So spending the time to keep asking people and doing your own research, you'd be surprised what you'd yield.

Now, when you talked about CoreLogic, you can go into the company like that, or even, there's one here called TaxNet that we use, and there are a bunch of different categories of filters. But a lot of these properties, if they're landlocked, it does say it in the appraisal district like metric somewhere.

So you might spend a little time filtering through some data in particular counties that you're familiar with. But a lot of times you can find it where it says that it's landlocked, and they even under-assess the value sometimes because of that. So if you do that, and you could pull that stuff out really quickly in large volume.

I haven't done it that way. I'm really looking at this particular property that was on the tax sale list, and I called the owners, $5,000 in the taxes owed, and $5,000 is what I paid to the owner. So I was in it for ten grand, which is what I actually paid. But you really have to look at the fact pattern and what caused it to be landlocked.

So if you're a single operator and you want to go make a lot of money, you might want to do some bigger projects or other projects. But if you have some people or some help or your time isn't quite that valuable, you can poke through these and you'll see a lot that's landlocked and doing a little bit of research, you'll be able to see that the front property is what used to be adjoined with that property in a single property. And when the front person sold off the back piece and caused the back piece to be landlocked, that's your event that's going to allow you to get access. That particular problem caused land to be locked. That event is illegal in Texas. So you can sue that front tract owner for an implied easement and you'll get it.

Seth: It makes sense. I don't know why that wouldn't apply everywhere.

Logan: All of these situations exist. All of these situations have clues. All of these situations have data pathways somewhere out there. You can get into it fairly easily by just finding a few owners and doing one of those deals, maybe negotiating some judgments or liens. What I'm talking about is ten years in, so they're very complicated and I'm talking about very simply.

But if you really want to get started, pick a couple of problems and just sort your way through it at a low cost every time. And that's when you develop a skill that may not be your everyday full-time skill, but when you run across these deals once a month, that might be where you pick up massive deals because you feel willing to try it.

Seth: That thing you were saying earlier about how you come across an attorney who doesn't know how to do it so they can't say it can't be done. I feel like I've encountered that a lot in my life where people just, what they're really saying is they can't do it, not that it can't be done.

How do you know when to believe that versus saying, no, I don't believe it. I'm going to keep powering through. When do you quit or when do you settle and just accept what you're told? Do you have any guideposts that you use for us? Like, okay, well, this person is this level of smartness, so I'm going to take what he says. Any thoughts on that?

Logan: You know, you'd be surprised. There's a lot on Google today. A lot of these law firms put out good articles, and if you get on Google and start Googling about your problem, you'll find a lot of really good information. And you have to feel comfortable questioning the knowledge.

The first guy that I sat down with was referred to me, the attorney from the title company, and he would say, this won't work. And I would say, why? And he would say, well, because of this. And I would say, why? And he would say, well, because of this. And I would say, why? Like a three-year-old. You really have to be willing to pester the heck out of a professional who thinks he's smarter than you, and you have to get him to the point where he'll either give you a different answer or give you an answer that you really believe.

Seth: Awesome. Well, Logan, if people want to find out more about you or learn more from you about how to dig into these title issues and make sense of them and really get to the bottom of what can and can't be done, where do you suggest they go? Do you have a website for this kind of thing or how does that work?

Logan: I tell people to go to Instagram, type in “Logan Fulmer” on Instagram. You can see it right down there. My name, if you go there, man, I'm easy to connect to. I give a lot of information out here. And the truth is I need those folks and they need me. I can help solve their problem, but I do deals with folks from these referral sources all the time. One in three deals are referrals.

So I encourage folks to reach out to us with these problems. You're going to learn something from us. We're going to help do the deal with you and make you a little bit of money on it. And you might decide it's your new profession, I don't know. But let's start that on Instagram.

Seth: Awesome. And just to clarify, that is logan_fullmer, and I'm going to have a link to that Instagram profile in the show notes, again at retipster.com/177.

Logan, appreciate you spending some time with us today and schooling us on how this stuff works. Appreciate it. And let's stay in touch.

Logan: Absolutely. I enjoyed it. Thanks for your time.

Seth: Hey, folks, how's it going? This is Seth Williams, and you're listening to the REtipster podcast, episode 173.

For years, I've wanted to find someone out there who specializes in solar energy, because as land investors, when we're looking at a prospective deal, depending on the property, this can be a pretty brilliant way to monetize a parcel of land. And this was actually one of the infamous monetization strategies I talked about in one of the most viewed videos on our YouTube channel called “Seven Ways to Make $1,000 per Month From Land.”

And ever since that video came out, I've been working to find experts in each of these different fields to explain in more detail how you actually make money from things like wind turbines or cell phone towers or RV storage parks, that kind of thing.

And I've been waiting patiently for a solar energy expert to reveal themselves to me. And they finally did. And this guy is Dakota Malone. And Dakota reached out to me recently to pitch this idea to come on the podcast. And I was like, yes, please, let's do it. That's perfect.

And today I'm going to grill Dakota on how this industry works and how to determine when this strategy makes sense for a vacant parcel of land. And as usual, we're going to pick up a lot of other tidbits along the way.

So, Dakota, welcome to the show. How are you doing?

Dakota: I'm doing amazing. Thank you so much for having me, Seth. I know that it's always a risk when you have strangers reaching out to you, but I appreciate you taking the swing on me.

Seth: Absolutely. So aside from the little I just said to introduce you, who is Dakota Malone? What is your background and experience in the solar energy sector?

Dakota: Sure. Yeah. I'd love to give you a brief background.

So again, my name is Dakota. I was born and raised in central New York area, upstate New York, currently living in the Midwest, down in St. Louis. And I've been in the energy space. For over a decade at this point.

So I just recently turned 30. It's crazy that I've been doing it for this long already, but essentially I went to community college, got my two-year degree, handed it to my parents, and asked them to leave me alone because I wanted to figure out entrepreneurship for myself. And sustainability has always been a core value of mine.

I've had five heart surgeries, and so my childhood was very atypical compared to the regular person. And really what I did, Seth, was map over those same ideas that I used in human sustainability to take care of myself and really mapped it over into entrepreneurship, and then I went even more meta into building a sustainability company.

And so Community Solar Authority has been around for over the last half decade. We're a stakeholder in the national community/solar partnership, and really we serve as full service consultants to some of the most significant solar developers in the country, essentially helping them in the collective mission of deploying as many renewable assets as possible. And this is at a nationwide level.

So some states have better incentives than others, as I'm sure you can imagine. But essentially, we work with landowners and also large rooftop owners who are seeking to generate value-add from their real estate in order to monetize it further using these solar assets.

Seth: So we can't just gloss over this five heart surgery thing. What happened there?

Dakota: So I was born with a lot of congenital heart issues. I had a narrow aortic valve. The doctors gave me an emergency surgery as soon as I was born. So they went in through my wrist—I had what's called an ablation—and they essentially broke my aortic valve and it was then leaking blood. So I had two emergency surgeries as soon as I was born, three more in high school. A week before I graduated high school, I had my fifth and final surgery, which was open heart surgery and absolutely life-changing, if you can imagine.

But actually, in unexpected ways, it really flooded my life with compassion. And I'll share briefly.

I was in the pediatric unit because I was still 17 at the time. And I was kitty-corner to a young kid who had a similar surgery. I'll try to skip the goriness, but the only way you can leave the hospital after open heart surgery is you basically need to drain your chest of the excess blood. And so you have to walk.

And it's very hard to walk with broken ribs and everything else. And I saw a seven-year-old kid walking up and down the hallway all alone by himself. And it just flooded my life with compassion and really changed the dial of my life and what I wanted to pursue and what I thought was important.

And so, again, over the last decade. I've also moved 40-plus times, essentially living out of my suitcase just with the intent of being an explorer and trying to soak in as much of life as possible.

So it definitely changed my life and like I said, planted the seed for what sustainability was actually going to do for me. And really, my intention is just to help larger entities and organizations think about the same way I thought about through my own life.

Seth: That's interesting. I can totally see how that would change your perspective on life. And, yeah, it's awesome.

Sounds like you're all good now. Or is everything like, stabilized at this point? Healthy as ever?

Dakota: Yes, thankfully.

Seth: Cool. Well, so what drew you to specialize in solar energy, aside from your prior life experience and the inspiration with your heart issues and all that? Did you take any other professional career path before you landed up here, or did you just jump right into this?

Dakota: No. So, like I said, I've been in the energy space for a decade now, community solar and renewables for about half of that. But my first five years, I was actually in the direct sales space in the electric and gas industry. So really helping energy supply companies think through their direct sales channels, building teams and really just working through those kind of strategies.

It was back in 2018 when I really saw the writing on the wall with renewables. Basically, the trajectory and job security of the U.S., and really from a global intention to deploy as many renewables as possible. If you look at the year-over-year growth of solar and expected growth rates, ot was too incredible to pass up for me. And I said, you know what? If I already have this experience working with large consumers of electricity, municipalities, investors, business owners, really, how can I take this into a higher opportunity vehicle, provide a greater impact and really help think through how to do this in a simple way?

And so that's really the tagline that we approach is simple sustainability. The world of commercial solar can be incredibly complicated, and when it comes to working with any of the facets that we do, because, again, we work as full cycle consultants. So even helping the landowner understand what this is going to look like over a 20-year period, to actually working with corporations or national retailers, think about their deployment strategy for ESG commitments, the whole thing can be very confusing.

And our intention is just to streamline that in a very concise way so that people can make the easy decision to be able to access and benefit from the word renewables.

Seth: A lot of our audience is land investors or land flippers, people who normally buy land and sell it relatively quickly just to make a profit between the delta, between their buy and the sale price, and buying a property to use it for solar, whether they keep it and lease it out to a solar energy company, or maybe the next guy wants to do that.

Who is your typical client? Like, it's a landowner who owns how much land and where is that land exactly? And what does the profile need to look like for you to even get involved and be like, yeah, you should consider this versus, no, this doesn't make sense for you, don't do it.

Dakota: Sure, that's a fantastic question, Seth, and I think that one of the things I'd like to do is either put it in your potential newsletter or just in the show notes. I think I had sent you our landowner's guide to solar leasing, which really spells out how to easily qualify your land and make sure it's a good fit. But I'll give you the brief rundown here.

So when it comes to solar assets, our typical landowner, or potentially, I'll also use municipalities, because they always have the extra incentive to do something similar, which. Is, hey, I've got vacant land; hey, I've got a waste fill or whatever it is, how can we monetize this? But our typical landowner could be a farmer or just an investor.

Like you said, one of my managing partners is also a land flipper. And so he was coming into this with a lot of additional knowledge as to what people were interested in and how they were doing it, from the owner financing perspective of basically buying and then reselling that land, but typically on the community solar side.

So there's two types of solar assets that we invest in and help other people do the same. There's a community solar asset, which is typically 10 to 30 acres, and that's going to build anywhere from a one- to five-megawatt facility. That's solar verbiage they don't need to know. But essentially, it's how many panels are going on that land and how much power is going to be produced every single year. And so based on that 10 to 30 acres, we'll essentially look at that available space.

And obviously, there are other qualifications. It needs to be close to what's called a substation. It needs to have certain power lines called phase three power lines. And I think it's also worth mentioning, Seth, that when we work with landowners, we do all of this turnkey. So what we like to do is, have people get a good idea of like, “I've got maybe 40 to 50 acres,” we'll take the 30 of those, and we'll transform it into solar. We'll go through and do the entire checklist to qualify it to make sure it's legitimate.

And then we'll actually run what’s called an internal RFP, and we'll just go to every single one of our solar developers that we work with, which, again, are amongst the largest in the nation, backed by many banks who have this collective interest. And we'll basically come back and shop around and bring back the best deal. And we don't charge a single dollar for our service. We get paid as consultants based on how much renewables we deploy.

And so, again, we're very streamlined in the fact that we get landowners the highest price of a lease and we're not affected by and don't charge for our service. So it's a very complementary thing.

So 10 to 30 acres is what it looks like on the community solar side. But then there's also what's called Utility Scale.

And so this could be 50- to literally 500-acre parcels that we look at. And the difference, Seth, is that community solar is available in about 30 states right now, based on pilot legislation, to fully completed legislation, but with Utility Scale, almost every single utility across the country needs to have some sort of blend of clean energy in their group of what they power. And so a lot of it's powered on brown sites or, excuse me, “dirty” energy. But then these utilities will also own 100 acres of solar farms, and that's used to blend their portfolio into clean energy. And so we do both.

Community solar is the smaller scale, but then there's obviously people who have tracts of land. So, for example, we're looking at over 800 acres in Virginia right now, and the legislation for Community solar isn't necessarily available. But again, in states where you wouldn't think about the opportunity to monetize your land, in states like Kentucky or a lot of the Bible Belt or southeast United States, all of those make for fantastic locations for these Utility Scale projects.

Seth: So it sounds like if my property is less than ten acres, I shouldn't even be thinking this way, right? Is ten acres kind of like the minimum to even go down this road?

Dakota: Yeah. When it comes from a leasing perspective, for what we do, at least, exactly. There are times where… I'll give you a very niche example.

We had a guy who was a consultant for us. He worked for us, and he had about seven acres of land that could build, like, a small PV system. So nothing for a solar lease. But he also happened to live across the street from a college, a university.

And so there are the times where you could build an asset on your property. It would be less than, again, a megawatt of power, which you could potentially sell to an end user, a university, a municipality, et cetera. And so it's not that it's ruled out completely, but for the sake of what we do, just to put parameters aound it, we work in that 10- to 30-acre space.

And I think that that's probably the most wise. There are probably better ways to monetize your land if you're under that.

Seth: Okay, that's helpful. And also, just thinking about other boxes that would need to be checked for this to be a viable option at all. You know, I'm not a pro, I don't know what to think of, but I'm thinking of how much sunlight is available at that place year round and how close it is to the power grid, that kind of thing. What does that need to look like?

Does this only work in Arizona? Or in places I think of, where I'm at in Michigan, where the sky is gray half the year? Or maybe everything is covered with snow, like, does this kind of thing not make sense in those parts of the world?

Dakota: Yeah. So contrary to popular belief, that's a great point, Seth. Many people think that the production factor of solar isn't as useful in states like New York, where I'm from, or Michigan, where you're at, compared to Arizona. Which does have a partial truth to it.

But the reality is that New York state, for example, is one of the leading community solar states. One for their policies and the way they do politics. But Michigan also has this legislation that's coming through the pipeline.

So a quick idea to think about as far as a checklist in order to qualify land, again, it's got to have easy access. And so, meaning it can't be in the middle of, you know. We just reviewed some area for the BSA, the Boy Scouts of America—I'm an Eagle Scout—so I reached out to them and they sent us a couple camps that were completely wooded.

So, we have no interest in deforesting land compared to putting it on a site that has the best and highest use case for renewables, like a waste fill or a quarry or something to that nature. So it's got to have easy access. Typically, like I said, it's going to be this 10- to 30-acre threshold. And then again, on the other side is like 50 to 500 acres. Typically, we're looking for state and local incentives to where, again, we can essentially bring back the best lease price.

Just as a broad range, we see anywhere from $875 to $1200 as a going per acre, per year lease rate for land. But I've seen as high as $5,000 an acre in the states where you have state and local incentives that can really juice up the price.

And again, part of our mission is to bring a fair practice all the way down so that these solar developers aren't necessarily not ripping off the landowners, but we're in the interest of making sure the landowner gets the best deal. I've seen farmers literally be able to retire because oftentimes they're old and they don't have the ability but they have to keep working, essentially.

And so, just as a total side note, we have a collective interest in that the land typically needs to be flat, bare, and not in a floodplain. So if anything's labeled in a marshland for zoning, we typically stay away from stuff like that.

It's got to be close to a substation, and that substation needs to have, essentially, “room,” what we call capacity lines to build solar energy. So oftentimes these substations have not been upgraded by utilities, and the utilities try to pass that responsibility on to solar developers.

Because we work with some of the most significant in the country, actually, globally as well. These guys can invest up to, we've seen $2 million to $5 million in substation upgrades. And so oftentimes we'll have landowners where they're like, hey, we tried to do solar in the past and we were told it wasn't possible. We're able to come in and make it possible because we can afford these substation upgrades.

It's got to be close to power lines, which, again, are the big, they're called phase three power lines. And so they basically have three levels to them. And that's basically what allows these solar farms to interconnect into the power grid.

It's obviously got to receive adequate sunlight. Which is like the least of factors, because, again, you still receive solar production on cloudy days, you still receive solar production on panels that have snow on them. Obviously not as much, and that's why O&M gets taken care of by the solar developer, meaning a landowner isn't going to be out there scraping snow off the panels if they choose to lease out their land. And I had mentioned that it's got to be close to a substation.

So I know I just spit a lot of information. Again, this is going to be in our landowner's guide, but that's essentially the checklist that we go through and confirm before we start shopping it around, trying to bring back a solar lease.

Seth: Yeah, absolutely. And I'm going to have a link, free download. You don't have to opt in anything. It'll be in the show notes, retipster.com/173 if you want to download that. And it's very well done. So I definitely recommend checking that out.

But with all the stuff you just mentioned there, Dakota. So some questions were coming up as you were talking. These might be dumb questions, sure, but I'm not familiar. So just to confirm, when you say substation, what is that? Is that like where the solar farm plugs into the power grid to get dispersed everywhere else? Is that what that is?

Dakota: Yeah. So a substation is essentially, they are very small lots where the utility will build exactly that. It's basically where the interconnection happens. And so you'll see these from the power lines. You'll drive by them oftentimes in rural areas, and they'll usually be gated off and it will essentially be there. It's owned by the utility. And it is how everything gets plugged into the power grid.

So you'll know when you drive by. Them, they basically look like very large HVAC units, I guess is the easiest way to describe it. And typically like a quarter-acre lot or something like that.

Seth: Yeah, I think I can visualize what you're talking about. Kind of ugly things that just look like a bunch of electric stuff happening there.

Dakota: That's a substation.

Seth: So say I just bought a piece of property, it's 10-plus acres. All the other boxes seem to be checked. It's flat, bare land with no trees, and it's not in a floodplain, all this stuff is there like some map I can go to to look at all the substations near me to figure out, “Hey, there's a substation there. Maybe this makes sense.” And how far away does the substation need to be? Is it like a mile, 10 feet, football field?

Dakota: Great questions. So there are maps. The utilities do make it complicated to find these maps. We have a GIS land team, essentially, that goes through and they check all of this stuff. If you were trying to do it on your own, you would just need to do a Google search of my utility, whatever it is. For me, it's Ameren in St. Louis and southern Illinois. So it's like Ameren’s substation maps, and with a little bit of research, you can essentially start to look at the hosting capacity.

And again, so you typically want to be less than 10 miles from a substation, the closer the better. And typically we see these off like major highways, stuff like that.

When it comes to the hosting capacity. Again, you want to look for two things. So you want to make sure that the substation is available, you want to make sure it's close, and you want to make sure that it has capacity for solar. And so again, even if you are close to a substation, there might not be any additional capacity because there's already solar farms surrounding it, and that's a good indicator of if it's going to be viable or not. If you live in an area where you see there are solar farms, they are going to most typically be plugged into a substation close to your parcel of land.

And oftentimes there are megawatts of power available. And so again, if you've got 10 to 30 acres and it reveals that there are 1 to 5 megawatts of hosting capacity available and that substation is close, that would be considered a prime spot for a solar lease.

Seth: Is there any kind of a nationwide map that shows where all the existing solar farms are located just to kind of get a feel for, like, hey, there's a cluster of them over here, maybe there's opportunity.

Dakota: Yeah, there's not that I know of, although that would be extremely helpful. And I think one of the reasons why, Seth, is because obviously, solar and renewables has been around for a long time. Actually, the longest standing solar farm, I believe, is being used by the military. And it's been around for, I want to say, over 100 years, and it's still generating power today.

So these things can definitely last a long time. But recently, especially with the updates in legislation, we add, and I say we, as in the U.S., adds maybe five to ten additional community solar markets per year. So the surge of solar farms going up right now is actually, like, at an incredible pace.

But I would love to have some sort of person track that, because it would definitely be able to help people understand, like, hey, is this a good opportunity, or am I just kind of wasting my time here?

Seth: Yeah, it sounds like, when you mentioned, are there any state or local incentives to get the best price and that kind of thing. Correct me if I'm wrong, but it sounds like politics are involved with this, depending on who gets into office.

Dakota: Very much so.

Seth: I don't know, say if it was Trump or Biden, does that mean, okay, this is going to take off or it's going to die, or. I don't know, how big of a difference would that make?

Dakota: It's a great question. So I'll tell you that with the Inflation Reduction Act, that really set the pace for renewable energy growth, which is very much a Democratic policy. In terms of the renewable sector, many Republicans want to slash parts of that bill, which would be bad for solar growth.

But on the same stroke of the pen, community solar is considered very much bipartisan, meaning that it's a conservative approach to utilizing renewable energy. And I think a part of the reason why is because when we're building these solar farms again, you can lease this land, and so a farmer can take advantage of it. Once you build 10 to 30 acres of solar panels, those solar panels typically get divided up into what's called subscribers. So my company helps fill these solar farms with large consumers of electricity, and small businesses and residential customers are also allowed to join.

And so instead of having a singular offtaker, basically “take the power of this,” it is a way for communities, oftentimes rural communities, that otherwise couldn't install solar. Same thing with urban. Basically, everybody has the power to benefit from renewables. And that's why community solar legislation, we're watching it go nationwide.

Now, when it comes down to additional incentives, like you had mentioned. Back to the IRA, there are specific pieces of legislation within that that allow know what's called adders, where you can claim additional tax credits, essentially making the deal more lucrative for solar developers, let's say, in areas where they are considered what's called an energy community or a low-income area.

And so oftentimes, our work revolves around working with affordable housing communities or low- to moderate-income subscribers so that the developers can capture that additional value-add. And again, we like to make sure that that goes all the way down to the person actually leasing the land to make it a full circle kind of deal on that perspective.

Seth: And when you said easy access earlier, what exactly does easy access mean? Does that just mean, like, there's direct road access from the road, or, say, if I got an easement that's big enough for one truck to go through, and that goes a mile back into this property, and then you can get there. How easy does it need to be?

