Passive income is certainly not safe from risks and pitfalls. If you are not careful, you might as well send money down the drain. In this episode, Kevin Shortle talks with Steve Landaal, Vice President of HIS Capital’s Portfolio Management Division, who discusses the power of passive investing and why you should look at potential risks first before prospective yields. Steve explains how to determine when to put your money at work or keep it safe by putting it on the sidelines. He also talks about HIS Capital’s 40-40-20 investing strategy and why you should give more attention to affordable housing over high-end ones to avoid tight competition.
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Mitigating Risks In Your Passive Income With Steve Landaal
Thank you as always for reading the show. If you enjoy the show, please subscribe. Go ahead and give me a nice five-star rating. That does help in attracting sponsors and everything else to the show so I can provide you with more content. Speaking of content, as you already know, if you’ve been following the show, I’ve been putting out a lot more content for you and plan on doing that.
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I got another great episode for you here. I’ve got a special guest with you and we met by social media. LinkedIn does work. He looked me up on LinkedIn. We had some common interests and ended up getting coffee together. He is a very impressive person in the industry, very successful, and is along the same diversification thing that I truly believe in taking passive monthly income, looking at how you can apply that in real estate, not just any single way but in a portfolio style of approach to this, which is the best way to do it. I’m glad to have him on. Everybody, please welcome Steve Landaal.
How you are doing, Kevin? I’m truly honored to be on.
I was looking forward to that. You and I have had some conversations about the business and industry. Even when I was going to Mexico, you and your company have done things out in Mexico in direct places where I was and everything. It’s very interesting and timely. I want my audience to know who the best people in the industry are, people that impress me. You’re certainly one of those people. I thought it was best to bring you onto the show and let you give us a good idea of your background, your philosophy on what makes people successful, why passive income is so important, how people are able to replace trading hours for dollars for simply investing and making that passive income.
We’re going to try to pack all that in this episode. I know about HIS Capital, which is a company that you’re Vice President of Portfolio Development for. You started as a client at that company and then you’re VP of the portfolio division. Maybe that’s a good launching point. Tell us how you were attracted to that, how you got started in that, and how you evolved into working with the company.
I did start as a client. Honestly, I’m humbled because there are a lot of you reading this that probably know a whole lot more than I do about whole notes. I learned about them many years ago. I wish I would’ve learned about them when I was in my 20s and 30s. This is a milestone for me. You officially have an old man on the show with you.
We were closed. I turned 60 at the end of May 2023. You’re not the old guy on the show. I got you beat by a couple of months.
The reason I say that is because I’ve been self-employed my whole life, pretty much. I’ve been commissioned my whole life. At the age of 50, I was in the insurance industry for probably about 18 years and we had a corporate buyout. My goal at 50 was to financially retire. I thought retired completely. The company I was bought out by the Blackstone Group, a big private equity company. I thought, “We’re in the money.” They had other ideas. They started getting rid of everyone from the top all the way down and to the ones they thought that was making too much.
I embraced that. I walked away into the sunset with my stock and the severance. I was very happy about it with two challenges. One is I had to get that money working for me. I didn’t know where to go in the stock market. Over the course of our lives, my wife and I lost quite a bit of money in the stock market. Thank God we got it back. It took us nine years to recover it.
I remember it went into thin air and gone. I remember that sick feeling. I wanted to find something that was secure, something that understood whole note investing, becoming the bank or property without renters. Honestly, I don’t know where it was my whole life because I bought my first rental property at eighteen. My wife and I built a portfolio on the side, not even knowing what we were doing but we learned as we went. For some reason, I missed what you’re teaching and I wish I would’ve known that earlier.
What happened was I started to become a student of what you all do. Behind every good man, there’s a way better woman. My wife started becoming a student as well. She’s the one that found HIS Capital Group. What they said was, “We can get you a predictable return and you’re secured by the asset that is worth far more than what you’re lending.” I hope they’re telling me the truth because I thought, “If they’re telling me the truth, we’ve officially retired financially.” Sure enough, they did. It’s going to be many years. I’ve never lost a nickel of principle. They truly secure all of you on the call and all that.