Dakota: Yeah. So it really depends on what developer we're talking to and who really wants to take on the project. That should be fine in most case scenarios. Seth, we say easy access, and I'll give you an example. Someone passed me some land. It was about 45 acres. He was super excited to do it. And it was in the middle of the Adirondacks, which is like upstate New York mountain ranges.

And when I say, like, middle of nowhere, you could drop someone off on Survivor, and that would be, like, their territory. And there was no phase three power lines. There was no easy access to be able to get to his parcel. It was surrounded by other parcels that really didn't have any access point. And you do need to be able to get trucks back there. You need to be able to get the panels back there.

So it's one of the lower priority as far as the checklist goes, but it is something that we check for. So in your scenario, like, hey, I've got an easement, I've got an access point, it goes a mile down the road. As long as we can fit trucks back there, typically that's going to be good enough. And again, we just mentioned it, people aren't sending us parcels of land that we're just going to automatically disqualify because it's in the middle of nowhere.

Seth: And when you said $875 to $1,200 per acre, was that per month or per year? I couldn't remember if you actually said that.

Dakota: Yeah. So that is per acre per year. And so this will typically come. The way that it works is that the first couple of years are all dedicated to some sort of study. So those can be environmental studies, interconnection studies. And this is a time when no construction takes place on the parcel. If all goes smooth, Seth, it will typically be 12 to 18 months to get through this process, and the landowner can expect to receive small milestone payments.

So while these studies are going on, they might get a few thousand dollars a year, maybe $10,000 a year, just for the solar developer to basically tie up that land, do the studies, and as long as the studies look good, they'll move forward and develop.

Now, oftentimes, people can go through these studies and they end up not working out, which is a downside. And that's part of the reason why we built this guide and we built this process because we like to do all of the qualifying work on the front end. So, we like to check the substation, we like to check the phase three power lines. We like to do all of that work upfront so that, one, we're decreasing the likelihood that this project is going to be dropped later and really increasing the rate of success.

And so the first couple of years are all dedicated to these interconnection studies. They'll receive small milestone payments.

And then typically there are two phases. One's called NTP, which is notice to proceed. And that means everything checks out and you're ready to move forward with the construction of the project. The developer will then go and build the solar asset. And once it turns on, also known as COD, commercial operations day, that landowner will start to receive those yearly lease payments in the form of a single payment per year across the next 20 to 25 years. There are typically options in there. So, like 10-year options, 5-year buyouts, et cetera. But we've never seen a landowner stop wanting to monetize their land. So for us, that's never happened.

That's the expected per lease rate. Like I said, the $875 to $1,200 is pretty standard across the board. And again, I'm speaking at a nationwide level, so this could be a lot higher in certain markets and a little bit lower in other markets.

Seth: Does that annual lease payment step up each year to keep up with inflation, or is it just like, no, it’s $875 a year, that's what it is for the next 25 years?

Dakota: Sure. Oftentimes there are escalators. They're small, typically 1% to 2% escalator payments for that landowner, which isn't much. But we do consider that when it comes to inflation and everything else, and typically, almost every single time, the solar developer is responsible for any increase in taxes. So there's really no worries from the inflationary standpoint, other than you want to monetize and make as much money to live otherwise. But as far as, land increases, insurance, the developer takes on that responsibility.

Seth: Yeah, that was actually going to be my next question. Does the property taxes go way up, since it's now an improved property? But is it set up like a triple net lease where the solar farm pays for everything involved, or how does that work?

Dakota: Yeah, exactly. And so I've had people ask if they could cut the grass and get a higher lease payment, which I think is a great idea, like thinking ahead. Of how to get the most out of it.

But really, the answer is yes. So the developer takes care of everything front to back. And so, again, this is very much just them leasing out the property. It's completely hands-off passive income. So any operations or maintenance, any snow removal, any grass that needs to be clipped, or panels that need to be washed, everything's completely turnkey for the landowner.

Seth: Is the developer essentially the same as the long-term owner? Or does the developer build it, then they sell it to some other entity, and then they are the tenant that pays for that lease?

Dakota: It depends on the strategy of the developer. So we work with both. We work with asset owners, which can oftentimes be banks, or the companies that the banks own, essentially. And so we're partnered with the longest standing, most bankable asset manager in the community solar space. They're called Community Solar Platform. They manage assets across the entire country.

And so what we'd like to do, Seth, in the spirit of being full service, is that if we're working with a landowner and we're identifying that they're going to be a good fit. The last thing that we want to do is work with an organization that might potentially go under. Selling the project is really no big deal; that's actually very common in the community solar space. Many times, people will build the projects, and then once they get to interconnection—that interconnection typically costs at least half a million plus dollars, oftentimes in the millions of dollars, and those construction companies and EPCs simply can't afford it—and so they'll sell to much larger asset managers and other developers, essentially, that own portfolios of these projects. Which is typically a good thing, because, again, you want to make sure that that asset is being managed by someone who knows what they're doing, someone who has the tenure and experience to do that long-term, because these assets are going up for decades at a time.

And also, just as a total side note, there's always peace of mind with decommissioning bonds thrown into this. So that the landowner knows that should this project come to the end of its life cycle and they're not going to renew their lease, that that solar farm is going to be taken down and it's going to be appropriately brought back to its original state as a parcel of land.

Another point worth mentioning is a lot of times people have questions about whether or not these solar panels affect soil quality. I think it's called Jack’s Solar Farm, I believe they're over in Colorado. They do a fantastic job of doing these types of studies with what's called agrovoltaics, which is essentially dual-use solar farms. They'll have the solar on top, and they'll grow things like berries and herbs along the bottom.

And so when it comes to decommissioning and returning a land back to its original state, there have been no studies to suggest that the solar panels or the solar farms affect any of the soil quality or otherwise ruin that value of the land. And in fact, it's, no pun intended, one of the cleanest ways to monetize that land. And then obviously bring it back to its original life, if that's what a landowner chooses to do at the end of its cycle.

Seth: Does it ever make sense for a landowner to just try to build their own solar farm and then sell that power to the local utility company? Or is that never how it works? Or is that just not a smart way to go about this?

Dakota: A lot of co-development work, Seth, and oftentimes it's not with landowners, but it can be with municipalities, larger organizations. Commercial real estate companies love us because you'll see in the news a lot of times, like the big boys of commercial real estate, CBRE, these guys are adding renewables as a way to create value-add because they have the portfolios of properties and they know that they can claim tax equity and tax incentives if they build it themselves.

And so oftentimes we'll go into co-development relationships where it's like, hey, we have the access to develop and build. If you want to own this long-term, you can absolutely do that. If you want to turn it into an asset that's just selling power back into the grid. Again, it's not typical for landowners to do that, but it is possible

And again, part of what we do is in identifying. So if people check out our landowner's guide, they want to send us their land for review. I doesn't cost you a single dollar. We'll do it all for free. We'll get it qualified. We'll essentially be able to come back and we'll say, hey, what's your intention? Do you want to lease this land?

You could potentially sell it to us. If we're interested in buying it, we have investors that we work alongside who will buy up these properties, and then we'll go do exactly that. We'll go develop it, turn it into our own asset, and then either sell it back into the grid or sell it to a developer. But the opportunities there, there are multiple ways to kind of monetize the land. And it comes down to what a landowner wants to do.

Seth: I've got a self-storage facility where we have a little over 27,000 storage buildings with flat roofs and thought about putting solar panels on the roof. I've never really looked into it. I don't know if it's smart or not. But in that kind of situation, I guess my assumption was I would own the solar panels and sell power back to the energy company, however that works.

But is it a smarter idea to work with you and say, hey, can you find some developer out there who wants to put these panels on the roofs of our buildings? Or does that not make sense for some?

Dakora: You know, I just saw public storage came out. They're working with a company called Solar. Landscape out of Jersey, who is doing a fantastic job of media coverage for the solar world.

It is very wise for storage companies to be able to use that as value-add. There, again are multiple opportunities. The easiest one is simply to just lease your roof and let the solar developer take care of it. Again, not everybody necessarily wants the… because if you were to sell the power back yourself, you'd typically be responsible for the O&M, which isn't the worst thing in the world. But you don't want to have to clean 27,000 square foot of solar panels as an additional job.

Typically, if I had to guess, based on what you do, so oftentimes working with storage facilities, which we're in the very beginning relationships with several of them, it's a fantastic play. Again, for the same exact reason, it's value-add to your real estate and it's passive income and you don't necessarily have to take care of any part of it.

So again, based on the state and where that's at, we'll determine which legislation makes it fruitful and really what it looks like. for example, a state like Rhode island, we're working on a mall over there right now, one of the biggest in the state, and the roof didn't really work out. So we're doing carports, which is very much different than a roof.

But my point is that Rhode Island, for example, has some of the highest utility rates in the country. And so when it comes to the lease rate, it's not that powerful of a lease. But we're utilizing carports here as kind of a multi-tool so that it's protecting cars, it's giving the coverage, it's taking care of the snow plowing for the parking lots, because the O&M's taken care of.

And so again, part of the creative process on our end is like, hey, if you bring us an opportunity, we're going to come back and we'll give you all of our consulting advice for free.

In the assumption—I don't even want to say in the assumption—but just in the spirit of providing as much value upfront as possible, and we'll give you options, we'll say, hey, here's what we think, here's what we can do. You tell us what you want. And, typically, based on the consulting that we give and the access that we have—which is the bigger piece to it, because we have the access to pull these projects off at scale—typically people are like, okay, awesome, let's do it. And so I hope that provides a little bit of insight to that question.

Seth: No, for sure. I guess it just helps confirm I'm not crazy for thinking that, but I guess maybe one drawback—

Dakota: You're very wise.

Seth: Thank you. I like hearing that.

If we were to agree to some kind of 20-plus year lease like this, and they go on the roofs of our buildings, I would assume we're kind of stuck for 20 years or however long the lease is. Like, if I want to knock those buildings down and build something else there, I can't really do that because that lease is there. Is that accurate?

Dakota: I'll give you an example. So, same group over in Rhode Island. They had a beautiful 60,000 square foot strip mall, and we were going to do solar. And the lease rate, I don't even remember what it was. It was decent, but we didn't factor in. Well, it's not that we didn't factor it in. It's that they had an opportunity to monetize it in a greater way.

So they ended up selling the strip mall because it had ocean view over on Rhode Island, and they sold it to a real estate developer for many millions of dollars, which ended up being a much more valuable play than just leasing out the roof for less than $100,000 a year for the next 20 years, which, again, is great money. But they were able to just sell the building instead in the spirit of that developer wanted to build vertically, and they were going to build condos on top of it with the ocean view.

And so my point is that if you plan on developing, and again, we'll give people this advice up front to help them think through it, which is like, “Hey, if you plan on knocking down your storage facility in ten years to do something else with it, maybe not the best fit.” Same idea when people are considering.

I was talking to a manufacturer the other day in upstate New York. They're like, hey, we plan on exiting our business in five years. So you have a ten-year agreement in front of us. And I'm like, well, yeah, maybe you're not the best fit for actually joining one of these solar farms if you plan on exiting.

So, again, stuff to think through. And that's a really good point, Seth. Is if you have better ideas for your property long term, one of the things you are in this scenario is committed. And so it's always important to consider that.

Seth: Yeah, along those same lines, I've seen a couple of really creative ways that people have utilized solar panels in a way that kind of kills two birds with one stone.

For example, there's this canal solar power project in India that I saw on Reddit this past year where they've got this big, long canal and just having an open, exposed area that water runs through, where water is scarce and it's going to evaporate. It's like, hey, why don't we cover that with these solar panels. So we're not only saving and conserving the water and has less evaporation and heat on it, but also we're creating tons of surface area of solar panels, that kind of thing.

Or, like, if you wanted to create a covered parking lot, normally you could just put up a metal roof over that. But what if you just put up solar panels to act as your roof? And these things seem like brilliant ideas. Have you seen any other creative ways to use solar panels that sort of accomplishes two objectives?

Dakota: Totally, yeah. What comes up first is my carport example, again, because, again, not only can you connect EV charging to that and kind of have it power itself, but again, you're shielding cars. And so any auto dealers that might be listening to this, we love working with auto dealerships, because they're being forced to deploy EV as that comes online more, but again, as a way to protect your assets underneath that roof and have the O&M taken care of.

Carport solutions are fantastic. Typically, they are the most expensive kind of product to make pencil, which is why the lease rates aren't always that great. But again, it's in the spirit of this dual-use, highest-use case of this.

I've also seen the canals. I have a contact who actually reached out to me not too long ago. He's at a large real estate organization, and he, you know, I've got this canal, and we want to put solar over the top of it, not necessarily for making sure the water doesn't evaporate. But I have seen stuff like…

You know, we actually just did another deal a few months ago, executed a lease agreement on another mall in upstate New York. But this guy came back to us. And said, hey, I've got three other parcels I want you to look at. Two are parking lots and one's a lake. So we're going to do a couple of carport solutions, and we're going to do, actually will be our very first, if we can get it to execution, our very first floating lake solar project. Which I think is very cool.

There are so many use cases for dual-use solutions. This is unrelated to what we do.

But I saw basically a roll-up solar. It was almost like, I guess, a roll of tape that they're using in the military for medics. And it's a way to do pop up wound care for combat soldiers that get hurt in the field. They basically roll out 100-plus yards of solar panels, very much like a fire hose, like a fireman rolls out their hose. They roll it out and it instantly starts producing power wherever they're at. So they can set up basically a medevac shop right wherever they're at, which I think is really cool.

And so I think a lot of these solutions that are coming out, we're just going to see more and more creative ways to kind of plug into the power of solar. But then also thinking about how can we get multiple uses out of this. I only think that's going to become more popular.

Seth: Yeah, I do wonder, kind of going back to the government policy stuff. So let's say I'm living in a time where the government policy is very supportive of solar farms and one is built, but then all of a sudden government policy changes the next year, and all of a sudden they're less supported or even discouraged.

Does that ever come back to bite a solar developer like, oh, man, you're going to start losing money now, you never should have built this thing? Or does it simply slow things down? Like it's going to continue expanding, but it just kind of slows down depending on if somebody's in office who doesn't support it?

Dakota: The latter. I've never seen a case which isn't to say that it's not true, I've just never seen a case where it hasn't been a good idea. It definitely makes projects not as lucrative, which no solar developer or financier wants to hear.

But I would say it more or less just slows it down more so than it does completely takes the opportunity away. There have been states like North Carolina which take away their net metering policies, which can be disadvantageous for people who were looking to take advantage of solar.

But again, especially because Utility Scale will always have a blend of renewables in their portfolio. In the case where they're doing these 50-plus acres of Utility Scale solar, that will always be a part of the strategy, regardless of what the legislation is. I don't think I've seen an example of where that has happened yet. Community solar has been around for 15-plus years at this point. Again, the management partner that I spoke. On, community solar platform, these guys helped pioneer the program into existence, and so they've been at it for a long time.

I can always circle back and ask and get you that answer. But I don't think I've seen a case where that's necessarily been true.

Seth: So this is maybe not totally relevant to you because it seems like you deal with larger parcels of land and commercial applications and that kind of thing. But sometimes I think about putting solar panels on the roof of my house or even getting, like, I don't know, any kind of a smaller scale solar thing just to generate energy, whether it's for, like, a residential generator or something like that.

But I hear that solar panels are getting better and cheaper every year. Does it make sense to just keep waiting five more years until the product is better before investing all the money into that kind of thing? Or is it better to buy it now? Any thoughts on that?

Dakota: Yeah, again, definitely not my expertise. I actually own a converted school bus. That has solar panels on top, and I get to be powered by the sun. And last summer I was road tripping with my bus, and I always found it so cool how I always had a full charge minus when I turned the AC on because it was so hot, I turned it very quickly.

But the power of kind of liberating yourself with clean energy from that sense is really powerful. I would say it's based on what your intentions are and your end results are. Again, when you install solar on your home, you're never really freed from the “grid,” as people say, versus if you were homesteading, producing your own power. I think that's a totally different scenario.

Again, when it comes to residential solar, I don't really have the expertise to speak for it. I mean, it doesn't hurt to look at what residential installer could bring you. Oftentimes they completely replace your electric bill, and obviously, you now have a bill to the solar developer, which cuts your electricity costs.

But to your point, Seth, solar technology is improving greatly. And again, this is full cycle, meaning that a lot of people complain about the fact that solar recycling, for example, isn't nearly where it should be. But over the next ten to 20 years, that problem is going to be, most likely, solved in a very powerful way. And so it takes the adoption of this technology in order to improve the technology.

But to your point, yeah, the solar panels that were around 5 or 10 years ago, compared to what's available now, are very different. And again, we're even seeing technology like the solar shingles come out, which are a very expensive solution, to my understanding.

But I think to your point, if you did wait over the next couple of years, because you could afford to, then I think, it really comes down to a person's options and what they think is best for their family. And I'm sorry, I can't give a better answer to that.

Seth: That's totally fine. Totally fine. So I often hear solar spoken about alongside wind energy, just because they're both green energy sources and that kind of thing. And a few years ago, I interviewed a consultant similar to you, about wind energy and wind turbines and how that all works. And he was telling me, in the many things we talked about, one of the biggest drawbacks of solar power is that it requires a lot more land than wind energy does, where just you stick that turbine there, and it's a smaller little footprint.

So this is your chance to strike back at those wind energy guys. What are the drawbacks of wind turbines where solar panels excel?

Dakota: Awesome question. It's actually funny, because I work with a lot of wind consultants as well. They'll actually come work with us as partners. When their wind projects don't work out, they'll turn around and say, hey, maybe you should do solar instead.

Seth: So they're not sworn enemies with you or anything?

Dakota: Not for me, at least. No. I find a lot of those wind guys know because they're working with a very similar, know, farmers, people with land. See a lot of off site wind projects going on and, like, the oceans and stuff. Again, over in states like Rhode Island, I saw they had a really big bill that just pased.

I guess I can only speak to. The fact that, again, I'm from upstate New York, so I grew up on a small town in between two cornfields right off Lake Ontario. But we've got a camp up towards the Adirondacks and what's called theTug Hill plateau.

I remember seeing the transition from this just bare land. It's got to be hundreds of acres. I don't know the exact amount, but it is massive. I remember when the first wind turbine went up. And now when you drive through there—I was just there over the summer—it looks like it goes on as far as the eye can see, wind turbines and solar.

But again, there are projects that are hundreds of acres of solar farms. Again, I'm in favor, going back to the technology question, I'm in favor of dual use. If we can incorporate more agrovoltaics to accomplish farming on top of power generation. I think that's really wise, and I support that and embrace that, contrary to what most people view as what a solar guy would be.

Again, my spirit of sustainability comes actually from my own life. It comes from the pillar of human sustainability. Oftentimes when you get in the clean energy space, it does get clouded by politics. And so I'm someone who's very balanced. Like, I believe nuclear is just as. Important of a conversation as solar. And so I think oftentimes that comes as refreshing because people sometimes approach us and they expect us to have a very linear way of thinking.

And really, I'm in favor of one understanding the complete details. I'm sure wind is complicated. There's not much I know beyond what I had kind of just mentioned, but I think that there's a use for both of those projects. I could probably argue and disagree with the consultant that came on, as far as whatever else he had to say about solar, because, again, there are often times where helping a farmer retire is going to be of equal use as to putting a smaller amount of wind turbines if his intention was to be able to stop working. So that's my initial thought.

Seth: So I think I know the answer to this, but I'm just going to ask it straight up, just so I make sure I know the answer. So if I own land and I decide to lease it out to some developer or energy company to build a solar farm, are there any costs involved for me, or is it just purely profitable?

Dakota: So in the case of a roof, for example, people might need to reroof, and that's obviously very expensive.

In the case of land, there are typically no fees associated. And if there is like a survey or something, we'll make sure the developer pays for it. So if they come back, and again, just as a total side note, if there are listeners that may already have a proposal from a solar developer and you want a second opinion, happy to review your agreement and tell you if it’s good or if they're trying to pull something. And happy to get second and third opinions and other proposals.

But typically there are no fees associated with doing this stuff. There may be the developer asks for a survey, maybe putting documents together, or other legal fees for reviewing agreements. But that aside, no.

Seth: And I kind of talked about this earlier when you mentioned bare land. So does that mean, like, to build a solar farm, you can't chop any trees down? Like, if I've got a 30-acre property that's just, like, packed with trees and we gotta mow it down to put solar panels there, that's a deal breaker? Or does it have to be truly, completely nothing on there? Like, if I got chopped down one tree, is that a deal breaker? Help me understand that.

Dakota: How many trees? No, that's a good question. Again, we're in favor of doing things for the best and highest use case. You can absolutely chop down 30 acres, profit from the timber, and then turn it into a solar asset.

Seth: Okay, got you.

Dakota: Typically that will need to be done before a solar developer takes interest in it. But again, if it's a smaller acreage where we're looking at 10 to 30 acres and a couple of acres are wooded, we may be able to find a solar developer that would go ahead and take care of that or work it into the process so that maybe the lease rate is slightly lower because they're paying for the trees to come down.

So, not to say it's not possible, by any means, it's just if we had two parcels of land, they both looked good, but one was bare and one needed to be deforested in any way, we would take priority over the one that's already bare. And that's just from, again, a streamlined perspective.

Seth: Okay, so if I've got like 20 acres or something, and I really want this thing to get leased out to a solar developer, is there anything I can do to make it look more attractive to them if it's not already done, or is it one of those things where it is what it is? You can't put lipstick on a pig.

Dakota: I mean, again, it really comes down to, like I said about the zoning. So as long as the zoning looks clean, you could potentially grade it. So it's like the slope of the land. But again, I don't think it's necessary to do. It really comes down to, does it fit in these parameters that we talked about earlier? So, from the substations, the hosting capacities, those are the biggest factors when it comes to this stuff. It's not necessarily if the land is going to look pretty with the solar panels on it. So, no. My answer is no.

Seth: I mean, are there any other preliminary assessments or preparations a landowner should make before approaching a solar company or before talking to you, or just pick up the phone and call you and you'll figure it out for them?

Dakota: Luckily, we have our GIS team that can work pretty quickly to determine if land is eligible or not. At this point, we're pretty much wide open across the country because of the legislation and intentions of development for the developers we work with.

And so, again, they have endless appetites to be able to deploy as many renewables as possible. And so it's a little bit extra work for us on the front end because we're qualifying thousands and thousands and thousands of acres of land per year. But for us, it's worthwhile, at least at this point, because with the given parameters that we have, if people are sending us the ten to 30 acres or 50 acres plus, from there, the work to do, the substation checks, et cetera, it typically takes us 20 to 30 minutes to qualify a parcel.

And so again, even if we get thousands of parcels a year, we're already invested in that interest of making that happen. So that's kind of where we sit with that. And I'm sure that will change over the next few years. But right now, we're pretty much wide open across the market for this stuff.

Seth: Do you have like a list of which states or counties or anything make the most sense for solar development? Like, if you're in XYZ state, don't even think about it. Or if you're in this state, pick up the phone, a call right now.

Dakota: So for the latter, I would know if you're in states and you have land in places like California, New York, Illinois, Maryland, these are all very hot markets. There are other territories, for example, there are energy grids across the country, one of them being called PJM, which is one of the primary in the country, they are kind of slowing down on their legislation and kind of getting locked up in policy. So, for example, we were looking a a portfolio in Ohio, and that's, again not to say that it's not favorable, but right now it's like a slower state compared to other opportunities that I had mentioned.

Again, if you know that your town where you locate your parcel, if there's no other solar farms around, and there's what's called a moratorium, where they just don't want any solar farms built—because, again, it does go down to a local level. Oftentimes we'll need to go into board meetings and you'll have the one guy stand up and scream in how solar is going to ruin everything, which is fine, and I respect all opinions—but if that's going on, obviously it's probably not a good idea.

But really, that aside, Seth, again, we're open to look at whatever you've got. If we get 1,000 parcels of land as a result of this podcast, that's fine, we'll go through it. And again, it may take 20 to 30 minutes to qualify a full parcel. Like all the way through, but if we get a bunch of stuff that doesn't qualify based on like, it's in this particular state and it's got this particular legislation, or it's less than… Basically, if it doesn't fit, we'll kick out all of that stuff and it may only take 30 seconds for us to look at and be like, oh, this is no good. In which case we would just send a very quick note back and say, hey, thanks for submitting, but this parcel doesn't look good for us.

Seth: Do you guys have like a form on your website or something where it's like, yeah, fill in your, I don't know, parcel number and coordinates and name and all this stuff and just an automated way of saying that? Or human eyes have to look at it every single time in order to make that determination?

Dakota: We have an opt-in form. We don't have any automations as like, oh, hey, this is going to be a good fit. Which actually isn't a bad idea. I might have to think on that, Seth. It may have just given me a good idea. It won't be accurate per se, but it's like, hey, we think this is going to be a good fit.

Our website is being redone. By the time this podcast comes out, I'm sure it will be out. So it's communitysolarauthority.com. We'll have a sector for land. People can essentially put in their land criteria and basically what they've got a hold of. I will make a note that we don't typically like to work with people who are like, oh, I want to buy this land, would this qualify? The process to get through that is just a little bit too strenuous, so I will say if you fall into that category, we can certainly help you think through it. But as a general note, we like to do deals with people who already own the parcel.

Again, part of our simple sustainability tagline is all about streamlining it, because we are service consultants for these developers and our mission is to just streamline it. And so I will make that note.

But you can go to communitysollarauthority.com and plug your information in, and they'll be able to kind of submit their parcels and we'll be able to reach back out and let them know.

Seth: Yeah, got you. So it sounds like based on that, it's not a good idea to speculatively buy a piece of land with the assumption that you'll be able to use it for solar. It's more of like, that would be a Plan B, like, have something else in mind first, but don't buy it assuming it's going to work out for this, because you can't really determine that before they own it, right?

Dakota: Exactly. Yeah. And again, it's really just in the spirit of we built our entire company based on partnerships, Seth. And so as part of our mission, we always like to start small and with pilot deals, because again, we have investors that work with us that do go and pursue land. They buy it up. They work closely with our internal team. We say, hey, this is a really good parcel. We know we're going to be able to monetize it, buy it up.

But when it comes to our first transaction together, we don't want that to be our first transaction together. We want it to be people who already have the land. They're like, hey, I've been sitting on this 50 acres, or I've been sitting on these parcels or a portfolio. We work with, like a trust, for example. They've got thousands of acres in a trust in a singular state. They passed it over to us. They said, here's 300 parcels. Which ones work?

We love doing that because it just. Increases our hit ratio, essentially. And so that's really who we like to work with. But again, if people just have a single piece of land, again, we'll happily take a look, as long as it fits into that criteria.

Seth: Are there any risks associated with doing this? Like, if I lease on my land to a solar developer and they do it, from what I'm gathering, it sounds like the main risk is just that I will probably be locked into this agreement for however many years unless I can somehow terminate the lease agreement early, which I wouldn't normally expect I could do.

But other than that long-term commitment, is there anything that would it devalue the land in any way, or can you think of any reason why you wouldn't want to do this?

Dakota: Again, if you plan on, and even if you did sell your land, that's okay. People buy solar assets all the time, and they also buy the rights to have these parcels leased.

So if anything, you could obviously take that monetization schedule that you have and say, “Hey, this parcel of land is 30 acres. It's currently leased at $50,000 a year on 50 acres. You buy this land, and you are coming into $50,000 of guaranteed income.” So really, there's a lot of advantages on that side.

But to answer your question, typically no, there's no way it devalues the land. There are really no opportunities, at least with the solar developers that we work with. I can't speak to this across the board. There's really no opportunities to lose here, which is the entire point of working together.

This is a massive opportunity in history with the intentions of deploying as many renewable assets. This is just really a piece of time right now where there's a window open for people to take advantage of the legislation in place and really benefit from the collective deployment of renewables. Again, a lot of people are. It's going to the banks of the world that own all of this property. We work with the corporations and the giant real estate companies, but we also love the hero stories of, again, the farmer that was able to retire, the family that was able to have the peace of mind for the rest of their lives, that they were going to be able to live without fear of inflation. And so we push for those stories as much as we do for the large clients that are looking for the tax equity and to make the breaks.

And so, yeah, I just think that it's a really valuable opportunity for those that obviously fit into the scope of what we're trying to do.

Seth: I think you kind of answered this question earlier, but say I or a developer put a solar farm on the property, 20 years goes by, and then that solar farm is removed. Are there any permanent modifications made to the land that's like, okay, well, before you were able to do this, but now you can't anymore because that solar farm was there and that permanently changed something about it.

Dakota: I don't think I've ever got that question before. Yeah, no, there's not. Again, the advantage here is that when it comes to ground mounts, which is what we call them, when they put them on the land, all of that is, again, in advantage of protecting the land and making sure that it could be returned to its original state.

The downside of that is that if the 20 years is up, those developers typically don't want to move that. They might go and replace the panels, but you can essentially keep that lease going. So if you're a young person and you've got this land, you can essentially just continue to lease that out every 20 years. And obviously the terms change, right? The price changes, et cetera. But you can keep going if you want to.

Otherwise, no, it'll be decommissioned, returned to its original state, and again, the developer will be responsible for recycling those panels. So that land is returned as is.

And there's nothing that I know of or could even imagine where work would be done on that land where you couldn't go and do something else with it. I'm trying to imagine a scenario where maybe they put gravel down, but that's not even a thing.

So I don't think so, no.

Seth: Is it a common thing for people to get these leases in place and then sell the lease while keeping the land? Like, for example, if I had a 50-acre property and half of that was, I don't know, a shopping center or something, and the other half was a solar farm. So I want to keep the whole property, but I want to sell off just that lease so I can get the cash.

Now, is that a common thing people do, or like a normal strategy that people take?

Dakota: I have never heard of that, I guess. Are you saying it would be a separate parcel from the strip mall, let's call it? Because if it's a separate parcel, you could obviously sell it.

Seth: I think that's one scenario, but the reason I asked this is because I interviewed a cell phone tower consultant similar to you, but he was specialized in cell phone towers, and he was mentioning that that was a not uncommon thing where cell phone tower leases are bought and sold, like just the lease, not the land underneath it. So I didn't know if that was normal for solar farms.

Dakota: I actually have never heard of that.

I've got a friend who does the cell phone leasing as well, or the tower leasing. I've never heard of a scenario where people sell their rights to the lease, so I guess I can see why because they want to keep the land. But they would be able to basically almost like an exchange to pull out the equity.

Seth: Yeah, it's kind of like selling a note or something like that.

Dakota: Yeah. Which is obviously very common in what you do with land flipping and what your audience does. I've actually never heard of that. Again, I'll have to come back and see if that's a thing. And if it is, we could throw it in the show notes.

Seth: Yeah, you bet.

So as a land flipper and a land investor who's just always looking for different opportunities out there, what advice would you give me if I were scouring the country trying to find markets where I can buy parcels of land? This might not be the primary strategy, but it could be like a Plan B.

It sounds like I should be looking for parcels that are 10 acres and larger, preferably in a state or market where there are incentives for this kind of thing, with easy road access, preferably close to a substation. Anything else I should put in my filtering criteria as I look around for potential properties for this kind of thing?

Dakota: Yeah, I mean, again, almost in the pirit of doing it, even easier, and this obviously creates a split, but if I were to run a strategy like that, I would do exactly that. So I would start to look around for pieces of land that might make sense, like open farms, et cetera. And I would actually probably even start with the partnership route.

And again, this is just specific because this is how I build my entire businesses off of partners. And so again, we'll partner with wind consultants who may not be able to put their wind farms up, but their client still has a need to either generate income through a lease or electricity costs. And so they will pass as clients, and we'll work in tandem.

So if I was running this plan for land, I would start to focus on farmers and other people where this land criteria kind of comes up. And I would say, hey, I want to help you monetize your land through solar leasing. And so instead of trying to take the full dive myself, like you said, and potentially find the land and then buy the land and then try to qualify it, as a starting point, to keep it simple, I would just start partnering and say, hey, I want to make a chunk of whatever your land lease is, or let's do a flat fee.

You only have to pay me if I get a solar developer to come build. So that way, again, it's very like Airbnb arbitrage style, where you are arbitraging other people's property and land, generating a solar lease. You can get a couple under your belt. And then from there, I would start to, okay, like, what does this actually look like for me to do?

But again, I'm a very big believer in starting small and derisking the opportunity. So that's how I would start. And actually, that could be crazy lucrative. And again, we have people on our team that are simply 1099 contractors, but they are basically bird-dogging land that way. They're going into partnership, finding a couple of those deals, and then after they get a few, they're starting to kind of build the opportunity larger and wider.

Seth: Now, how do you make your money exactly? Because I think you said that it doesn't cost anything for the landowner. Are you making your money from the developer in some way, or how does this become a profitable venture for you?

Dakota: Yeah. So no matter what we're doing, so from land leasing to actually installing solar for a real estate group to enrolling a national retailer in a solar farm, we just get paid as simply an extension of these solar developers, what's called their origination teams. And so, very similar to any sort of consulting work, we get paid a fee based on how many megawatts of power we either develop or enroll.

And so again, when it comes to land leasing, we could charge for our service. Probably not that much for landowners, but in the case of, like, we work with national retailers and corporations, we could charge hundreds of thousands of dollars for what we do. We choose not to, again, for the sake of competition. There's a lot of sustainability consultants that don’t execute and charge lots of money.

And so we just kind of put the process in reverse and we don't charge for our service because we know we're going to get paid based off of execution. And because we've been doing this for so long and I come from the sales world, we're really results-driven. And so again, we'll get paid based off of how much power we actually develop.

And so other opportunities in land, Seth. Sometimes developers will pay people just a finder's fee, so they'll pay them like $10,000 to $20,000, just as an example, for finding the land and bringing it to the solar developer, which, again, can be lucrative for the right person, not our collective interest.

We want to do the full lifecycle. And so we're going in making these deals with solar developers for the long term. We're finding the land. We're helping build and construct on the land. We're subscribing that solar farm once it's built, and then we're managing the asset long-term over the next 20 to 25 years with our management partner.

So a very different strategy compared to what other people are doing. But that's kind of like some insight into how we get paid. And again, there are opportunities for us to monetize elsewhere. We're just long-term players. And so that's how we think about things.

Seth: So it sounds like you get paid upfront and then also sort of long term as you help manage it?

Dakota: The opposite. We typically don't get paid on the land that we invest in for a long time. And so again, it will come in what's called milestones. The landowner will always get paid first. And if we get paid any sort of upfront money, we'll pay it to the person who brought us the deal. And so again, if we're working with consultants who brought us the land, we're like, just take all the upfront money so you get a payment. We're willing to wait because we make a lot of money for what we do elsewhere and we don't need the cash flow necessarily from a small milestone payment.

And so again, part of the reason why it's cool to work with us is because we think in decades where everybody thinks about instant gratification. And so because we have the ability to think in decades like this, we are willing to wait a long time invest right alongside the landowner to make sure that project actually goes through. And again, that just leverages the opportunity because we're invested in making it work and we don't believe in wasting our own time.

So when we choose to work with landowners and say, hey, we want to do this for the long haul, they can believe us because we're very transparent in our business strategy and how we think through things.

Seth: So as we wrap this up, I guess my closing thought is how do you see the future of land leasing for solar energy development in the next five to ten years? I don't know if there's ever going to come a day when this is saturated or like we don't need any more solar farms or anything like that, but it sounds like clearly this industry is growing, maybe growing faster in some states than others.

But do you kind of think that we're at the beginning of that growth curve, or in the middle of it or near the end of it, or how much more opportunity will there be in the future?

Dakota: Yeah, so I think the opportunity is only going to grow. Who's to say how long of a window we have? But I think we have clearance at least for the next decade. And so again, I think in decades. So I'm committed to doing this for over the next ten years.

And I think that, as I go on, I think a lot of cool things I see other people doing are like funds and syndicates for this type of stuff in the commercial real estate world, for example. And I would love to start doing that with solar farms and again, partnering with people, with audiences and networks, because from our side we're invested in building these projects, but we also want to own and buy up our own land to run these strategies, too.

So again, we practice what we know. My intention was to come on today and provide as much value on the subject as possible, but also let people know that this is the same strategy that I'm running internally at my company. I co-founded Community Solar Authority over half a decade ago at this point. And we are in the collective interest of having land leases ourselves, buying up property and owning that for solar development. And so we're going all in on this area for at least over the next ten years and hopefully that kind of paints an arc as to where we're thinking and what we're seeing out on the field.

Seth: Awesome. Dakota, thank you so much for coming on and talking to us today. I learned a ton from you. I'm sure a lot of people listening have as well.

So just to recap, if people want to find out more about you or talk to you or figure out if their land is a good fit for this. Do they go to, is it communitysolarauthority.com?

Dakota: Yes. So that is our website.

I would actually prefer if you come connect with me on LinkedIn. So that's linkedin.com/dakotamalone. And the reason why is I create content on LinkedIn daily. I've been on there for over a year at this point and it is a way for your listeners to be able to come on and actually have conversations with me. They can have, obviously direct access and also continue to learn about a lot of the projects that we do and what we've got going on.

But if you do have those 10 to 30 acres of land or 50-plus acres of land anywhere across the country, you own it and you're interested in a solar lease, you can go to communitysolarauthority.com, put your information in, and we'll reach back out to see if it's a good fit for some of the solar leasing that we're doing.

Seth: Awesome. And I will include a link to that LinkedIn profile in the show notes. Again, retipster.com/173.

And if you people out there are listening on your phone, feel free to text the word free, F-R-E-E, to the number 33777, to stay up to date on all things going on in the world of REtipster.

Thanks again, Dakota. Thanks everybody out there for listening and we will talk to you next time.

Dakota: Thank you so much, Seth.

Seth: Hey, everybody. How's it going? This is Seth Williams, and you're listening to the REtipster podcast.

So today, I'm talking with Joseph Woodbury, the founder and CEO of Neighbor.com. So Neighbor.com is a marketplace that is disrupting the $500 billion self-storage industry. And Joseph started this by raising more than $65 million in funding with part participation from the world's top investors, including the creators of Airbnb, Uber, and DoorDash, to name just a few. And Joseph and his team have grown Neighbor's user base to cover all 50 states with more storage options than any other storage company out there. And the hosts on Neighbor.com are earning tens of thousands of dollars annually.

And when I first got an email from one of the reps from Neighbor, I honestly had some mixed feelings about this because I am a new self-storage facility owner and I'm all excited about getting into this business.

And when I heard about Neighbor, on one hand, it was like, this is a brilliant idea. Like, I can't believe nobody's thought of this sooner. And I downloaded the app, and it's very, very well-designed. I mean, it is crazy easy for anybody with extra space to get started with this. By the way, we have an affiliate link retipster.com/neighbor, if you want to check it out.

But on the other hand, it's kind of like, man, this could be terrible. What if this totally ruins the self-storage industry? What if all of my neighbors around my property decide to lease out their space and then I can't get tenants? Are we in huge trouble here? I don't know, but we're going to find out in this interview.

And I think I ultimately thought it would be a big disservice to not tell the world about this because this is an amazing opportunity for anybody out there who has space to dip their foot in the water and just figure out, do I like this? Could this be a thing for me? And there's a lot of people I know who have actual businesses making money with things like Turo and Airbnb and all these other things, and this is that kind of thing for self-storage. And just seeing how well the app was put together, I was like, man, these guys are doing it right. Like, this is going to go somewhere.

So I'm excited for this. Joseph, welcome to the show. How are you doing?

Joseph: Great. Thanks for having me, Seth.

Seth: Yeah, absolutely. So let's start at the very beginning. How did you first get this idea? Did you work in the self-storage industry yourself then? Or what made you come up with this?

Joseph: So I wish I could say it was my idea. I'll tell you, I had the exact same reaction that you described when I first heard it from my co-founder, and that the first thing out of my mouth was, how has someone not built this already? How does this not exist? So my co-founder, he had the idea from just having the pain himself. He felt the pain that I think a lot of Americans feel when they go to purchase a self-storage unit. He and his wife had just gotten married, and shortly after getting married, they flew down to South America to work for a humanitarian organization. And of course, you just get married. You go to South America for four months, you need a storage unit for your items while you're gone. And they looked into getting one and had a very similar experience to most Americans where the storage facility close by them was totally full. So they were going to have to drive like a half hour to the next city just to find one with any vacancy, and they were going to charge him several hundred dollars a month.

And as a college student, he said, I don't pay several hundred dollars a month for anything. My Netflix is $10 a month, my Internet is $30 a month. So he found a friend who was willing to let him store his items for the summer in his garage. And so they dropped the items off, and it was actually not until he got back that he had the idea. He went to pick his items up, and as he was getting the items out of his friend's garage four months later, he was just thinking, this was such a better experience. I felt so much more peace of mind knowing my items were in a nice, clean garage in a neighborhood I trusted than in a storage facility on the outskirts of town. Plus, I saved a ton of money. Why doesn't everyone do this? There's got to be empty space in every neighborhood in the country. Why isn't there a directory or a marketplace where you could search out what space is available?

And he approached me and our other co-founder and told us about the idea. We both said you're brilliant. This is amazing. He let us come along for the ride. And we've been building ever since. And it's been a lot of fun.

Seth: So I know when I first downloaded the mobile app and tried to sign up as a host, I was struck by how easy it was. Like, it is dead nuts simple to use, which I think is crucial for something like this to gain mass appeal and get adoption from the masses.

But I also know from experience that when you make something that easy to use, there's a reason it's that easy to use, because a ton of thought and effort and design went into that to make it really natural and intuitive. So is that hard to do? How much work did it take to make this app and this website that just functions really, really well?

Joseph: Yeah, it's definitely been years in the making, but I'd say when we read our user feedback, we thought when we first started this that the predominant feedback we would get be how cheap it is or how close it is to my home.

But like you've said, the most frequent piece of user feedback we get is just how easy it is to use. Self-storage has never been done through a mobile app. A few of the larger companies have started, but we're the number one ranked mobile app. So we're kind of bringing self-storage to the people so they can have it on their phone.

As far as getting to that point, we really have our users to thank for getting us there. When we first started this over six years ago, we really focused on our home market of Utah. We're now in all 50 states. But we didn't start that way. We started in Salt Lake City. And what we did for the first year of being in existence is we didn't spend on marketing campaigns. We didn't try to grow the business. We just let users organically come to us. And we listened to that user feedback and anything they said sucked about the product. And there was a lot that sucked about the product. We would go and modify that and fix it.

And we really built it as a user-first company. Because ultimately, marketplaces are a very unique businesses. We don't have a product that we sell. Instead, our hosts, they have a product that they sell to our renters. We have two types of users: hosts and renters. And so it's all about getting those users to interact well with each other. And we, as a platform, what do we bring? We bring trust. We bring insurance, we bring the payments. We bring all the systems you need to make that transaction as smooth and easy as possible. So we're actually not the product. What we do is we make that interaction between a host and a renter easy.

That is, what we're paid to do is to make it easy. And so it's got to be the center of our attention and the forefront of everything we do at Neighbor.

Seth: Now, why did you choose this name, “Neighbor,” in the first place? Is there some story behind that?

Joseph: Yeah, it ties in with our vision for where we'd like the company to go. It's actually not often that we're able to talk about it, but the name Neighbor, we could have called this company Store-this or Stash-that or Space-something. And there are many companies in the storage space that have named the company after the space or the items being stored.

The reason we called it Neighbor is we're the first marketplace to ever really have neighbors interact with each other. If you think about Airbnb, you're staying in some other country or in some other state, some destination. Same thing with an Uber. You get an Uber when you're in Chicago and you need a car, your DoorDasher typically isn't your neighbor. They may live in the same city as you, but they probably live in a different part of the city.

With Neighbor, though, you want storage as close to your home as physically possible. So we'll have two people that live two doors down from each other that may or may not have spoken with each other before. Maybe they've said hi or run into each other on the sidewalk, but they'll rent from each other because that makes it very convenient to access.

And now we have neighbors in almost every neighborhood in the entire country renting from each other. That's kind of a fulfillment of this original name that we chose is we wanted to make it not about the stuff or the space, but about the people.