The other part that I had a challenge with was retirement itself. We live on a lake and I like to fish. If we had time, I’d show you this big bass that our grandkids caught. I remember sitting in the boat. We’re right along I-4 by SeaWorld there. I remember thinking how lonely I am and how inward I was fishing. I got money and but everyone else on I-4 has a purpose. They’re going somewhere. They’re moving something forward. Something’s happening.
I felt so alone. At that moment, I realized work is a blessing. HIS Capital called shortly after that and offered me a position to run the division for passive investors. I said, “I will start yesterday.” Here I am, many years later, still with them and loving it. I plan on working and moving something forward until the good Lord calls me up.
Why not if it’s fun and you have a passion for it? You’re at that stage looking to give back and help people. It’s a great fit. This is one of these strange parts of real estate that has finally awoken. I’ve been involved for many years in this but it was always referred to as this small niche. The profile has been elevated to such a degree and more people are being exposed to it.
Even for the economy the way it is with all the uncertainty and strangeness that’s going on, we’re going to have a recession and inflation. Rates are coming down or going up. Everybody’s guessing at what’s going on. This is still so well-positioned. I believe it comes down to that key point that you were mentioning, which is everything we invest in is backed by something of higher value.
A real easy way that I found to explain it is, let’s say your house is worth $1 million and I want to borrow $500,000 from you. We make an agreement that I’m going to give you whatever that percent interest is that we agree on. Let’s call it 12% or whatever number we come up with. You’re happy with that 12%. The risk is what if I don’t pay you back? What if I take off with your money? The security is your house is worth $1 million. I’m only giving you $500,000. You ain’t going to run too far. You’ll sell an organ before you give me your house. It’s fair for everyone.
One of the things I always talk about in live presentations is you have to look at these investments’ risk first. “What’s my risk?” Some people go right to return. They start looking for, “I can make 10%, 12%, or 15%.” I’m going, “Yes, but you’re into an investment for $95,000. The asset is only worth $100,000.” You don’t get stuck on the yield part because that may never come out. If you have to take this back, you paid $100,000 or $95,000 plus expenses. For a $100,000 house, it doesn’t make any sense to do it that way.
Investment to value is always the first thing that I look at and then at yields. A lot of people with yields, what I’ve found is you tell people ranges of things are 10% to 12% and then they sit on the sidelines until they can get something of at least 12%. I try to work with people that say, “8%, 9%, 10%, and 11% are still good and strong. Plus our yield can change in this business.” Sometimes they have to do that math of keeping their money at work versus sitting on the sidelines with money waiting for that so-called 12% to 15% yield. What are your thoughts on that?
My wife and I lost hundreds of thousands. It was a big number. Like all of you on the show, we started with nothing. My wife cried one time when we were first married. She accidentally bounced the checkbook and it cost us $5. You finally got traction over the years and it’s gone. The first question is 1) How do I not lose my principal? It’s Warren Buffett. Rule 2) Go back to Rule 1. Protect yourself. I will tell you what we do. My wife and I are very conservative on notes. The notes that we have that we’re conservative on, we’re happy with 8% if it’s structured right. In that 8%, there are enough notes that pay our monthly bills. When we wake up in the morning, our money is paying our bills.
Think about that for a minute. Protect that area. You get to go out to work or whatever you want to do but if you do go to work, you’re making pure profit minus taxes. There’s a whole lot of cool stuff you can do with your life but then outside of that, let’s call it an 8% conservative bubble that takes care of our expenses, then we do get a little crazy. I’m with all of you. I’m starting to go for some higher returns. I can take more risk for that money but that’s how we structure it.When you put note investing to work, make sure you are making pure profit minus taxes. Click To Tweet
Company-wise, HISCapitalGroup.com, diversify, buys real estate, and does whole notes and private lending. What’s the model that you find best working? How does that work? Your model is a little different than some of the things that our people do buy one note directly.