The last thing I'll say is we have this vision of being far more than storage. Storage is certainly the beginning for us. Just like Amazon.com began with books, and they sold books, and they became the world's largest bookstore, and then they branched out to other items. We think at our core, what we are is a platform that connects neighbors. And right now we do that with storage. And it's this huge, you mentioned it's a $500 billion industry. And so we can make a very big, well-run company just in the storage space.

But what else could neighbors do for each other now that they're renting out space to their neighbors? What else could they rent out to their neighbors? Perhaps you have a basketball court that I want to come use and I could rent that from you. Or I have a $2,000 table saw. And you don't want to buy a $2,000 table saw, so you just come over to my house and use it and pay me instead. We eventually want to be the platform that enables neighbors to bring back a more hyper-local economy and serve each other in that way.

And so that's why we chose the name Neighbor.

Seth: Nice. Do you have any timetable or plan for when that other stuff is going to start happening? Or is that just kind of a “someday we'll do it” kind of thing?

Joseph: It's definitely part of the vision, but we're laser-focused on what we do today, which is storage. It's such a big industry. I mean, storage does about eight times the amount of revenue on an annual basis than the entire taxi and limo industry that Uber and Lyft disrupted. So it's just massive.

And you've seen how large Uber and Lyft have become as companies, how globally encompassing. And so we could spend a decade just in the storage space. It's so big and the user base is growing.

You mentioned at the start of the call, your worry about how does this affect your storage facility that you're building? And I'd argue that it doesn't affect it at all. Storage is an extremely supply-constrained industry. I think the average occupancy nationwide is 95%. You probably knew this; this is probably why you built the storage facility. Because storage facilities, they have the highest occupancy of any real estate asset class. Way higher occupancy than retail or hospitality or certainly office. Today, no one even comes close. No other asset class comes close to a 95% occupancy.

And the industry builds, I want to say, $4.5 billion to $5 billion a year, is spent on new construction of storage facilities. By the end of the year, all of them are filled and the occupancy rate is still 95%. And so this is an industry that just needs more supply. There are millions of consumers every year who are unable to find the right storage unit for them. We just need more space.

And what we're doing is unlocking a bunch more space that hopefully helps take the pressure off the problem. I think your storage facility, we could unlock half the doors in the neighborhood and your storage facility would still get full. That's how pervasive this storage problem in the United States is.

Seth: A year from now, when that happens, if things don't go well for me, I'm going to hold you personally responsible, Joseph. So I'm going to remember this.

Joseph: We honestly don't discriminate. So if you really want to hold me personally responsible, just list your storage units on our website and we'll get them filled for you. We don't discriminate on the space type. We'll take all types of space and get it leased out.

Seth: That leads into my next question. When I was first getting into self-storage, I went through demos from all the different self-storage property management software companies. Not all of them, but probably like 80% of them, almost all of them were just terrible. I mean, just laughably bad. Like, looks like it was designed in the late 90s and it only works on a Windows desktop computer.

I mean, it's just terrible. I don't know how they survive. I think the only reason they do survive is because there are not that many options and the ones out there are all really bad. And then once people sign up with them, they kind of hold you hostage, so it's really hard to move to another one.

It makes me wonder, seeing how well Neighbor has done at putting this together. I mean, it is light years ahead of anything else I've seen out there. Although I know a lot of the reasons why people use these self-storage property management software is because it integrates with the gate company, it controls their gate, and it assigns a unit number, and all this stuff. But it just makes you wonder, do you know of any legit storage facilities with 100 or more units that are using Neighbor as their software instead of one of these other terrible software options out there?

Joseph; Absolutely. We have storage operators in most states that have listed on our site, and that's not our primary customer type. That's just been a byproduct of building it.

I was at a conference last month and I had a guy come up to me who was a large storage operator and he said, “I was checking out your platform.” And he mentioned very similar comments to you about how outdated and archaic all the software is, super legacy. And he said, “It seems to me that in building tools for your customers, you have built basically self-storage SaaS. And let me get this straight. You give it away for free?” And I was like, “Yeah, I'd never actually thought of it in that light. But basically we do. Anyone can sign up, list their units, we'll get them booked, we'll keep track of which units are booked and all that stuff. And we do it for free. We don't charge you for the outdated legacy software like everyone else does.”

And so, again, certainly not our target customer base, but there have been some smart kind of tech-savvy storage operators in most states that have noticed that. And I don't want to say they have taken advantage of us because they're welcome, but they really have just taken advantage of basically free software by signing up.

Seth: So how does Neighbor make money? Like, where are you guys getting your revenue in this process?

Joseph: Yeah, and it's a novel concept for the self-storage industry because they've never thought about our monetization model. But it's not a novel concept. In most other industries, we just use the Airbnb model. So when you list space on our platform, say you list your garage or say you have a parking lot, and you list it for vehicle storage, you will set the price that you want for each of those units. And then we'll take that and we'll charge the renter that price plus a service fee. And that service fee is what we make.

So it's just like Airbnb where you go to checkout and you see the host fee and then you see the service fee that Airbnb gets. And that's how Airbnb makes money. And so we just make this little piece of each transaction. Almost all the money that we process goes to our hosts. It's pretty amazing to see all the money that our hosts make every year.

Seth: So the money is made from the renter, not the host. And what is that fee?

Joseph: It's not a set percentage. It depends on the price. So for lower price spaces, like, we have some people, they list spaces like a closet on our website. I saw a fun listing the other day in New York City—it's just amazing how tight space is in New York City—someone listed the storage space under their bed on the platform and it's been booked for like a year and a half.

And so a space like that where you're listing it, you may list it for $20 a month. And so our fee, if we applied a flat percentage to that, say the percentage was 10%, then that would only be $2. So we charge a higher fee for those smaller dollar spaces. And then we have big retail REITs and office REITs that list large spaces on our platform, and they can be $1,000, $2,000, $5,000 a month. And our fee just slides down. So it starts out and slides down.

But to give you an example, for a $100 space, we may charge the renter $120 or something like that.

Seth: Like on top of the cost of rent?

Joseph: That's right. So if the host’s price were $100, we may charge $118 or $119 to the renter and make our portion.

One thing people unfortunately find out too late when they store it in a storage unit is that storage facilities don't provide protection for your items. I don't know if this is something you've considered for your storage facility, but 90-plus percent of storage operators don't offer any sort of protection.

And so when you're entering a storage unit, you're signing a contract that says if anything happens to these items, flood, fire, if the whole place burns down, theft, then you're on the hook for replacing your own items. There are some forward-looking storage operators that have started to offer tenant insurance options to their customers where you can get $1,000 or $3,000 or sometimes even like $5,000 in coverage for the items that you store. We're the only platform in the country that offers up to $50,000 in item protection or vehicle protection in all 50 states.

Seth: Is that part of the cost or do they have to pay extra for that?

Joseph: So that's something you can select at checkout. You could book your garage or you could book your storage unit, or you could book your parking space on Neighbor. And at checkout, we’ll provide you an economical option and a mid-level option and a premium option. And you can select your plan, or you can select no plan at all. And then if anything happens to your items, we'll replace it.

It's also worth mentioning, Neighbor tends to be a much safer platform than traditional storage. Oftentimes, traditional storage is built in industrial parks on the outskirts of town. Most people don't know that one in ten storage facilities is broken into every year. So pretty high break-in rates.

Whereas residential areas or commercial areas have much, much lower break-in rates because there's a lot of people there than in those industrial parks. FBI statistics say that residential commercial areas have seven times lower break-in rates. So not only are items typically more safe stored in one of our commercial businesses or our residential homes, but also we provide the best protection in the industry for them as well, the highest replacement cost. So we like to talk about Neighbors as the safest place you can possibly store your items.

Seth: So it sounds like just like renters insurance, right? Like the tenant has the option to pay extra for that if they want that coverage, but if they don't want to pay the extra, they just don't have it and just shoulder the risk of something having to do it. Is that accurate?

Joseph: Yeah, it's totally optional. You're not obligated to pay for it at all.

Seth: Yeah, I mean, most of the self-storage facility and owners I know offer something like that because it's very small, but it's an extra revenue source and that kind of thing.

It is kind of funny how that works, where it's like, you can store your stuff here, but if anything goes wrong with it's not our fault. It's like, well, what's the point of storage then, if it's not going to actually protect it from anything? But I guess that's the cost of just having a roof over this stuff and having it enclosed and that kind of thing. But it doesn't mean it's going to be safe per se.

Joseph: Yeah. When we first did our map of this industry and identified what are the big consumer pain points, what are the big frustrations a consumer might have? That was one of the big ones that jumped out to us, this expectation that when you're renting a storage unit, you're just renting a place to stay. You're not actually renting safety. There are no guarantees being made about your items. It's just there's a roof over your items.

One was the price. It's the single largest subscription payment that most Americans will make in their lifetime. I mentioned earlier Netflix, your Internet bill, there's not much you pay $200, $300 a month for. The closest thing to it is like a car payment. And storage is going to have a higher penetration. Most Americans will use storage at some point in their lifetime, and at any given moment, like today, one in nine Americans is in a storage unit. And again, that's not the percent that will use storage in their lifetime. That's just today, one in nine Americans is currently paying for a storage unit. So it's one of the highest penetration items in the country.

So price, safety, the proximity was another thing that we saw as a major consumer pain point where because of being zoned industrial, oftentimes… I think the self-storage almanac says the average drive time to a storage facility is 30 minutes or more.

Seth: Oh, really? Wow.

Joseph: And for millennials, that boosts up to closer to 40 minutes because they're a little more price-sensitive, so they'll drive further. Whereas the older generation, they tend to pick the storage facility that's just closest to them regardless of price. And so these drive times can be burdensome. Neighbor, by crowdsourcing, can really localize the storage to you.

So again, these three value props we like to talk about cheaper, safer, closer. And everything we try to do is to try and bring it cheaper, safer, and closer to you, or at least provide that option.

And then we also have, as I mentioned, actual self-storage operators that will list on our platform. And so the consumer has all the choice right before them. We just want to be this super consumer-friendly platform where all of your options, anything you could ever want, it's right there for you to evaluate the pros and cons of each and make the best decision for your situation.

Seth: Random question. As a storage facility owner, if I wanted to use Neighbor.com for my software, say, if it was a non-gated facility or even just like a personal vacant land where people can park stuff, is there a way to create a website URL that just contains the units that I have at my facility? Not just the main Neighbor.com thing where you can see all the storage stuff all over the place, but like, here's just my facility, here's what I have available. Does that happen?

Joseph: There is, and that's actually a fairly recent development, something we've rolled out just earlier this year. You can create a dedicated page for your storage facility. You can have a unique URL where you can send people to, where they'll see all of your units listed. It's quite good. We can do a lot of the management in setting up Google Maps listing for you. So you drive Google Maps traffic and it drives directly to this URL. We can do a lot of that kind of site-specific.

We'll even send you signage. Some people, they've built the units or they have the parking spaces, they don't want to think about branding or signage. And so we'll send them out signage that's actually got QR codes that link directly to these pages. It's very cool.

Seth: Another random question that just came up as you were talking. So I know some of the complaints I've heard about the big self-storage property management software companies is that not only do you kind of get held hostage by them, once you start using them just because it's so difficult to leave and migrate to a new platform, but they also take a lot of your data and share it around in ways that may not necessarily be in your best interest. And it's really valuable data because it tells anybody who wants to know in the market how many storage facilities are in this area and what's the supply and demand and what's the pricing and all this stuff. A lot of people don't like it.

But I'm curious, does Neighbor.com do that kind of thing? Like, does your data get shared anywhere? And I guess what I'm thinking of specifically is market data companies like Radius Plus or Storetrack that you can go to to find out like, okay, how many facilities are in this geographic area and what's the square footage of that facility and what's all this pricing and all this stuff. But I'm just curious, how would those companies or would those companies have any way of saying, yeah, in this market area there are these storage spaces hosted on Neighbor.com. So be aware of that as well because that affects the supply and demand in the market.

Joseph: Super familiar with Radius, actually a big admirer of what they've done. I think they've really changed the face of how the storage industry operates. Neighbor is a consumer of Radius data, so we pull that Radius data down. Fascinating.

I will say, in many ways, Neighbor itself has the best pricing data of any operator because of the pricing variability and also the geographic distribution. You look at like a public storage, large company, $55 billion publicly traded company, huge. Amazing to think that they only have 5% or 7% market share. That's how big this industry is, is that this $55 billion company only has 7% market share.

But as large as they are, they only have facilities in 39 states. We're the only operator in the country that has active people in almost every city in all 50 states. Furthermore, we see a lot more price testing because if you're a self-storage business, your appetite for testing is smaller. You might do some price testing plus 5% plus 10%, minus 10%, but ultimately, you need to somewhat play it safe and just make sure your units get filled.

Whereas residential users that are listing out their space, we actually don't require them to list at our recommended price. We'll give you a recommended price and we give you the price that makes you 90% more likely to get reserved. But you can set the price at whatever you want.

And you'll see consumers test all sorts of stuff on our platform. You'll have people try to list it really low. You'll have people that will say, “I think I can charge $800 a month for this 10x10.”

Seth: That'd be nice.

Joseph: And it would be nice. And our system will tell them like, we don't recommend you list at this price, but they can try it anyway and it gets listed. And then we get to observe as a platform what works. And so we get to see a lot more pricing variability than almost any other platform in the country. I'd say more than any other platform in the country.

And that goes back to Feed, our pricing recommendation engine. So we have one of the best pricing recommendation engines in the country for those that are looking to optimize their prices because we just see more experimentation than most platforms do.

Seth: It's actually really interesting when you say that, because I know I'm looking at a new possible facility right now, like a development from the ground up. And one of the huge questions in that, that can make or break the deal, is what can I rent each of these unit sizes for in this market?

And currently the only way I know of to do that is to look at the other facilities in the area and figure out, well, what are they charging and are they full? But Neighbor might even have a better way to do that. Because like you said, you have so much information out there of what different people are doing, which probably includes facility owners and just somebody who's listing their closet for rent. So it would be interesting to use that to do the property research and figure out, okay, what is the going rate? For real, not just looking at storage facilities, but everything else that's out there.

Joseph: Yeah, absolutely.

Seth: So if I go into Radius Plus right now and I do market research to figure out how many facilities are in this area, the listings from Neighbor.com will not show up in Radius Plus, or they will?

Joseph: They will not.

Seth: Yeah, I mean, I guess that's good or bad, depending on who you are and where you're coming from on that.

But you mentioned a little bit about the types of spaces people are listing on Neighbor. Like I've heard under somebody's bed in New York City, which is crazy, I never even thought about that. But what is the smallest space a person could legitimately rent out? What are the most common types of storage spaces people are renting out? Is it like garages or like closets or barns or just under your bed? What's normal?

Joseph: I'll talk about different asset classes because they're going to have different common spaces.

To answer your first question, there's a small, call it 5% of the storage industry, that's like student renters, very small contingent, but we have hosts that will serve those people. So they'll rent out a closet and a student will come store one box in that closet for the three months they're gone for the summer because that's all the items they have. It's just like fits all in this big kind of tote box. And so that's the smallest you're going to get, where it's like a 3x3 or something like that.

As far as most common spaces, certainly those are not the most common spaces on the platform. In the residential space, hands down, the two most popular spaces on the platform are the garage, because you can store items in it, you can store vehicles indoor in it, and then also the adjacent kind of driveway or RV pad.

There's a huge shortage in RV boat storage in the country. And so being able to, instead of having to drive down to some RV lot, being able to park your trailer, your camper trailer, or your boat on the side of your neighbor's house and be able to go get it whenever you want is extremely convenient. And so those are very popular spaces, the residential garage probably being the most popular space.

Actually, we're seeing a huge surge in sheds as well. People renting out, they have a shed adjacent to their house and they rent out that shed for individuals in their neighborhood to store whatever they'd like in that shed. They may not have room for a shed at their own house and so they just walk a couple of doors down and rent their neighbor's shed.

In the commercial space. It's going to vary by asset type. So in the retail space, you'll often have strip malls where they'll take, they rent out 80% of their units but they've always got the 20% of their retail suites that they just struggle to get a tenant in. And they're typically around 5,000 square feet. They'll give us the retail suites in the back, they'll list them on our platform and we'll rent it out. Sometimes we'll dice it up and rent it out for individual 10x10s, sometimes we'll rent the space as-is to someone who's looking for small warehousing and they want the full 5,000 sqft.

For small business, inventory can be a great option. And then also these retail spaces will often rent out parking spaces because they're required by the city to build X number of parking spaces, but they don't ever use them all. And they've got the parking spaces behind the retail. They'll rent those out and we'll fill them with long-term boat, RV, and car storage.

You get a very similar thing with office. Typically when we do office, we are doing some sort of build-out of the space. You'll get a lot of high-rise office buildings where they struggle to rent the first floor and the second floor, especially. They get those top floors all rented out, but no one wants the first or the second floor. And so they'll give us the first or second floor, we'll convert it to storage. These are often located in very central kind of urban downtown areas and so they get rented very fast.

I think of one office building we did in downtown SF, there was a WeWork on one floor, there was a tech company on another. We took the first floor, converted it to storage, and we had it to full occupancy in 60 days after launch. So that's something that office providers will do.

The multifamily space—oftentimes multifamily builders, they actually have built storage cages or storage lockers in the multifamily complex that were supposed to be for the tenants to use, but the tenants never use them. They stay like 30% occupied, and so they'll list them on our platform and we'll fill them with the broader community.

And then as well you'll see multifamily where again they have that problem. They're required to build so much parking, they assign a parking stall to each tenant, but then they have a bunch left over and they'll list it on our platform. And we'll rent it, some to their tenants, some to people that live elsewhere and we'll make sure every parking stall is revenue-generating for that multifamily provider.

So it really depends on the asset class, what type of space is most popular.

Seth: When you say you convert the first floor to storage or just that word “convert,” what does that mean? Does the property owner need to build infrastructure so that it's storage unit, like put roll-up doors and that kind of stuff in, or how much work does it take?

Say, if I've got an empty office space floor like you mentioned, do I have to change anything or just leave it as offices? And people can kind of come and go when they want and that kind of thing?

Joseph: Yeah. In an office building like that, we'll typically build out actual units, and we handle that process on behalf of the office provider. So the office provider has to contribute some capital for that, but we go and manage all of the contracting and everything, and we get it done. It's typically about a two-month process.

Seth: Wow. I mean, what does it cost for you to do that?

Joseph: It's going to depend on the area in the building. It can be as cheap as $10 a square foot, as much as $20 to $25 a square foot, but it's very minimal.

Seth: Wow, that's awesome.

When you were talking earlier, you mentioned people renting out their sheds. So I have a shed in my backyard, and I put myself in that position, and I think, suppose I rent this shed out, do I need to let that tenant access the shed at any point? Like, they can just show up and whatever they want unannounced walk into my backyard and get their stuff? Or can I set hours when they're allowed to show up or restrict times when they can access it?

I might not necessarily want people to just kind of show up when we're having a family picnic and they're getting this stuff out of my shed, or worse yet, if it's in a closet in my house or under my bed. How do you control that? Or is there a way to control that?

Joseph: Yeah, so access is set entirely by the host, and it's actually a required question when you're signing up your space. We'll ask you how often would you like the renter to be able to access their items? And there are some standard selections that you can choose from, such as “business hours only” or “after hours only,” or “by appointment only.” Many hosts will say, you have to set up an appointment with me before you can come over.

Some people will have a large…For example, we have a middle school teacher that had a large (kind of) side yard, a big plot of land next to their home. She's now making $10,000 a year renting that out for vehicle storage, and it's very accessible. That's an area where you're able to allow 24/7 access. Just come get your trailer when you need it, that sort of thing.

And so we have 24/7 access available as well. Many of our commercial spaces will grant 24/7 access, so it completely depends on the host. The renter is able to see the access before they book the unit, so it's really prominently displayed on each listing. And so the renter can kind of shop for what's right for them.

In the storage industry, fortunately, most people are not storing things that they need frequent access to. They keep those items in their home. If you're going to use something every day, are you going to go put it in a storage unit? No, you may go put the Christmas decorations in the storage unit, and once a year you go trek down, get them. You may put your boat in a storage unit once a year. You go grab it in May, you get it out, you use it for the summer, you go put it back in September, and then you don't touch it for the rest of the year.

And so we provide a bunch of variability and access options for consumers. Again, it's like the perfect consumer place. You can find exactly what you're looking for.

Seth: How many of your hosts just rent out vacant land for outdoor parking? Like that example you just mentioned. Because I know as a land investor, this is an awesome idea. And I suppose it depends on maybe the zoning of the property, maybe and what the local municipality will let you do with it. But for example, would you have to paint parking spaces on the land and make it a gravel parking lot first? Or put a fence up? Or literally just take raw land and rolling hills and say, there you go, park whatever you want there. I don't care. How involved is that?

Joseph: Yeah, it's very common on our platform. We're actually trying to spread the word more and more about this because as an investment opportunity…

I'll just use my home market of Salt Lake. If you had $500,000 to deploy and you wanted to deploy it into real estate, you could purchase a rental property, get yourself a $500,000 townhome, and that would yield, in the Salt Lake market, somewhere between $2,000 to $2,500 a month in rent. So call it $30,000 a year.

If you converted it to a short-term rental, if you put the furniture in, it's a little more investment, but maybe you return $40,000 or $45,000 a year in rent from making it a short-term rental. But that same $500,000, that could purchase you somewhere between an acre to a two-acre lot in Utah, which on Neighbor would earn you around $100,000 a year. So just a much better cash-on-cash return profile than just buying another rental property. So it's really attractive.

As far as improvements that have to be made, it really depends on the municipality. We have many people that have literally listed unpaved lots, just dirt lots, on our platform, and they get booked full. There is so much demand for this. We recommend putting down some sort of either gravel or pavement. It's not very expensive. Even nice asphalt is only around 50 cents a square foot, so it's pretty cheap to put down. But it's not required. You can increase your prices the more you improve it.

Seth: When I signed up as a host, I was trying to go through the process of listing a vacant lot. Maybe I was doing it wrong, but I noticed that it seemed to require me to put an address in. Which, with vacant lots, a lot of times there is no address yet, there's just a parcel number. And if you don't know the coordinates of that thing or the address next door, you can't really find it.

So does Neighbor have any plans to add like, yeah, put the parcel number in or tell us the coordinates of it and we'll do that. Or you would have to register a physical address before you could officially start using it?

Joseph: So this may be a feature we need to make a little more prominent in the flow. But if you type in an address, it will show you a map of where that pin is and it'll prompt you and it'll say you can actually move the pin. So if it didn't land exactly where you wanted it to, you can actually drag the map and drag the pin exactly to where you want it. So as long as you have an address that's close.

We don't have any plans to do like a parcel number system or anything like that, since many times that's going to be local to the county. We have to operate off of a kind of national mapping structure. But you can drag your pin to exactly where the lot is.

Seth: I guess if you're going to rent to somebody and then you want to give them directions, you would have to say, go to this house next door. But that's not it. It's actually over here to the right.

Joseph: You can send, just like an Airbnb, you can send detailed check-in instructions, but also, if you put that pin in the right place, we'll show them that pin and so they'll be able to navigate directly to that.

Seth: Does the app show like parcel lines of each property?

Joseph: It doesn't, no.

Seth: Okay, because I know that's another big thing with vacant land. Because there's nothing to go by, there's no building there, if you don't know the parcel lines, you don't really know when you're at it. So anyway, it might be another idea.

And that kind of data is actually not that hard to get. There's a bunch of databases out there that can provide it to you.

Joseph: We've built a really cool tool that actually allows you to use to actually pull up in addition to uploading photos of the space, we encourage hosts to upload detailed photos of their space, five or six photos.

We've also built a tool that allows you as a host to see the parcel on a kind of a satellite map and to layer on actual digital parking stalls to that parcel. And the user, the renter, will be able to see that, and you can even label them. You can even say, this is parking stall A1 or B2, and they'll be able to see that, and they'll be able to see exactly where that is and where A1 is on the lot itself.

So all of these things to help the user identify where the right spot for their RV is, is kind of built into the product.

Seth: If anybody out there is listening to this and they have a vacant lot they want to use for this purpose, as Joseph is mentioning, it's very helpful to indicate, like, hey, here's parking spot number one, number two, and that kind of thing.

So I actually spent a lot of time trying to figure out the right way to do this. How do you actually indicate on-site where is the parking spot? Do you have a post there or a bumper or paint lines or what do you do? And I'm sure there are many different ways to do it, but it can depend on does this place get snow that's going to cover up whatever you put on the ground or not?

And I have a video that I'm putting together as we speak that thoroughly explains how I handled this. So assuming that video is published by the time this episode goes live, I'll put that in the show notes. And this is retipsier.com/169, if you want to check that out. Just if you need some inspiration for how to handle that.

We talked a little bit about the different types of spaces that people rent out. Have you seen any creative ways that people have repurposed their properties for this kind of store? I remember hearing years ago about somebody on Airbnb who built a snow fort in New York City and rented that out on Airbnb.

I don't think you're allowed to do that anymore. But it was just one of these, like, oh, wow, that was unexpected, but I didn't realize you could do that. Can you think of any weird things people have done to create storage space? I guess that thing under the bed was kind of creative. I'd never heard of that. But anything else come to mind?

Joseph: Yeah, I mentioned some already that are fairly unique. I think the principle here is that there is a shortage of space in the United States, and Americans are really hurting. We live in a world where space has gotten extremely expensive, especially living space. I think we've all run into this.

There used to be that there was this affordable housing crisis that existed in coastal cities, New York and San Francisco. That over the last decade has really spread into the interior of the United States. You now hear about the affordable housing crisis in Austin, and Salt Lake, and Milwaukee, and everywhere across the country. There's an affordable housing crisis in almost every major city.

And so that's why the storage industry is booming as it is. Millennials are using storage at much higher rates than their parents did, which is surprising given that what we thought about millennials is that there are these minimalist individuals. And to see that their usage is outpacing both generations before them just shows how big of a problem this is. People use storage because while expensive, it's still a cheaper cost per square foot than buying additional living space. And so that's why they shift to storage.

So the reason I bring this up is to say if individuals have space that they're not using, no matter how unique that is, whether it’s a closet or a space under a bed in New York City or whether it's a large lot in Austin or Salt Lake City or Michigan, or whether—we've had individuals list barns where they bought a property with a big barn, but they don't have animals; they just liked it for the aesthetic—and now they store a bunch of their neighbor's vehicles in the barn.

Really, we're at a shortage for space. People are willing to pay for that space, and there are ways to make that space extremely safe and protected. In fact, oftentimes the more unique spaces are safer than traditional spaces. And so we can solve this space shortage problem in the United States by coming together as neighbors.

That's the thesis of everything we do is that neighbors can help neighbors. We've seen people come from the residential community. We've seen office buildings come and say, I'm not using this space. I can't get anyone to rent this space. Why not give it to someone for storage instead of for office? Because there are not many people renting office right now. So let's help solve this storage problem which continues to grow. We've seen people come from all different walks of life and different real estate backgrounds. And we've even had self-storage operators who have built purpose-built self-storage space, list that space on the platform. And then consumers are able to come onto the marketplace and see all these different options and not feel so stressed as my co-founder did when he first went out to find storage and all the spaces near him were full.

That's a common experience. 50% of storage facilities in the country or close to it are completely full. It's an average occupancy of 95%, which means that everyone above the average is pretty close to 100% full. And then you have about half below the average that are somewhere in the high 80s, low 90s. And so it's a common problem to go look for storage and not be able to find any space available. And we can solve this problem.

Seth: I know people who have gone out and bought cars for the sole purpose of renting them out on Turo. I also know many people who have bought houses for the sole purpose of renting them out on Airbnb. I know people who have bought cars for the purpose of being an Uber or Lyft driver.

Are there a lot of people who build barns for this purpose? Because in their mind they're thinking, I'm going to list this on Neighbor.com and make money that way. Is that a normal thing? I'm not sure if you have that information or not.

Joseph: Absolutely. And I'll say I'm a Neighbor host, I'm also a Turo host and absolutely love the program that Turo provides. It's great way to earn income on an idle asset.

And as you mentioned, people will start with one car and then they'll get to three, and then they'll end up with ten cars in a fleet that they go park by the airport because you can make so much money off your cars. And we see the exact same thing on our platform. We actually have dedicated landing pages that we can send to you that help real estate investors think through how to evaluate a real estate investment. We'll have individuals that'll, as I mentioned, instead of deploying money into a short-term rental or into a rental property, they'll buy a lot instead in a central area and they'll rent that out. And it's a higher yield return, it's a higher cash-on-cash return.

We have individuals that have rental properties already. Maybe they've got 15 rental properties in a portfolio and their ability to increase their cash-on-cash return on those properties is limited. They can increase the rents each year, but that's about the options they have. But we can come in and we can consult them and we can help them see that you could rent out that space or that shed, or there's a third car separated garage that you could rent out on Neighbor.

And all of a sudden we're able to double their cash-on-cash return in many instances because they make $2,500 and the mortgage is $2,200, they're making $300 a month. And so if we can add an extra $300 a month on each property, that's really meaningful, and in most cases we can.

Seth: So I would love to use Neighbor to manage my self-storage facility, to get tenants and collect payments and all this stuff, but my problem is I have a gate on my facility and currently the way it works is it hooks up with the gate software, which communicates with our self-storage property management software. They all work together to assign each tenant a gate code and then assign them a unit. It's honestly a huge pain to do this stuff, but that's what you get if you're going to have a gate, to give people this illusion of security.

Am I correct that given that's my situation, I can't really use Neighbor.com because there's this gate factor that Neighbor doesn't control? Or is there a way to use Neighbor but just have a separate system that somehow manages the gate? Do you know anything about that?

Joseph: Yeah, so we've had individuals do both. In most scenarios, the storage operator will say, I'm going to use Neighbor and I'm just going to separately manage the gate code. I'll just have the gate system generate a code and that'll be my one message that I send to the renter through the Neighbor platform, is I'll just send them their gate code.

In some limited instances, depending on who the provider is, I'm happy to have my team sit down with you. We may be able to actually connect with that provider, but it's not one of our main offerings. So in most instances, it's kind of separate.

Seth: Yeah. Interesting.

How often can a host increase their rent? I know this is a strategy a lot of self-storage owners use where they'll get somebody in at a super low price. Maybe it's half off on the first month or free for the first month, but then, like clockwork, every couple of months they increase it by $5 a month. Low enough that nobody's going to move out because of that, but they can.

I mean, it's a serious, powerful strategy for increasing the value of your storage facility because $5 times 200 units is a lot. I mean, that adds up when you keep doing it. So are there any limits on how often you can increase people's rents?

Joseph: Yeah, so that's actually one of the huge advantages of using Neighbor as a renter. When we went and did this map and identified a bunch of the pain points, one of the big pain points that most renters do not realize is exactly what you're talking about.

I saw an interview with the extra space storage. It was an earnings call or something, and they were kind of bragging about how they increase rents like 144,000 times a month or something like that. They increase price 144,000 units each month, they increase their prices.

So to explain this in layman's term to the average renter, you'll get advertised a move-in price, and that price may be $100 a month or even free. And then you'll pay that for the first month and it'll revert to the normal price, which may be $150. And then every four to six months on average, although some are more frequent, some are less frequent, you're going to get a price increase and that'll be more nominal. So it may go from 150 to 170 to 190 to 210. Three years in, in some scenarios, you're paying double what you started paying.

And to answer your question, Seth, that's not something we do on the platform. So when renters join Neighbor, the price they pay is the price that they pay. Now, if a host absolutely needs to increase the price on them, then what they can do is they can have a conversation about it. They can message them and say, “Hey, I'm going to be increasing my price to X if you're not okay with that you'll need to move out.”

We require hosts to provide renters with 30 days notice before evicting them. So as long as that notice is provided, then that's good. But the host can confirm that that's okay with the renter. And if the renter is okay with it, we can actually enable a host to increase the price on the renter, but we require that that acknowledgment take place. We don't love the idea of these kind of blind your-price-is-this-suck-it sort of mentality.

So we don't allow that because we believe in kind of protecting the consumer that way unless there's an explicit acknowledgment that's taken place where the host has proposed it in advance.

Seth: Yeah, it's interesting. With a platform like what you're running, how do you decide who to prioritize since their interests are often at odds with each other? Maybe not often, but sometimes they are. Like, do you focus on we want to make the hosts happy or no, we want to make the tenants happy?

At the end of the day, how do you decide which side you're going to give preference to?

Joseph; Our philosophy has been always to treat both sides as adults. You can talk about preferencing one side or the other, but think of this example that I just described.

We don't do one thing or the other. It's not like we don't allow hosts to increase prices if they want to. What we do is we require them to be explicit about it. I don't know that that preferences one side or the other insomuch as it kind of does what's right, it necessitates that that conversation take place so that the two individuals can interact as adults in a marketplace. Because at the end of the day, our hosts, they're business owners and our renters are individuals purchasing something for a fee.

And we can be adults about this. We don't need to dupe our hosts into doing something. We don't need to dupe our renters into doing something. We can have them come together and transact and ultimately that's again, our job as a platform, we're not a storage company. Neighbor is not a storage company. We don't sell storage. Our hosts sell storage. And what we sell is easiness. We sell trust. We sell the ability for transactions to happen quickly, safely, easy, cheaply for both parties because that's going to produce the biggest scale possible.

And so that's what we focus on is just we're not really in the host camp or the renter camp. We're in the transaction-taking-place camp. So whatever we can do to make that transaction happen and happen safely so that both parties are satisfied, that's our incentive as a company because that's how we make money.

Seth: So if there was a situation where somebody's going to walk away upset, is that person going to be the tenant or the host? And I don't know hoff that even happens, but I'm sure there are probably disputes from time to time, but ultimately, who wins?

Joseph: We believe in doing the, as I mentioned, we believe in doing the customer justice. So for example, we've had situations before where a renter, they said, and this happens in the storage industry, this is actually a benefit of using Neighbor where a renter will stop paying, right? One of the things we do to benefit our hosts is that even though the renter has stopped paying us, we keep paying you while the items are in your space.

Seth: How does that work? Where are you getting the money to do that? Or why would you do that?

Joseph: That's because we want hosts, especially a lot of these residential hosts that are not a large storage business. We want them to feel comfortable listing their space, knowing their items, that they're not just going to get stuck with items in their space that they're not earning money for.

And so we foot the bill. As a company, it's part of our host payment payout guarantee that we'll foot the bill and eat the cost and then we actually run the entire auction and eviction process on behalf of our hosts.

So many storage facilities are aware that different states require different procedures in order to dispose of items. When a renter stops paying, you can't just take those items and throw them away. There's actually a proper process and procedure to follow, and we do that on behalf of our hosts. We take care of that entire process and we take care of the auction and we're able to recoup our costs for protecting your payouts, when we sell those items in an auction. Occasionally though, the items don't sell for much and we're out. We take a loss and that's fine.

Again, it helps more transactions happen because people feel safer and they feel like they're taken care of. So that's an area where hosts are benefited.

We've had scenarios where a renter, they'll say, oh, I was charged for this, but I don't want to pay that. Because they decide to move out and they try to get a bunch of months back or something like that. And we take a look at it and they may say, oh, I'm going to give everyone a bad review or something.

And we just look at like what's just? And if your items were in a space, you should pay for that space. And so we're always going to come down on what's just. So that is going to benefit the host and not benefit the renter. Whereas if a host says, I want to jack the price on our renter, again, we come down on the side of what's just. Well, what's just is you should have to tell the renter that you're planning to jack prices on them and they should have to acknowledge that. And so that comes down on the side of the renter.

So again we don't really care about renter or host. We care about what's just, because ultimately that's going to be the most in our favor over the long term if everyone can trust that our platform is just going to be the safe place to interact and that no party, whether the host or the renter, is ever going to be able to take advantage of it. They're all going to have to transact in a very honest, straightforward manner that's going to invite more and more people. And it has! I mean that's the reason we're the only storage provider in the country that operates in every city in all 50 states.

Seth: Yeah that's an interesting thing, coming down on what's just, because what's just kind of depends on who you are and what's in your best interests and it's kind of presupposing this moral standard but it's like whose moral standard? Who gets to decide that?

But I hear what you're saying, though. I mean I think 98% of the time it's obvious.

Joseph: This is going to get existential real fast. We need to get into absolute versus relative truth. This is going to be a philosophy podcast pretty quickly here.

Seth: Yeah well it's truth. I mean everybody has a moral standard. It's just a question of where is that coming from? Is there an objective basis for that or is that just kind of am I using society or is it just my feelings this morning or where does that come from?

So anyway it's kind of interesting.

Joseph: I'm a big believer in absolute truth.

Seth: I am too. Glad to hear that. Not everybody is. So anytime somebody says they don't believe in absolute truth I'm like are you absolutely sure about that?

So I'm wondering are there any particular kinds of markets where this makes the most sense? Say I have a spare garage but I live in the middle of Brooklyn or I live way out in the middle of nowhere. Does the current supply of storage have something to do with that or the population? I have a feeling your answer is going to be, “Yeah I can work anywhere.” And I'm just curious if I was going to go out of my way to build three extra sheds in my backyard for this purpose what would I want to see in the market to make sure yeah this is probably a good idea.

Joseph” Certainly the markets where we have… well I'll just say what you just said. And that is we have users getting rented everywhere. We have users in cities that are like 2,000 people. They don't even have a post office where they've signed up space. And it has gotten rented through Neighbor because those areas are kind of neglected by traditional self-storage operators because there's not a big enough market to justify an investment. And so these individual guys can take advantage and get rented.

Hands down, though, where we have the most excess demand, we… Actually on Neighbor, we're a supply-constrained marketplace. We have millions of renters that come to our site every year that go unserviced. Meaning like we just don't have enough space for them. Even us with all this crowdsourced, like we need more supply in the United States. I think anyone who's spent any time in the storage industry has realized this reality. It's severely undersupplied.

So hands down where we're going to have the most excess demand is going to be top 25 CBSAs [core-based statistical area) in the country. So many people in such a dense area, it's just impossible to build as much.

So oftentimes when investors are coming to us and we're setting them up with our account executive team that will walk investors through, help them purchase in the right locations and stuff like that, we'll help them see that some of the biggest return opportunities are in these major cities.

Seth: Could I sublease space for this? Like say if I was renting, I don't know, an office somewhere and all of a sudden I don't need that space anymore, but I'm going to lease it to somebody else. Is that something people do?

Joseph: Absolutely. And in most cases this doesn't qualify as like a sublease. Obviously check with your attorney, don't take our word for it, but some contracts will have prohibitions on sublease. You can't sublease this space. Typically they're referring to having another person, another individual, sublease the space. If you're still the primary user of the space and you're just taking a portion of it and letting people store some items there, that's typically an allowable use for your space.

So it happens all the time. We have renters, we have many renters on our platform that have listed part of their space that they're renting on our platform and helps earn them money and helps pay their rent, right? We pay part of their rent for them.

Seth: And one interesting thing about this is based on everything I've heard you say, sounds like your property does not need to be zoned commercial in order to use it for this purpose. Whereas if you were actually running a storage facility, it would need to be. So it's kind of convenient that you don't really have to rezone your property just to use it for this purpose.

Joseph: It's very convenient and again, often comes down to primary use of the property. And that's why self-storage facilities have to deal with this as their primary use of self-storage.

But every municipality is different. So we do tell all of our users, make sure to check with your municipality because states tend to have similarities across states, but municipalities can get very different. You'll get some municipalities have a lot of authority to go one way or the other. And so it's always good to check with your municipality to see what local zoning is.

Seth: Now I know we've talked a little bit about the supply and demand and how your opinion is that this is not going to hurt a self-storage facility owner long-term.

But I'm just curious, let's pretend for a moment that you're wrong and this actually is going to totally screw up supply and demand, or it's just going to change things. Like Airbnb, it didn't destroy all hotels, but it did kind of change the landscape. I mean, there's just different options out there. And in some ways, hotels have kind of had to up their game to make it worth people's while to come there.

And I'm just wondering, as a self-storage facility owner who wants to stay competitive with Neighbor out there now, what do you think I need to, like, how can I up my game to make sure people want to come and rent for me instead of John Smith down the road who has a old barn to rent out. Is there anything I could do to stay relevant and stay attractive without having to lower my prices?

Joseph: Well, it comes back to a lot of these pain points that we identified. I think, if anything, Uber, when they disrupted the taxi and limo industries, taxis and limos in all of North America were doing around $5 billion in annual revenue. Uber today, just one company, does over $50 billion in gross bookings. Well over that.

So how did that happen, given that the entire North American taxi and limo industry was only doing five? And guess what? The entire North American taxi and limo industry, ten years later, 15 years later, still does almost five. So how did that happen? Uber provided a different service, a more convenient service, at a different price point than what taxis and limos were offering, and it expanded the market.

There's a famous guy, Bill Gurley, he's one of the partners at Benchmark, one of the early investors in Uber. He wrote a famous essay on the ability to attract new people, blue ocean, to the industry. And so I'll start with that and say we view ourselves as doing something very similar. Storage is a much larger market. Instead of $5 billion in North America, storage does $50 billion just in the U.S. in annual revenue. So just a huge, huge industry.

And we don't think we're going to contract that at all. We think we're going to expand it. We think we're going to open up the amount of people that feel like storage is now within their budget. And so we're generating new customers.

We did a survey early on. It's been several years, but we found that many of our customers had never used self-storage before, so they were entirely net new to the industry. So that's the first thing I'll say.

If there is one thing we're forcing, though, that I think you're seeing is just enhanced customer service. I think there was a belief in the industry before that you were going to get filled regardless, and you kind of do whatever to your customers, you didn't need to pay attention. Storage is famous for being super low OpEx. You don't need to do much.

Actually, one of our investors from Andreessen Horowitz, shortly after investing in Neighbor, we had told them about some of these stats on crime and other things like that, and he called me a few months after he invested. He said, I remember you presenting, and my son just called me, and he had a storage facility in SF San Francisco, and the storage facility got broken into. And he, of course, was super mad. So he marched down to the storage facility and he said, hey, all my items were stolen. You're going to replace them, right? And the storage facility was like, no, we don't cover that. Like you're on the hook.

And he was enraged and said something along the lines of, well, I'm never going to store at your place again. To which the operator responded something like, I've got a waiting list of 20 people for your unit. I don't care. Leave. I'll just call the next guy on the waiting list, and the unit will be filled tomorrow.

And so if there's one thing Neighbor’s bringing to the industry, I don't think it's much change in occupancy, but it is a little more focused on customer service and customer support and doing right by the customer.

You mentioned that it's becoming much more popular to offer some sort of property protection. I like to think that Neighbor is in part driving that trend because we offered early on, I mean, since the very beginning, since we first started out, we offered $25,000 in protection. Now we offer $50,000 in protection. We've been doing this for six or seven years now. And I like to think that over the years, that percentage of storage facilities that are really looking into offering this to their customers, they've realized it can actually drive revenue for their company.

So that's part of the adoption, but also part of it is it's, I think, becoming more expected because we've advertised this aspect so much. So I like to think of that as our impact.

And that's to answer your question, how you can compete in the marketplace is just be the storage facility that's not just profit-motivated, but also cares about the customer and is willing to offer things like property protection, is willing to be transparent about price increases, things like that.

Seth: Yeah. And I know a lot of new storage facility owners. They'll look at very basic metrics, like how many square foot square feet per person are there in this area? And that kind of thing. And they may see something like Neighbor and be like, oh, all these new square feet are going to come to the market and saturate everything.

But it's so much more granular than that. Like, is it climate-controlled or not? Are they 5x10 units or 10x30 foot units? There's so many different kinds of storage. So whatever comes out of the market, understand what is that, what kind of customer is that serving, and how can I serve a different kind of customer if I need to?

Joseph: One customer type, that is typically a lower price per square foot. And so most storage facilities have kind of neglected it to build interior space, which makes a higher price per square foot. But RV and boat storage has been highly neglected. Again, it makes a lower price per square foot.

So there's a huge opportunity for those, especially in areas where RVs and boats are very popular, maybe close to national parks or lakes or things like that. It's a huge opportunity to build very custom solutions for them.

We actually have a large operator that's listed on our platform, a group called Rec Nation. They've listed their spaces through us, and we help fill them. They are entirely focused on RV and boat storage. I think it's really cool what they're doing and the vision that their CEO has had to focus entirely on that segment of the market that's been underutilized. And I want to say they've been able to raise over $500 million from investors to go deploy into this area. And they're offering a great service. I think they're being very successful.

Seth: Yeah, I know we're probably going to be looking at that when we expand to phase two of our facility. I don't know if we'll go that direction or not, but you're right. I mean, RV and boat storage is pretty severely neglected. And I think historically it's been because even though the cost per square foot to build that kind of storage is pretty cheap. In a lot of cases, the amount of rent you can charge for it doesn't justify the cost.

But I feel like that's changed a lot since the pandemic. A lot of people have boats and RVs that didn't have them before, and they don't want to park them in their own yard. And there's a huge need for that. So I think it is definitely worth looking at.

Well, I know you've been very gracious with your time, Joseph. One last question here as we wrap this up. So I know whenever a company like Airbnb or Uber gets huge and adopted by the masses, inevitably you start to see news articles that talk about horror stories on the platform. Like, I remember hearing about Airbnb owners who couldn't get rid of tenants who would like, squat in their property and that kind of thing.

I mean, I don't know if Neighbor has encountered that kind of thing yet, but what are some of the biggest, unexpected challenges that you've had in trying to create and run this kind of platform? Does anything weird like that happen, or do you anticipate any of those kinds of, I don't know, PR nightmare issues coming up or what do you think?

Joseph: Yeah, I count my blessings every day that we're in the business of storing items and not in the business of storing people, as we like to refer to Airbnb, they're in the business of storing people. Uber is in the business of transporting people. And anytime you deal with people, the regulatory scrutiny goes way up and you have all these restrictions, these kind of tenant laws to deal with.

Storage is much, much more simple. In the vast majority of states, within a 60-day period of non-payment, you can have a renter out of the unit. There's no sort of kind of long-term squatter stuff like you talked about that Airbnb has to deal with. You don't have to deal with a lot of the tax burden, the room and board tax.

So I definitely count my blessings every day that we're in storage and not hospitality. That's a nightmare of a world with a lot of liability involved. For our business, what's been unexpected to have to encounter most things are just fairly straightforward that you'd expect in the storage industry. Like, a tenant stops paying, and so you have to deal with a tenant that's no longer paying for their unit. Or a renter's items get damaged in some way.

And those are things that's why we exist, right? That's why we are able to have a company, is because those things happen and because we're able to provide things that make them better.

So nothing crazy yet. I wish I had a better soundbite for you.

Seth: No, I mean, that lack of controversy and lack of drama and lack of excitement is why a lot of people get into self-storage. Just because you're right.

I mean, you're not storing if the people aren't living there in the property and if it's boring, that's ultimately a good thing as an investor.

Joseph: Yeah, we do occasionally and we'll filter these out, we'll occasionally have individuals come under our platform and they'll say, hey, can I live in this space? And we strictly prohibit that. Even if a host was willing, even if a host said, yeah, we don't allow that to take place on our platform for those very reasons. We're just not interested in ever dealing with any of the rules and regulations around living.

Seth: Yeah, that makes sense. So, Joseph, thank you so much for spending your time here with me. I know it's been fascinating. I think it's an amazing thing that you're doing. The app is very well made.

If anybody out there wants to give it a retipster.com/neighbor, I'll have links to that and a lot of other stuff we talked about in the show notes for this episode, retipster.com/169.

And I'm really excited to see where this goes. I mean, it's just a brilliant idea, and I'm shocked nobody else has done it yet, but maybe it's that whole thing of an idea is only worth so much as it's multiplied by action. Like, there are lots of great ideas out there that never get anywhere because nobody will do anything about it.

But this is one of those things where the idea was there and the action was there and look what we have now. It's pretty cool. Thanks again, Joseph. Appreciate it.

Joseph: Thank you, Seth.

Seth: Yeah, absolutely. I'm excited to keep an eye on Neighbor and see where it goes.

Seth: Hey, everybody, how's it going? This is Seth Williams and you're listening to the REtipster podcast. This is episode 167, and today we're finally dedicating a full episode to the 1031 exchange.

So if you've been around the real estate investing world for any length of time, you've probably heard of the 1031 exchange before. But just in case you haven't, we're gonna give you a quick primer on what this is and more importantly, how you can use it to save yourself a ton of money on taxes as you're growing your real estate portfolio. This is one of those amazing tax advantages that real estate investors get to take advantage of. And as a real estate investor, you need to know about this. This is a big deal if you plan on making real estate a big thing in your life.

And today we're talking with Scott Saunders, the senior vice president of Asset Preservation, Incorporated. And Scott has an extensive background and a huge wealth of knowledge and experience in this realm. I met him over a year ago at a speaker dinner for a conference we were both speaking at. And in just about five minutes of talking with the guy, I learned a ton about 1031 exchanges. It kind of blew my mind.

And I thought, you know, I wonder if I could recreate this conversation for the REtipster audience? And even go beyond that, learn even more things that I'm sure Scott can talk about that most of us don't know about, specifically as it relates to land investors. Which is kind of a niche that doesn't get served a whole lot when it comes to this kind of thing. So we're going to understand how land investors can use this, and even just real estate investors in general, some of the things that you need to know and some of the things that you probably don't know about it that you're about to learn.

So, Scott, welcome. How are you doing?

Scott: Hey, Seth. I'm doing great. Great to be here with you today with your audience. And I actually think it's a fun topic. Most people don't think taxes are all that exciting, but when you're looking to build wealth and scale and grow in real estate, this is just a tremendous tax-saving strategy that really helps propel people faster forward they can really use to their advantage.

And a little known fact, I don't know if you know this or not, but it's been in the Tax Code now for 102 years. So we're not talking about something that just came about, we're talking about something that investors have been using for decades and decades and decades.

So I'm looking forward to unpacking it, adding some value for your listeners, and hopefully talking about the rules, the process, and maybe some things they haven't heard about before.

Seth: Amazing. Over 100 years. I had no idea. That's pretty cool.

So maybe we just start at the very most elementary level. What is a 1031 exchange? And why might this be advantageous for land investors specifically?

Scott: Yeah, let's say you buy a property if you were to do a taxable sale. And it's just the most simple level. I take some land, I sell it, and I receive back cash. That's a taxable sale.

In a 1031 exchange, I have a property that I sell. The consideration for that instead of being cash is what we call a “like-kind” property. So at the most basic level, taxable sale property for cash, 1031 exchange, I give up property, I receive back like-kind property.

Now, you hear this word, 1031. And so let me kind of share where that comes from. It's not that complicated. It's a section of the Tax Code, which happens to be Section 1031, that talks about how you do this. Now, why people do this is that a 1031 exchange allows you to defer all of the capital gain taxes that you otherwise would have had to pay if you did a taxable sale.

Now, with land, there's one aspect you don't really face most of the time, which would be depreciation recapture, because there are no buildings that you're depreciating. But in a taxable sale, you have up to four different taxes that you pay. So first, if you have an approved property, you pay depreciation recapture at a rate of 25%. The remaining federal capital gain is taxed at either 20% or 15%, depending upon your taxable income. Some investors face what we call this net investment income tax. So this is a 3.8% surtax on any income over certain thresholds. So a single filer over $200,000, married filing jointly over $250,000. So, on a larger land deal, you're going to face that net investment income tax.

And then the fourth component, which I think is important, is state taxes. So you could be in a state like Florida or Texas or Tennessee with zero, but the highest state tax rate in the country right now is in California, it's 13.3%. The point being you've got to add up all four levels of taxes to see what you'll be paying in taxes. So you might make a nice profit, but at the end of the day, you might not put as much in your pocket. After you pay the federal government, you pay the state government.

So where an exchange comes in is I take all of that gross equity, I pay zero in capital gain taxes, so I defer paying that and then I use that equity to go out and redeploy and buy more real estate. So it's going to give you much more purchasing power, which allows you to grow and scale faster than someone who's selling and paying the taxes every time they do a deal.

That's the big benefit. It's a purchasing power that gets redeployed into other property because you have all of that gross equity you can put that into something else and you can do bigger deals faster.

Seth: So maybe I can just illustrate this with an example. And if I'm saying this wrong, feel free to jump in and tell me.

Let's say I have a $100,000 house, for easy numbers, and I sell this thing for $100,000 cash and I just put in my bank account. So if I were to do that on an investment property, I might pay, I don't know, 20%, 30%, maybe more in taxes.

But if I were to take that money and instead very quickly go out and buy a second property worth 200,000 or whatever, just a like-kind exchange, something that's bigger, kind of upsizing my portfolio, instead of paying that $30,000 in taxes, I wouldn't pay any of it. I would just take all of it and put it into that new, more expensive property.

Am I saying that right or am I missing anything?

Scott: That's a great illustration. You're correct. When you do an exchange, you don't pay taxes today. You reinvest in another property.

And so one of the things that comes up, and here's a common misconception that I'll kind of address, which is, “Well, I'm going to have to pay the taxes someday, so why not just pay them at today's rates? They're relatively low. Bite the bullet.” And the beauty of an exchange is this: you can exchange over, and over, and over again and never pay capital gain taxes during your lifetime. Build a huge real estate portfolio, and then you pass on that highly appreciated property to your heirs. They get what's called a step-up in basis to the fair market value at the time you pass.

So let's just say you start with $100,000 piece of dirt. You go up to 200, 400, 500, a million. At the end of your life, you've got a $10 million portfolio. And so it's all capital gain, but you never paid taxes. You deferred it. And the tax code says your heirs now get the value at $10 million. So you essentially deferred paying taxes in your lifetime. And now your heirs don't have to pay the taxes either, because they get the value at the time they inherit it.

So this, to be honest, is one of these secret strategies that real estate investors use to grow massive portfolios, right? The big people do it in commercial real estate, they certainly do it. The REITs do it, the Donald Trumps of the world do exchanges. But where I think it's great is it allows your average investor to get into the game. So let's just say you buy a piece of dirt for 100 grand. It's worth 300,000. You do an exchange, out of that 300,000, you scale up to a 600,000 to 1.2 million to 2 million. This is really the tool that allows the average investor to get into the game and keep redeploying their equity.

And what's really great about this, Seth, is you've got the ability to do this with real estate, any type of real property, and we'll unpack that in a few moments of what will qualify. And some things you maybe even thought about as being qualifying like-kind property. You can't do this with stock. You can't buy Apple low and try and sell it high and defer paying the taxes. So we have a built-in advantage owning investment property that they don't have in the stock market or with other types of investments. It really gives a real estate investor a huge leg up on other asset classes.

Seth: When I hear the word “defer,” what I think of is just “delay.” Meaning, like, you don't pay the taxes now, you pay them someday. But from what I'm hearing you saying, you would never pay the taxes as long as you just keep going and you never get to the point where you just sell out and take the cash and run with it. Is that accurate?

Scott: You're 100% accurate. As long as you don't pocket the money and take the cash out on a sale, you can defer it.

So sometimes you'll hear it called a tax-free exchange. It's not tax-free. You're merely kicking the can into the future. But there are a couple of options. So people might go, I want to sell it. Well, you could. Another one you could do is something called a partially deferred exchange. You sell a million-dollar property, and let's say you buy one for 800,000 and you take a little cash out. That's called taxable boot. You just pay taxes on the money you take out. The rest of it's deferred.

But I'll tell you, I've been doing this since 1988, so this has been my sole focus, really ever since I got out of college. That's all I've done. The vast majority of investors exchange over and over again. And you've got in your audience a good percentage that do dirt deals. But let's say later on you come out of a piece of dirt. Let's say you go into an approved property. Let's just say it's a twelve-plex, an eight-plex, something like that. Because it's an improved property, you can refinance it. So you do an exchange out of land into an approved property the very next day, and you got to make sure it's done as a separate event. You can refinance and pull all your money out tax-free or most of your equity out tax-free. So there's actually a way, because it's not really fun, Seth, if you keep reinvesting, reinvesting, and you don't ever get to enjoy the benefits. We're all buying real estate to build portfolios that will fund our lifestyle, right?

Doing an exchange into an improved property and doing a refi is a completely non-taxable event. And that's how you get access to your equity without triggering a tax hit. So that's a strategy many investors do. They call it equity harvesting, different names. But that's a way to get access to the capital that you're accumulating over time without triggering taxes. And that's what savvy investors have been doing for decades and decades and decades.

Seth: But if you do that refi, then that's now debt you have to pay on, right? With interest.

Scott: It is. But think of it this way. Let's say I got a twelve-plex, I've got tenants paying my debt. I'm not paying my debt. So you're right, there's debt on it. But as long as the numbers work and you can still have a positive cash flow, you, as the investor, aren't paying the interest. You've outsourced that to your tenants. They're really paying your debt.

Seth: Gotcha. So I know one of the things that kind of trips some people up with 1031 exchanges is the timeline. So can you give us a quick rundown on what do you need to adhere to, what needs to happen within 45 days, what needs to happen within six months, and what happens if you don't meet those deadlines?

Scott: Sure. What I'll do is let me go through the time deadlines and then also let me kind of insert what I call some practical tips that I find help people out.

So in the most common exchange, it's called a delayed exchange. Sometimes you'll hear it called a starker exchange, but it's delayed over time. So let me walk you through the sequence of steps. What do you do to set up an exchange? Number one, you list your property, and once it's under contract, this will be what we call your relinquished property, or the property you're selling.

Once you're under contract, you contact what is called a qualified intermediary. Sometimes you'll hear others call it a QI, an intermediary, a facilitator. We are going to be assigned into your transaction. We'll step in and we're actually going to sell the property to the buyer.

So when you close on the property, that is day zero, the closing of the property being sold, you have 45 calendar days, and they end at midnight of that 45th day to identify the property. And then you have another 135 days after that to close on it. So it's 180 days maximum.

The first 45 is what we call the identification period. The 180 days is called the exchange period. So you've got some very specific time deadlines that you have to adhere to.

And the question we get asked all the time, particularly in markets where inventory is tight, is there any flexibility in those? And 99.9% of the time, there isn't. And a very narrow exception is if you've got property in what is called a presidentially declared disaster area, say a hurricane, a wildfire, typically these are natural disasters. If the IRS declares your county a natural disaster area where you've got a presidential disaster declaration, you can get an extension of 120 days. But let's say that doesn't apply to the vast majority. And frankly, if you have a hurricane or fire go through, you've got all sorts of challenges. This isn't something you really want.

You've got to identify in that 45-day period. Now you've got flexibility there, Seth. You can start on day five and identify three properties and you can revoke them and you substitute with better properties. But by midnight of the 45th day, you have to buy something in that exchange period that was identified in the first 45 days.

And you probably hear this all the time. People look at that as a little bit of a challenge or certainly a concern. Right, what if I don't find anything? So let me give you my tip that I think makes it a little bit easier. As soon as you're listing the property that you're going to sell, you just get in a listing and you think you're going to list it at a reasonable price. You're going to get some good offers on it at a reasonable time period. Start working with your real estate professional, the broker you're working with, on what you want to purchase at the moment you list.

Where people get into trouble is they don't start until they close. I say start that process early on. Start looking at what you're looking for. You can start making offers, you can make contingent offers, but start identifying what you want to buy. I personally did an exchange two years ago. I sold a property in Phoenix, Arizona, and I exchanged into five replacement properties. So, four of them in St. Louis, one in Memphis, Tennessee. I didn't even list the property I was selling until I had locked up my purchases. So I literally had all five purchases with a verbal confirmation that I'd be buying and felt very good that I had all my purchases locked up.

So the way to kind of get around that obstacle is work on the negotiating the purchase. As soon as you list the property, get a bit of a jump on it. That's a big pro tip there. So that's called a delayed exchange. Yeah, the process is pretty simple. A good qualified intermediary, by the way, is going to walk you through this. They'll let you know, hey, here's your 45-day period. They'll provide a form to identify properties on. They'll explain those rules and we can go through those because you've got three different rules to choose from, to identify.

Seth: So, yeah, a bunch of questions coming up here. So how many properties can you identify within the 45-day period? I often hear the number three thrown around, but could I do 10, 20, 50, as long as it happens to be those that I end up buying on?

Scott: Yes. You've got three different rules. So what you've heard, Seth, is what's called the “three-property rule.” So if you sell, let's say for 200,000, you could identify three properties of any value. So one at 200, one at half a million, one at a million. But you're limited to three properties under the three-property rule. But that's just one of three rules.

The second rule is you could do something called the “200% rule.” So that allows you to identify an unlimited number of properties, but no more in value than twice what you sold. So if you sell for 200,000, you can identify up to 400,000 of a bunch of small one-acre parcels. So three property rule, you're limited to three, but the value is unlimited. On the 200% rule, you've got an unlimited number, but the values are capped at twice of what you sell.

One more rule here and it's rarely used. Believe it or not, I did this personally a few years ago. It's called the “95% rule.” And what this states is if you identify more than three and they're over twice the value of what you sold, you can buy those. So in your example, can you identify 50? Absolutely. But there's a little caveat you must close on, meaning acquire 95% of the value of the properties identified.

So to kind of make it really simplistic, if I identify ten hundred thousand dollars properties and I only buy nine of them, in a real estate deal, we'd say, hey, that's pretty good, you bought nine out of ten, but you're not over 95%. So you would have to pay all your taxes. So if you're going to use this 95% rule, my input would be you want to be 100% sure you can close on every single asset that you've identified.

So in summary, three-property rule limited on number, unlimited value. 200% rule is many properties but no more than twice what you sell. Or 95% rule. You violate the three property rule and 200%, but you basically have to close on everything. That's what it is.

And another thing to kind of share, when you identify, there's some very specific wording. You have to identify specific properties. So if you've got several parcels of land, you can't say, “I'm going to buy one of these five-acre pieces of land.” You've got to identify the assessor's parcel number or if it's a street address, you've got to identify a specific property. So the wording in the Tax Code is it has to be unambiguously described. So sometimes we'll have somebody, they'll go into, let's say, a condo complex in Hawaii, two-bedroom, two-bath. You have to identify unit 32 or unit 77, a specific property, not just a “two-bedroom, two-bath condo.”

Seth: Now this qualified intermediary that you're talking about, is that what you are or how do you go about finding one of these?

Scott: Yeah, a qualified intermediary is a middleman. That's all we really are. So we're going to hold the funds and we're going to prepare all the paperwork.

Now here's something a lot of people don't know, Seth. We are in a completely unregulated industry at the federal level. There's no federal oversight, so we're not under the SEC banking or anything like that. There are a handful of states that have state-level consumer protection laws. I'll rattle off the states: Colorado, Nevada, California, Oregon, Washington, Idaho, Virginia. And you know, a handful of states have that, but we're not in a regulated industry and so we're physically holding your money.

One of the most important things you want to do is find out how does that qualified intermediary secure those funds? Right. What security do they provide? Some things that you want to look at and I'll kind of share that with you and your audience. First off, probably one of the most important things, you want a separate segregated account. You don't want to be in a big pooled commingled account, but you want your money to go into your own account, require your signature to set up that account, and then your signature to move funds at any time. So that's an important aspect.

Another one that's probably a reasonable safeguard is work with a company that's a subsidiary of a big parent company. So most of the major title insurance companies have subsidiaries, like Stewart's, our parent company. There are a lot of banks that have qualified intermediaries. So now you're part of a bigger financial institution. So you're going to get those institutional controls, right? Checks and balances. Our parent company is publicly traded, so we're going to have all of those institutional controls built into it and a decent resource, a place to start.

It's kind of a mouthful, but the industry trade organization, I've been on their board and past president of it, is called the Federation of Exchange Accommodators. But I'll make it really easy to remember. Their website is super easy. 1031.org is their website. So it's just 1031.org and you can find qualified intermediaries in your local area that subscribe to the code of ethics and agree to hold funds in certain matters.

So that's a place to start, but for sure do your due diligence. There are a lot of excellent companies out there that do this, but you want to look at how are those funds being held, particularly in today's world. Look at what happened with the banks a few months ago. You probably don't want to be a big depositor in a little local community bank, but you want somebody to work with a lot of the bigger national banks, some of the ones that are too big to fail. That would probably be another good practice to make sure you're working with the big banking institution.

So does that give you kind of a little background on what a QI or qualified intermediary is?

Seth: Yeah. So I guess to clarify, first of all, that's what you are, correct?

Scott: Correct. I'm a qualified intermediary. Our company is Asset Preservation. What we do is we hold the money and we prepare all the paperwork. Yes.

Seth: Okay, so do you replace a title company or do you work in addition to a title company and how do you guys make your money from this process?

Scott: Yeah, we work in addition to, so we're another principal. So we would work with the real estate agent, the title company, we'll even work in conjunction with somebody's tax and legal advisor. So we're another principal in the transaction, qualified intermediaries.

Since they're not regulated, the fees vary. I would say you're looking on average somewhere to $1,000 to $1,500 is a fairly typical fee that's charged. We charge $1,250, which covers one sale, and then you could buy up to three replacement properties. So it's kind of a flat fee that allows people to sell one and buy up to three other properties. Might start at $1,000 and then charge you $500 for the purchase. But somewhere in that range is a typical fee.

I do want to point out that's on a delayed exchange, there are some really creative exchange variations out there that a little bit more sophisticated investor might want to use. Let's say you found just an unbelievable land deal, right? You found something that's $300,000 under market, but the seller needs a quick close. And you know, this deal has a lot of built in profit into it.

You can do something called a reverse exchange where you buy the new property first, then you've got six months to exchange out of your current property. You can do something called an improvement exchange, buy a piece of dirt, put a rental cabin on that beautiful lake property and rent it out airbnb. You can do a reverse improvement, buy the new property, start building a building, and then sell your existing property within six months. Those are all called what we call a parking arrangement because the QO is actually going to be parked on title. We're going to form an LLC, be parked on title. Those fees are going to be a lot more expensive, somewhere between $6,000 to maybe 12 to 15.

So that's another tool for maybe a little bit more sophisticated investor that could benefit from those strategies. So those are other options that are out there.

Seth: Going back about five or eight minutes. We're talking about identifying these three properties or however many. So what does it mean exactly to identify? Is this a paper you're filling out? Is this a person you're telling about it? Is this going on record somewhere? How does that work to identify?

Scott: You just have to write down so you take any piece of paper and you write down, identify these three properties, you have to sign and date it and then you send it typically to the qualified intermediary. So most of the time you're going to identify with the qualified intermediary.

Now these rules are pretty specific. You have to sign and date it, you have to unambiguously describe the properties. And once you do that, at the end of the 45th day, you've got to purchase one of those properties you've identified. You can't try and shoehorn something in after day 45. So the rules are specific and it can't be oral. It's got to be done in writing.

So it's interesting when you go back to the code. The rules from this came out from the IRS back in 1990, so we're talking quite a while back. They use a weird word, they use the word “telecopied.” So you can send it on over and done a number of different ways today. We've all got smart devices, right? Email wasn't happening back in 1990, except maybe the military. So the tip would be put it on a piece of paper, scan it in, and then send it to your qualified intermediary as an image. Don't just identify it in Microsoft Outlook. That way you've got your signature on it.

And a pro tip would be, I always have people have the qualified intermediary verify that they received it and send a copy of that back to you if you get audited a few years down the road. Now the qualified intermediary has it, but you can pull up your file and you could show the IRS. “Not only did I send it over, but I have proof my qualified intermediary received that.”

So I think that's an important thing. We all know there's a whole bunch more IRS audits that are going to be coming in the future because there's significant staffing for auditing. So anything you can do today to sleep well at night, and if you do get that letter in the mail that you're being audited, at least you're prepared for it proactively.

Seth: You mentioned earlier that qualified intermediaries are not regulated. Does that mean that you guys don't get audited?

Scott: You're 100% correct. We're not regulated at the federal level. So the states that I mentioned have some local consumer protection laws. They're really to protect the proceeds. But no, we're not audited.

I want to share with you, it's super important to do your due diligence selecting a good qualified intermediary. Some have better security than others, and those are the types of questions you want to ask and get good answers to.

Seth: So on that whole thing. So if you guys are never audited, what if you're my friend and I want you to do me a favor and just forget about those first three properties I chose and just put these other ones in there instead? You're never going to get audited. So as long as I've got my records from my IRS audit, I'm good. What's to keep a qualified intermediary from doing that?

Seth: Yeah. No can do, Seth. So we get asked that all the time. People want us to get creative about substituting. Here's why.

We're a principal in the transaction. We're a subsidiary of a huge parent company. We're not going to have somebody go through an audit. If we do that, we're committing tax fraud. We're not going to commit tax fraud because you didn't get your act together on exchange. So, believe me, over the years, I've had every trick in the book. Everybody, every request, as you can possibly imagine, from a revert request to, hey, pull my file out and can you run out and give me a cup of coffee and come back in a few minutes? Wink, wink. A reputable, qualified intermediary will never do that.

And the reason is let me tell you why. When you're an intermediary, what we're doing is we're holding money on your behalf so you don't have access to it. We're a principal, right? We act like a buyer or seller. We're a principal. We don't act as an agent of the investor, right? A real estate agent acts in the best interest of their client; a CPA and a lawyer is an agent of their client, we're not. We're a principal. So we're going to follow the rules of our agreement. If you don't choose to identify or you don't have your act together, that's on you, not on us. So we're just going to follow the strict wording of our exchange agreement. If you follow those rules correctly, you can do an exchange, and I will tell you set.

There are people that try to monkey around with this. There's somebody got audited in California a few years ago. It's called Dobrik v. Commissioner. They tried to backdate, they got audited. They got hit with a $2.2 million capital gain tax, hit a 75% fraud penalty. They had to pay another $1.6 million in fraud, plus they had to pay interest on it. So the penalty box for committing tax fraud is relatively severe, as it should be.

My input is to do a straight-up exchange plan in advance, work with somebody in advance, line up your purchases, and you can defer taxes and build a huge portfolio really quickly. But don't try and monkey around around the edges. It's just not worth it.

Seth: Yeah. The reason I'm asking these questions is it's not because I'm going to do it. I find it really fascinating that you guys don't get audited and that there's no regulation because, like you saying, you'd be committing tax fraud, but how would anybody ever catch you if you're it not audited? I mean, I know how I would get caught. Obviously, you have your own moral conscience and all this stuff, but if somebody doesn't have that and they just want to monkey around and they're never going to get caught, what's to keep them from doing that?

Scott: At the end of the day, let's say you were audited and we monkeyed around for you. Then they would know that we did that, and here's the big risk.

Seth: Is that because I would point to you? Is that how they would know that?

Scott: Well, they would know because you would point to us, or it would come out that we backdated it.

Okay, here's the big problem. Let's say your exchange is blown. Now. It's a taxable sale. You got to pay the taxes in our particular company, we've done over 250,000 exchanges, right? A quarter million of these. Seth, if I did this for you and I've violated my exchange agreement for you, and let's say the IRS finds one other time when we did it, you know what the IRS could do? They could come back and say, every exchange that we've ever done is unwound. Because we didn't follow our written agreement as a principle, we acted like an agent, which means now you have control over your exchanges.

So take your one deal out. Now all of the other people we've worked with ever could have their exchanges invalidated because we monkeyed around with one. And I can tell you, I won't mention names, but we've worked with all sorts of well-known people and players on deals. So big Fortune 500 companies, names of people you know. So there's no way we want to risk jeopardizing all of those legitimate exchanges because one person wants to come in, become a shyster, right?

Seth: What a disaster. That would be terrible.

Scott: Yeah, that's on you. So again, you want to work with a reputable company. And there are lots of reputable companies that are going to 100% do that that are ethical players.

Seth: So I've heard you mentioned a couple of times doing your due diligence on a qualified intermediary. And the things I've heard you mention are making sure your funds aren't commingled with other funds and making sure they have good security. I'm just curious, what does good security even mean? Or what would be red flags to the questions I would ask that would say, oh, I shouldn't use this one. What exactly am I looking for?

Scott: Yeah, why don't I do this? I'll share what we do in that regard. And there are other companies that will do something similar. We provide from our parent company, which is Stewart Title, a letter of assurance. So it's signed by the CEO of Stewart Title that says if anything happens to the money while in our possession, Stewart Title, who's been in business for 127 years and publicly traded, stands behind the money.

And there are other companies that can do that. Through maybe a letter of assurance. You could set up a standby letter of credit at a bank that you pay a fee for. There are some other mechanisms, but when you're working with a subsidiary of a big parent company, you're going to get those institutional-type security arrangements that are out there, and not everybody has those and can offer them.

But I personally think you aren't entrusting your money to somebody else for six months. And the most important thing is to make sure that they're going to have it to purchase the property that you want. There have been some examples in the past where people have absconded with funds. There was $100 million in Las Vegas. There was $132,000,000 bankruptcy that involved six different companies. The largest was $420 million because they invested in auction rate securities, a market that went illiquid back in 2007.

So there are a lot of great companies, but this is what you want to look at, are these types of things. And then look at the parent company. If they're publicly traded, look at their balance sheet. What do they have in equity, how long they've been around? What are their financial ratings? So you can find a very reputable qualified intermediary. It's pretty easy to find them.

Seth: So there's really like, people who just set up shop overnight, like, hey, I'm a qualified intermediary, give me your money. And then they'll just take off with money. Is that something that's happened?

Scott: Unfortunately, yeah, that's happened. And sometimes there are people that are trusted in the community. I'm here in Colorado. There was somebody by the name of Scoop Daniels, I believe is his name, about ten years ago, a trusted guy, church-going guy, worked on all these deals and one day just left. He went to South America for ten years. They found him and brought him back.

One individual, Ed Oaken, who was one of the larger bankruptcies. He served a 150-year prison sentence. So his situation, believe it or not, if you pull up an American Greed, you can find Ed Oakin on there. He did the typical crook thing, took other people's money and spent it. Bought cars, jets, yachts, all of that stuff. And he's a rare exception. But unfortunately, from time to time it does happen.

So do your due diligence. I think starting with the 1031.org, people that are willing to join a trade organization is subscribed to that. Dakota Ethics is a good start. And then just look at what bank do they put the money in, who can control that account? Having your signature to open it up and then to move money out is a really important aspect of it, I think.

Seth: Just kind of some random questions here. Is there a minimum dollar amount you need to be working with? Or a maximum dollar amount, like the deal needs to be 25 grand or higher, or it can't be higher than 100 million or anything like that, or like a limit to how much you can save in taxes or anything.

Scott: You can do it on any size deal. We get that question all the time. We've done billion-dollar deals, a billion. We've done deals with ten different apartment complexes. Smallest deal I've done is $12,000. And the way I kind of frame that, it's always a lot of money to you, right? If I'm selling my lot for 50,000 that I picked up for eight grand, that's a lot of money to me and to another investor, whatever their amount is, it's a lot.

So, no, you can do it on any size transaction. Really what it comes down to is where I say maybe you want to look at it, you want to weigh the taxes, you owe. And you came up with a good idea. Let's just figure somewhere between 20% to 35% is taxable on a typical sale. Then you got the fee, let's call it around $1,000 to $1,500. You got a really simple decision. Do I want to write checks to the federal government, my state, or would I rather pay a modest fee? And so if you've got only a little bit in capital gain, it may not make a sense to do it the other time. It may not make sense to do an exchange is if you don't want to be in real estate, you made money on a deal and you made a whole bunch on it. But you want to go back and you want to buy stocks, bonds, alternative investments. You don't want to be in real estate, well then an exchange isn't for you.

Now, I find most people in real estate love real estate, and all they want to do is buy more. They want more units, more dirt, more value, more cash flow. But there are times when people do want to get out for whatever reason, maybe partnership, they're going their separate ways and they're just willing to liquidate. So they might make a decision to just eat the taxes on that.

Hey, Seth, one thing I want to kind of jump into a little bit. Can we unpack? I want to unpack a little bit of like-kind property.

Seth: Yeah, let's do that.

Scott: So like-kind is super broad when you're dealing with real estate. It's any real property held for productive use for investment or in your business, exchanged for any other real property held for investment or used in a business. So land can be exchanged for improved property.

Probably an easier way to look at it, actually, Seth, would be let's talk about what you can't exchange. Number one, you can't exchange your primary residence. So the house you live in, that doesn't qualify because it's your residence. It's not held for investment. So you can't do that.

Number two, and we can maybe expand upon this a little bit, property that is held primarily for sale. So dealer property, fix-and-flips. Those types of properties where you hold for sale, not long-term investment, are excluded. As long as it's not your house and it's not property you're holding for sale, you can exchange it.

So let me share some things you can do. Land, improve property. You can exchange a vacation home that is held for investment and meet certain requirements. Certainly apartments, multi-family retail, industrial. There are even things called Delaware Statutory Trust or tenant-in-common ownership. So I can go in and buy a slice of a large building with a bunch of other co-owners and that qualifies.

When you want to look at creative things, have a little fun, here. You can exchange in New York City air. Literally, it's called a transferable development right? I've got a 20-story building, and I've got the right to add five stories, even though I don't add it. In New York law, that's considered real property, and I can exchange it.

Seth: So this is like air rights, right?

Scott: Air right, Yeah. So it's called an air right. The technical term is a transferable development, right? But it's an air right. We do exchanges on certain states on water rights. So in Colorado, water is precious. Same thing in Nevada, Arizona, new Mexico. A few states water rights, if they're considered real property under state law, can be exchanged.

Another one, easements of every type can be exchanged. So I can have an agricultural easement, I can have a conservation easement, and exchange that. And you can even exchange what is called a perpetual communication easement, which, if I say that in English, it's a cell tower. So if you've got a piece of dirt with a cell tower on that high point, I can create a new perpetual communication easement, sell just the cell tower, keep the rest of the dirt.

Another one that you probably never think of would be oil, gas, mineral rights. So as long as it's a royalty interest, the right to extract it, you can actually keep the land and exchange the mineral rights or the oil rights on it.

So, like-kind is very, very broad. It just has to be real property. After 2017, you can only exchange real estate. Prior to that, you could have exchanged exchanges on art, gold, coin collections, businesses, the tax reform, the tax cuts and JOBS acts, eliminated personal property exchanges. Today you can only exchange something that's considered real property, but you want to look to your local state law, because real property varies from state to state a little bit. A water right in Colorado is real property, in Washington it's not because water is plentiful. So every state's going to have a little bit different rules on that.

But I think that opens up a lot of potential. You can start scaling with land, and then you could go into multifamily and you could go into a Delaware Statutory Trust. So a lot of options out there.

Seth: Does all of this real estate or light kind of real estate have to be in the U.S. Like, say, if I own land in Belize or something, that doesn't count.

Scott: For this. You can't exchange U. S. property for Belize. So it has to be within the United States.

And now there are a few little caveats. You can exchange Guam, Mariana Islands, and the U.S. Virgin Islands qualify. The other one you can do to take your example of Belize is you can do a foreign for foreign. I can exchange Belize for another Belize property or Belize for Mexico.

So in the United States, it's got to be a U.S. property for another U.S. property. You can also do foreign exchanges, foreign property for foreign. But I can't go domestic to foreign and I can't go foreign to domestic. They modified the Code back in 1989 to restrict that.

Seth: So when we're talking about foreign to foreign properties, are we like completely leaving the IRS at this point? And now we're talking about that country's thing? Or does the U.S. somehow still stay involved if you're a US citizen?

Scott: If you're a U.S. citizen, it still is a tax liability, but it's a foreign for foreign. It gets just to let you know, it gets complicated the way you transfer property in other areas.

I just wanted a contract in a property in Tuscany, Italy, and it's different. Real estate laws are different. The process is different. When you put in earnest money in Italy, it goes hard at the time you make your earnest money. It's not like in the U.S. where you've got an escrow that's neutral. You put your money in. If you walk from the deal, your earnest money goes over to the seller.

So all these different international laws, it's fascinating learning how to transfer real estate in other countries because there are different terms and different mechanisms. But the vast majority, U.S. for U.S. And I gave you those little caveats so people cannot come out of the U.S. and go buy that rental condo down at Cabo. That's not going to work. Or the ski place up in Banff, that's not going to work either.

Seth: So from what I'm hearing from all that, is that if I've got a piece of vacant land and I wanted to do 1031 exchange with it, it can go to literally any of those things we talked about, which is very diverse. But you mentioned that this doesn't work with properties that you hold for the intent of selling it. It sounds like that whole investor versus dealer argument about what am I and what am I doing with this property. So how does one prove whether they're an investor or a dealer? Like, do they have to own it for a year or more? Or is there something else that has to substantiate that claim?

Scott: Yeah, this is probably one of the more not confusing, but there's a lot of discussion on this topic. So the question that we get asked all the time in regards to this is how long do I have to hold it before it's held for investment? What's the time period? Is it a year? Is it a year and a day? Is it 18 months? Is it two years?

Here's where I think you've got our unique planning opportunity. The IRS says it's just your intent. What you intend to do now, what they're going to look at are your objective facts and circumstances. What provable facts do you have that support investment intent or contradict it?

A lot of investors want to know the time period, and certainly the period of time is important. But I want to be really clear, there's no time period in the Code that says one year is long enough, or two years or 18 months, or a year and a day. Those might be reasonable time frames to aim for, but it's not required. We've got a tax court decision from just a few years ago. Somebody held it for only eight months, but it was considered held for investment.

So what do you guys want to do to do this right? You want to document your investment intent. If your intent is to hold for long-term investment, what I would do is have some correspondence with the other players in the transaction. Have an email to your real estate broker, “I'm gonna buy property in Missoula, Montana, which I intend to hold for long-term investment.” Keep that email if you need it. After you buy a property, email your CPA, or maybe your tax or real estate attorney, “Hey, I just bought such and such property in Yuma, Arizona, which I intend to hold for long-term investment.”

Where people get tripped up is they don't take the time to document their intent. So if you've got two, three, four, or five data points that substantiate your investment intent, if you get audited, you're going to be on much, much more solid ground. Here's where people get hurt. They have no documentation. They tell the IRS, well, of course I intended to hold it for long term investment. And the IRS is going to come back, and they're gonna come back with two simple words, and you probably know what they are. “Prove it.” Give me proof that shows your intent was to hold for investment. Who did you tell that to? When did you communicate it? What can you prove to me that happened at the time you're doing the transaction that supports the intent.

So a lot of taxpayers don't do this, and I think everybody in your audience take the time to document that intent. I think an email to your CPA would be great. An email to your real estate or tax attorney, have correspondence with your real estate broker. If you're married, you even have a discussion with your significant other, right? “Hey, we're looking at properties we intend to hold for long-term investment. Here are some of the parcels we're looking at.” Rip off that piece of paper, slip it in a file folder.

So the more you have support that documents the intent to hold for investment, the stronger you'll be in an audit. To the extent that you have goose egg, the weaker you're going to be in an audit. So those are just a couple of planning tips.

And we were talking right before we kind of kicked off this show, Seth, about people that maybe flip properties or hold really short-term. One thing you can do, you can buy some assets in whatever entity you're buying in where you flip them. You flip it, make the money and pay your ordinary income.

But let's say you find a property that you want to hold long-term, buy that in a separate entity and kind of separate it. So you have one entity over here that's flipping, and then you have another entity here that holds for long-term investment. That way you can show the IRS, “Look, I bought these properties to flip. I paid my taxes as ordinary income. But I had a couple properties over here which were I really intended to hold for long-term investment.” The purpose of that LLC was to hold long term, and I treated them separately.

So try to bifurcate your assets. Here are my flipping assets. I'm paying my taxes. I'll deal with it. Here are my assets that I'm going to hold for long term investment. So that might be a strategy that people can do when they're really kind of doing a little bit of both that would help them out. That's a way that I'd recommend structuring it.

And the other thing is, pull in your CPA. You want to get your tax advisor involved who knows all of your unique facts and circumstances as a qualified intermediary. Seth, I have no idea what you're doing with your investments. I have no idea of your intent, what you do, but your tax advisor will know what you're doing. So bring them in early on, get their advice.

And as a qualified intermediary, we're happy to talk. We're really good in this niche called 1031. I know all the tax court cases. Everything about 1031, probably better than most CPAs ever know. But I can't give tax or legal advice. But I could talk to your CPA and we could talk about, here's an aggressive approach and here's a conservative approach and here's what's in the middle. And then you and your tax advisor can decide to do what's right for you. Some investors are aggressive and some are conservative. Some tax advisors are fairly aggressive. Some tax advisors are ultra conservative. So I don't know where somebody lies on that continuum and what's right for them. Somebody that has one property and that's all their wealth is a very different scenario than somebody that owns 60 properties and they're very wealthy. They can probably stomach a little more risk because of their financial situation.

So that's why you got to pull in your tax advisor, bring them into the thought process, the decision making process, and get their input and guidance. I think that's critical.

Seth: That's interesting. I've had these similar discussions with my CPA before about how do I prove whether I'm an investor or a dealer? And a lot of the examples you just shared, even seemingly trivial stuff like having a separate LLC that's called like Williams Long-Term Investments, LLC to imply that, hey, this is a long-term investment, and buy it with that one instead of Williams Land Flipping LLC or whatever your normal land flipping entity might be.

So it feels kind of grayish, kind of loosey goosey, but maybe that's just the nature of the beast sometimes.

Scott: Well, you know what? I like the gray area because it gives you opportunity, right? If you're somebody that likes to be a little bit more willing to take just a touch more risk or you want to be pushing the envelope in a gray area, you can. So sometimes people want it to be all black and white. I actually like that it's about your intent and documenting that which you mentioned, right? Having different names for LLCs that reflect the intent and treat them that way, those are really easy things to do. But if you get audited, it makes it pretty easy in front of the IRS to clarify that.

So take the time to document that investment intent. I think that really would help all the listeners. If they ever face an audit, they can do it a lot more confidently. There's nothing worse than getting audited and the IRS says, hey, show me how it's held for investment and you can't come back with anything. You're going to lose in that situation nine times out of ten because you have nothing in your court to support that. So be smart, learn from podcasts and things like this and bring that into your real estate investing. And if you haven't been doing the past, start doing it right on a go-forward. Everybody can change and do it better.

Seth: On that whole thing of holding it for a year or more, does that mean anything? I know you mentioned the one about somebody who owned it for eight months and that was fine. But I mean, just generally speaking, does it help if you can prove it's been 365 days since you bought it? Or is that just a meaningless metric? Like, don't even think about it?

Scott: I'll give you my opinion. In my opinion, it's a meaningless metric. It's beneficial to demonstrate that maybe you've held it in two tax years, but there's nothing magic about day 366. It's a day.

So if I were to give you some broad input, the longer you hold it for investment, the more conservative becomes. If I hold it for 18 months or 24 months or three years, I can more easily make the argument that I'm holding it for long term investment. If I turn around and sell it in two weeks, I'm going to have a really hard time saying, and I held it for investment, particularly the other thing they're going to look at, Seth, they're going to look at things, did I list it with the real estate professional? I say I'm holding it for investment, then I list it with the broker. Well, obviously then I'm holding it for sale.

So they're going to look at a whole wide range of factors to determine what really was your intent. So you've got to make sure that if you have that investment intent, the facts support your investment intent and they don't contradict it. That's, to me, the most important thing, having a lot of good supporting facts.

Seth: Yeah. Again, maybe this is something about me, but I keep thinking about this through the lens of somebody who's trying to game the system and cheat the Code and all this stuff.

Say if I bought a piece of land, that in my heart, I know I intended to flip that thing. But all of a sudden, I change my tune and I decide I want to make it look like I'm holding it for an investment. I mean, couldn't I just shoot a quick email to my CPA saying something to that effect and then maybe put it on some marketplace to lease it out for rent, and then document that and then just sort of check some of these boxes just to kind of I mean, is that something people do? And does that work if they try to do that?

Scott: Well, if you're a savvy investor, I think anytime you create good facts to substantiate what your intent is—I understand what you're saying there—if you have a lot of favorable facts that support that, I think that makes a much stronger case.

I understand where you're going with that. You know, you've got a deal. It's got a lot of built in equity. But if you want to do an exchange, taking the time to do the sort of documentation, creating that paper trail and those facts and circumstances that will help you. If you're audited, most people don't do anything at all, and so they get audited. And he said, she said. And in that situation, a lot of times, the IRS will win, because your job as a taxpayer is to be able to support your position.

So let's use something not really just for real estate. It's morning right now. Let's say I woke up this morning and I intended to eat well today and exercise. And let's say I just started the morning I went out, I got three Egg McMuffins at McDonald's, and I didn't get a walk or workout in. My intent might have been to exercise, but if you look at what I actually did, I didn't work out. I blew off my workout, and I had three Egg McMuffins for breakfast, putting crap in my body. Well, the reality was, the facts show that I didn't really intend to work out this morning because I did something different.

It's the same way with the IRS. They're going to look at what you actually did, and that's going to show what your intent was, because your intent is right here in your brain. They're going to look at what you actually did or did not do to determine what your intent was.

Seth: So, in my limited experience with 1031 exchanges, I dealt with them as a banker when we were trying to close some various SBA 504 loan deals, which are inherently slow. They do not happen, quickly. Sometimes they take more than six months, believe it or not, to get those things approved and done. And in other situations, when I had other investors trying to invest their money with me through a 1031 exchange.

Just in those kinds of experiences, they seem a little difficult to do just in adhering to this rigid time frame. And it makes me wonder, why do they make these rules so hard? It's almost as if they're trying to make this difficult. Is there some benefit to the government to make it this way? Or are they just intentionally trying to make it cumbersome? Like, if they don't want us to do a 1031 exchange, then they just outlawed. Why make it such a hassle to do these things?

Scott: Yeah, the whole 1031 exchange came about back in 1921. So the rules came about for 1031 back in 1921, but they were primarily swaps of property.

An individual named TJ. Starker in 1979 went through a tax court case which created our first delayed exchange. So you could do a delayed exchange in 1979 for five years only in the West Coast, the eleven western states under the 9th Circuit Court. 1984, they codified in Congress the 180 days and 45 days.

So let me get to your point on this one, because you're looking at, from your perspective, saying the timeline is kind of difficult. The IRS could also just say you have no 1031 exchange. They put in some mandatory guidelines because they want people to have an intent to do the transaction. From the IRS's perspective, they would rather the IRS is the enforcement mechanism, right? They would rather get all the tax revenue. The IRS wants as much tax revenue as they can get. That's their job, to get the maximum amount of taxes that they possibly can.

So the IRS thinks that it's very generous. They provided a provision with that six-month window and 45 days to take advantage of tax deferral. You don't have that with other asset classes. So, again, I think the real estate investor has a tremendous tool available that you just don't find in other parts.

I get what you're saying from the frustration of it. It is what it is. But to me, why not use this tool to build a massive real estate portfolio? Follow the rules, take the time. Yeah, there's a little bit of stress. You've got to find rules, you've got to do some due diligence. But if I don't have to pay taxes and I can defer that indefinitely, I'm coming out way ahead. So I have no problem doing that.

I do cost segregation on some of my assets that I own. Does that take time to do a cost sake study? I got to pay money, but now I get a massive accelerated depreciation that I can use to my benefit. So sometimes you got to jump through a few hoops to get a massive benefit. To me, it's worth it. I'd rather get the massive benefit than not have that benefit available at all.

If you took 1031 out. So today I'll be on with somebody in Congress. I spent probably met with 60 people in the last year in Congress educating them on why 1031 is good for the economy. It helps create transactional activity. Real estate brokers get paid on it, title companies, lenders. It's something like $98 billion annually impact on the GDP of the country. There was a study done on that.

So it really affects, it creates thousands and thousands of jobs. So we educate people in Congress of why having this thing called 1031 is good for the economy. It helps real estate investors. And real estate, as we all know, really is a big aspect of our overall economy. So if you had people not taking advantage of exchange, let's say it was eliminated, people would not sell their properties because they'd have to write a big check to the government. And we'd have a lot less real estate transactions, a lot less turnover.

Think of what we see going on in the marketplace now. We see people leaving states like California, the western states, and they're going to Texas and Florida, Tennessee. Up in New York and New Jersey, they're going down south to Florida, the Carolinas. This allows businesses and people to relocate, bringing their investment with them. And so companies are relocating and they're doing exchanges on their companies and creating jobs at a new marketplace.

So it really allows people to kind of redeploy their capital into places where they think they're going to get a better return on their investment. And frankly, investors do a lot better job of creating return than the government does. And the government knows that. That's why they have this incentive in the Code is it helps create communities. I can tell you there are areas where people took an old blighted area, did a 1031 in, and created a whole new shopping center and redeveloped it, which now becomes a little economic hub for that community.

We're going to need 1031. Now think of office buildings, class A office building, the vacancies in some cities there's about 50%. We're going to need to repurpose downtown office buildings into something, could be storage, could be housing. 1031 is a way to come in and do that and improve it during that exchange time, the six months, and repurpose commercial buildings. So shopping malls that are kind of dying off that maybe Amazon wants to have take over that old Kmart store that was there, right? And they'll make it a distribution center.

1031 allows that to happen. So we do this for individuals, we do it for corporations, for partnerships and REITs who do major economic redevelopment. So as you can tell, I get a little excited about it. It's not just tax law. It's about creating jobs and economic growth and allowing capital to flow to where it can best be deployed and get the best return on investment.

Seth: Well, I guess one counterargument to what I heard you saying earlier about the whole thing about why does it have to be so hard and just be thankful that this is here at all, that kind of thing. I guess the way that I look at this is (and maybe I'm just thinking about it wrong), but with that whole 45-day timeline to identify a property and then six months to close on or 180 days to close. So the problem that I've had in trying to find self-storage deals over the past couple of years, like existing facilities to buy, is that the easiest deals to identify within 45 days are the worst deals, the ones that will not make much money or even lose money. I've seen people asking twice what their facilities are worth and I can go buy those all day long, but it's not good for me. And if I just do it to do it just to not pay taxes, it may actually long-term be a really dumb decision. And at that point, I think it's on me to understand that and not do it.

But contrast to that, the best deals usually take more than 45 days to identify and sometimes more than six months to close. So I think that's where the rub is for me. It's like I just need time and 45 days isn't going to cut it. I mean, sometimes just getting the financing approval can take a long time to get done and that can kill the deal. So it's frustrating. It's almost like if they're going to allow this, then make it feasible for more people instead of just making it like, oh, here's the thing, we're going to take it away from you because it's so hard to do. So I don't know, I guess that's where my question was coming from.

Scott: Yeah, well, it's a great point. I think in some markets, people have overpaid for assets because they have the exchange. So I think it's on you as a savvy investor to go into a deal that makes sense because the deal makes sense, not because of tax savings. Sometimes people get that wrapped up and they're looking to just the tax savings. They're not looking at the deal.

I think the way to try to prevent that pressure cooker of that time deadline there is start talking to sellers or assets that you want engage in those conversations early on. So I told you my property in Arizona, I didn't even list it. I knew I could sell it in a matter of days if I priced it right. So I spent all my time negotiating on my purchase and talking to people that I wanted and getting those locked up before I even listed it. So on self-storage, you'd want to do the same thing. You know roughly what you're selling for and you know roughly what you want to redeploy.

And that brings up something we haven't touched upon. In an exchange, you have two simple rules. You've got to reinvest your net equity and have the same or a greater amount of debt for full deferral. So if you do those two things, you have 100% deferral. If you take cash out, that's called cash boot. If you go down in mortgage, that's called mortgage boot. So start that negotiation early on. Just start reaching out to those sellers that you like. Their deals begin the discussions early on. You have a pretty good idea of your asset, what the market is that you're selling. And so that's really your deal to control. I always tell, put all the pressure, put all the energy on the purchase, the sale will take care of itself if you price it right for the market.

Seth: Thinking about this from the standpoint of a land investor. So let's say if I buy a parcel of 40 acres or something like that, and I want to subdivide that land or make improvements in some way or change the zoning or something like that, does that impact a 1031 exchange at all? Like, say, if I subdivide it into ten parcels and I sell off one at a time, are there any additional factors that I would need to be aware of in that kind of scenario?

Scott: Yeah. What I'd recommend there, you buy that 40 acres, sit on it for a period of time, document your intent to hold for long-term investment, and then don't subdivide right away, sit on it for maybe a year-ish or two-ish. Then you're going to move forward with the subdividing and doing everything that involves.

So make it clear, “I bought 40 acres, I'm holding these for long-term investment.” You might very well intend in your head, you see the opportunity to subdivide, break it down into five-acre parcels down the road. But don't start that. If you buy it, and let's say the very next day you start subdividing it, what does it look like? It looks like you're now going to be holding it for sale to sell off those parcels. So if it were me, I'd season it for a period of time, ideally a year or two-ish, then change your mind.

So remember, you can always change your mind with an investment. I could do an exchange under a beautiful golf course property that I rent out for a couple of years, and after two years are up, I decide, you know what, I'd really like to move into that golf course property. I convert a rental and I make it my residence. As long as I'm changing my mind down the road, it can't be my intent to do that from day one. So somebody can always change their intent later on and have a different intent with the property. Just make sure that initially you document the intent was to hold for investment.

Seth: So it sounds like the act of receiving rent on a property, is that significant in terms of determining whether your intent was to sell it or hold it as an investment property?

Scott: Yeah, if it's an approved property, that's one of the big issues. No prudent investor is going to have a property that can produce rent, not bringing in rental income. Now, some people go, “Well, what if I have it rented? At least I have it listed for rent, but I list it for three times market and nobody rents it.” Well, then you're not making a good faith effort to rent your property. So if it's improved property, rental income is a great way to substantiate that. Your intent is to hold for long-term investment. In fact, the IRS will look for rental income. They want to see the rental income. They want to see you taking depreciation, treating it as a legitimate investment property.

Seth: I'm curious, as a land investor who is trying to find deeply discounted deals from landowners who don't want their land anymore, could you almost use this as a selling point to help that motivated seller sell their property to you? Say, for example, if they have other goals for their money, but they're having trouble selling their land, could you somehow help them along in the 1031 process and make it easier for them to go down that path and give them yet another reason to sell their land to you, even at a discount?

Scott: 100%. It's absolutely a great tool. Some sellers, even though 1031 has been around for 100 plus years, some sellers don't know it or they don't know they can sell their land and go into, let's say, a fourplex that provides their retirement income.

So a seller has one piece of land and that's where their equity is. They really want to retire and get some cash flow so they can travel, sell the land, and you're a buyer of the land. You say, look, did you know you can do an exchange out of the land? You can pick up that fourplex for cash. Now you've got $4,000 a month of rental income coming in that allows you to pursue your retirement lifestyle.

So it's a great negotiating strategy, I think, for a buyer to say, hey, by the way, you could do a 1031, go into an approved property and get that retirement income now that you were looking for. So you'd be surprised how many sellers don't know of all the things that are available. So that's a great tool.

And a great way to do that is pulling a qualified intermediary. Just say, hey, I've got an expert here. We'll do a phone call, they'll explain what exchanges are. So a qualified intermediary stays on the line talking about what a 1031 is, what the rules and time requirements are. The buyer then is talking to that seller and saying, here's an exit strategy. This is why maybe I could pick it up at a little better price because you get what you want, which is retirement income. You take this land and you're going to get your retirement income on that improved property.

Seth: Yeah, because I've heard it said when people offer to buy properties with owner financing, where that seller is financing it to them, one of the ways they can sell the person on that idea is the legitimate point of this could help you save money in taxes because you don't have the whole tax bill in that first year. And this is kind of a different way of making a tax strategy offer by bringing in the 1031 exchange, like giving them a tax reason to consider something that they wouldn't otherwise consider unless they realize the potential benefit there. So that's great to know.

Scott: Yeah, no great strategy to do that. At the end of the day, if you can help solve their problem, they're selling a property if you help solve their problem as a buyer, puts you in a better position negotiating to get what you want, which is their real estate. So that's a great tool to use.

Seth: When you think back to all of your experience in 1031s, are there any big mistakes or oversights people make when trying to do this that they could easily avoid? But we've kind of talked a little bit about them just regarding the timeline and all that. But any other just big obvious glaring, don't do this if you want to go down this path.

Scott: Yeah, here's the one mistake and I get it every single week and it's tragic. Here's the mistake. They don't set up a 1031 before they close on the sale of their property. So I'll get a call, I guarantee you multiple calls a week. “Hey, Scott, I need to set up exchange right away. I just closed on my property three days ago and the money's sitting in escrow.” You can't set up an exchange retroactively. You have to set it up before you close. Even if you don't touch the money, if it's sitting in escrow or in a trust account, you have control of the money. It's called constructive receipt. So we probably as a company, get maybe 50 to 100 of these every single month. So these are people that wanted to get tax deferral. They just didn't know they had to have the documents in place prior to closing.

So that to me, hands down, is the number one mistake is not setting up an exchange when they want it. The other kind of thing to be aware of. You don't have to do a fully deferred exchange. So many people think, well, if I sell a property for a million dollars, I've got to go out and buy a million-dollar property. You don't have to do a fully deferred. So you can sell one, turn around and buy a couple of good performing properties. And if there's 20 grand left over, called cash boot, you just pay taxes on that 20,000. So statistically about 30% of all exchanges are partially deferred exchanges. So don't think I'm going to do an exchange and I have to do everything. If you find a really good deal and it's at a lower price point, okay, you pay taxes on the difference and you pay a little bit in tax, but you still did an exchange into one or two replacement properties that make sense.

So don't think you have to do a fully deferred exchange. You got to be all in, do the whole thing or nothing. You can do a partial exchange and buy one or two properties and then that cash that's left over, you pay taxes on that. And then keep in mind, you can use other strategies like cost segregation if you go into an approved property to create some other tax benefits.

So taking advantage of taxes is a critical way to build wealth. If you want to get ahead in real estate, you need to become tax-savvy and entity-savvy. And so this is just one piece, right? There are other things you can do. You need a good tax planner to work on setting up your entities, right? Passive entities over here, you're going to have sub-S entities for your active efforts.

So this is just one tool in your toolkit that could be really critical. And there are some other tools you're going to need as you become an investor. But this tool you can use over and over and over again. So I just think it's phenomenal. Fortunate. It's made a great career for me. And then personally, with my investment portfolio, I use exchanges too. So I'm professionally in the business and then I also personally invest and I never will sell my assets. I will exchange until I die and my kids will get a handoff of hopefully a decent real estate portfolio.

Seth: Do you ever see it happen where a person sells a property because they have this idea of doing a 1031 exchange? Maybe they identify three, then they close, then they try to pursue these things because it looks like a great deal, but then it doesn't work out. Say there's some huge environmental contamination issue or for some unforeseen reason it just doesn't work out. They end up having to pay a huge tax bill. And had they known that, they never would have studied this in the first place.

Because in my mind, that's kind of like my biggest fear about doing this is like I don't want to go into this blindly or somewhat blindly, which is inevitable because you're not going to know everything at the very beginning and then end up in a worse off position than before. Does it happen a lot or how could you avoid that kind of thing?

Scott: So what you're saying does happen not a lot. Let me give you the big planning tip to avoid that.

Where people get into that situation is they find one property they love, they identify the one property, but they don't identify two backups. So the way to avoid this is even if you've got a perfect property and you know you want it and it's great, what I would recommend is put your second and third options on that identification list. So as you're doing your due diligence and you find it's contaminated, now you've got two other backup properties to look at.

So the way people get hurt is they only identify the one that they really want. They're outside of day 45, and there's no way to get any other properties. So I strongly recommend put a couple of backup properties on your identification.

Now, could those also sell or have problems? Of course they could, but I'd rather have my first deal not work out and have two other options to look at that are decent deals than faced with a huge tax hit because I sold my highly appreciated property. So that's a way you can kind of mitigate that or try to proactively avoid getting into that situation.

Seth: At what point do you actually sign a purchase agreement with these new properties and put earnest money down? Do you do that after you've closed on your sale? Because once you do that, you're going down a path. There could be consequences if it doesn't pan out.

Scott: Yeah, you could do it anytime you want. We have a lot of people that will make an offer. They'll put down their own earnest money before the property they're selling even closes, and then we'll later replace their earnest money with exchange funds once they've closed on their sale. So you can start that process, and I'd encourage you to start that process of making the earnest money deposits, negotiate it, you can make a contingency offer, or there are a lot of different ways to do that. But anywhere in the process, you can make the purchase offer and get it locked up under contract. And in fact, I think the earlier you start that, you take some of those time pressures off of yourself, for sure.

Seth: Sounds good. And then last question. Are there any resources like books or websites or courses that you recommend for those who want to better understand 1031 exchanges? Where should they go if they want to really understand this?

Scott: Well, there are books out there. A lot of them tend to date themselves a little bit, and most of the books tend to be a little beefy for an investor. They got a lot of case law. They're written for attorneys and accountants. That's probably not my first choice. Probably your best choice would be in your local area. Find out where a qualified intermediary is putting on a class for CE credit. So most people are going to teach CE classes, two, three hour classes for credit for realtors.

And you as an investor, just jump into one of those. You're not getting the credit, but you're going to get a three hour discussion on the whole process. That's probably a good way to go. We've got a YouTube channel that's linked to our website APIexchange.com, where I've got classes that I do. So I'm an instructor nationally for CCIM. I do a two hour advanced class for them, but I've got introductory classes. That's probably a little better than trying to buy a book.

Now, the one little caveat I'll give you is if you talk to ten different companies about the question of how long I need to hold a property before it's held for investment, you're going to get ten different answers on that. That's just the reality of it. I like the answer that I gave it on this because I think it's accurate about your investment intent. But there are going to be some companies that are going to tell you a time period.

Now, I believe they're wrong. I don't believe that's the most nuanced, accurate answer. So realize when you learn from a qualified intermediary, you might get a little bias of that person teaching. So if I were around, I started giving classes in ‘88. 2023. I know a lot more than I did back in 1988, right? I was just out of college, young and dumb. So maybe pick an instructor that's seasoned, that's been doing this for a while, has been in the business for a while. That would probably be another way to do it. Some people like learning from a CPA or an attorney. I'm neither of those, even though I teach thousands of CPAs every month. But somebody that's got experience, 10 to 20 years of experience doing this, you probably are going to get a little bit more seasoned, maybe a little bit broader in depth answer. So that's what I'd recommend.

If you use Google, you're going to get all sorts of stuff, and you're going to get a lot of people pitching product. They're going to be pitching DSTs that you can exchange into. So sometimes the internet is not your best friend. You're going to get people that have a goal to get you into their particular offering or product rather than you learning about it.

The last thing I'd mention, too, is just call a qualified intermediary. Go to the website I gave you, the 1031.org. Call two or three companies, explain to them your situation. Here are my facts and circumstances, and just listen to their answer. Doing that, sometimes it's better. I think it's faster to speak to three qualified intermediaries, listen to their spiel and how they educate you rather than having to go in. You don't need to spend time on the internet studying this and Googling and reading. It's really not that complicated.

We visited together for a little over an hour. People now know pretty much everything they need to know to put a deal together. So you don't need to be kind of that analysis paralysis, where you think you need to become an expert on 1031, know the basic process and then review your situation with your tax advisor. I think that's super important and maybe with a couple of good qualified intermediaries would be a good way to go.

Seth: I don't know if you're familiar with Realty Mogul, the real estate crowdfunding platform, but I had heard of a thing that they were doing years ago where if you get into a situation where you start going down this 1031 exchange track, you identify the properties, but they all fall through. You're just kind of stuck in a corner. You don't know what to do. You can basically take your money and put it with them and tie it up for five years or however long it takes. And obviously that's not your first choice, but at least you don't have to pay the taxes because the money just goes over there, in a real estate fund.

Is that a viable option or is that a good example of like a plan B or plan C when things don't work out, or any other ideas of what could you do if everything falls apart and you don't want to pay those taxes?

Scott: So for a plan C, probably the best option is what's known as a Delaware Statutory Trust. You go into a property as a co-owner with a bunch of other people.

I'm familiar with Realty Mogul and what they do. There are probably 50 companies out there that offer something. So learn about what's called a DST, a Delaware Statutory Trust. These are kind of a hybrid. They're treated by the SEC as a security, but yet they qualify for 1031 deferral. There are probably 50 or so providers out there, they're called sponsors that have property right now that you could get into within a day or two.

So there are a lot of options. You want to look at them, you want to look at their fee structure. They're going to charge a fee for that. You want to look at their track record. How long have they been doing that? Some companies like Inland have done it for 20 to 30 years. They've gone through economic ups and downs. There are other new players that are in the cycle now. And we all know on the commercial side, commercial is going to face some distress, right? Loans people aren't going to be able to refinance and capital calls, and there's distress in a lot of commercial segments. You don't necessarily want to go into a DST with a brand new player that hasn't weathered a cycle or doesn't have a lot of capital behind them.

So again, do your due diligence with who you're going into, those types of relationships. There's a whole group of financial advisors that specialize in DSTs and Delaware Statutory Trust. And a good one would offer to you several different companies and several different programs. You evaluate them. These are for accredited investors only, so you have to be accredited investor. They're made available through a PPM, a private placement memorandum, and somebody with the appropriate securities license will offer these up.

But yes, there's a whole wide variety of these. Most qualified intermediaries can introduce you to several financial advisors in your market that you could turn to and get a list of options so that's a viable I call it a Plan C. Plan B would be identifying multiple replacements. Plan C, this is kind of a last fallback provision.

Seth: Yep, that makes perfect sense.

Awesome, Scott. Well, thanks again for sharing all of your wisdom and knowledge and experience with us. If people want to connect with you or work with you in some way, or find out more about how your company works, where should they go?

Scott: Yeah, the easiest way a toll free number is 888-531-1031. Website is APIexchange.com. So A as in Apple, P as in Paul, I as in Igloo, exchange.com, and then my personal email is just my name, scott@apiexchange.com. I spend 90% of my day just talking to people, answering questions. Even if you don't have a transaction, you just want to kick around some ideas, give us a call. That's why we're here, to educate you on your specific transaction. Love talking to people about it, and been great visiting with you and your audience. Had a lot of fun. Hopefully give some new insights, some things to unpack, some things that people haven't thought of before. So thanks so much. I really appreciated this.

Seth: Absolutely. I've learned a bunch here. I'm sure other people have too. Thanks again, Scott. And I'll have links to all the stuff that you mentioned here in the show notes for this episode at retipster.com/167. And I wish everybody out there the best. If you're working on a 1031 exchange, hopefully you found this useful. See ya.