We do what we call the 40/40/20 strategy. We’re dividing our investments into three groups. One 40% is fast money. We do our flips and projects. We’re even building and flipping a brand-new house. We’re taking even on manufactured homes and putting them on a cement slab. They become real estate and flipping them is very profitable. I’d be happy to share that technique with you. The middle 40% is your sweet spot.
That is what we protect with everything we’ve got. That would be our cashflow. Our cashflow comes in two ways. 1) We own rental properties and do that. The second is notes. We lend and do notes. The 20%, almost like I was saying outside that 8% bubble, that’s higher risk, higher reward opportunities. That’s where you drove right past your property until Mexico. That’d be in the 20%.
Protect the base, go for some quick turn, quick cash type of strategies and then go for the higher-end projects that have a lot more upside but that’s a smaller percentage of your overall portfolio.
Even on that 20%, we are as conservative as far as vetting the investor, property, and deal as much as we are on any of 40/40/20s. The 20% we call high risk, high reward but we know what we’re getting into.
It’s a higher risk than what you normally do. You are still based on the fundamentals of what’s backing and is worth more money than what you have in it. You have ways that individual investors can participate as well. You do equity participation and things of that nature.
We got investors that buy whole notes from us. We always have whole notes. We have investors that come in and they say, “I’m a little more aggressive. I want more than just interest. I want debt and equity.” We’ve got opportunities in that area. We got some bigger investors that JV on some projects with us. we’ve had some very successful funds in the past. There are all kinds of opportunities. I always like to say it like this, “Let’s walk before we run.” When I came to this company as a customer or client, I bought one note. It was $50,000. Once there’s trust on both sides, more opportunities open up.
A lot of times when people hear other investment opportunities you can put in, it’s usually, “I have to be accredited.” You have investors who are both accredited and non-accredited. Is that accurate?
That is accurate. One thing that has happened is sometimes the whole loan or note is a little too high. Even our higher-end investors might not have $150,000 or $200,000 idle, or someone may not even have $150,000. Maybe that person only has $40,000 or $50,000. What we do in that case is on our projects, we can take that note and divide that into a 1st and a 2nd.
We put it under what we call a land trust situation where we control the property and project. The borrower is an operating partner. It’s someone that we trust and that we’ve been with for years. If they would default and walk away, it’s our project. We take it right back. We don’t have to go through the court systems or anything. That protects our investors to another level.
Over the years, I’ve had people wanting to partner with me. I’ve thought about what’s the best way to structure it. The land trust is underutilized by most people because there’s a level of understanding of how it works and such. I learned that years ago when I used to buy real property, fix it up, and sell it. The gentleman that I borrowed money from always structured it through a trust. The trust was the owner of that property. I was simply a primary beneficiary as long as I paid and lived up to the obligation of that trust. That way, if I didn’t, I knew and he knew that he could take that property back with a stroke of a pen without going through the legal system because it’s part of the agreement that we already have.
I would lose my beneficial interest in the property if I didn’t live up to the obligation on the debt side. That’s a fantastic structure. I’ve found that ease of transfer when you have assets like that. Maybe an investor needs out and you can replace them with somebody else. There are a bunch of scenarios that can be done with that. That’s a structure that I’m going to be utilizing as well through that. That’s a fair deal. Everybody, you can check out their website at HISCapitalGroup.com.
You can get a great idea on the website about what they do and the type of assets that they have. There’s even a video from testimonials and Steve on there as well. It’s an Orlando-based company as well. He’s on the other side of Orlando from where I am. I’m impressed with what the company is doing, what they’ve done, and how they manage these assets. What do you see going on in the future? Do you see a change in your business model? Are you concerned about property values? I’m a little bit more concerned about the borrower’s ability to pay than I am about property values. What are your thoughts on the future real estate and note market?
The immediate has changed. COVID has changed everything. The fact of what we’re doing, COVID has made this. We can do business through Zoom. That’s one of the best things that could have happened with COVID, in my opinion, out of all the bad things that happened. As far as the investments, almost immediately we stopped lending and investing in high-end homes unless they are out of the box. We’re doing some high-end cabins near Gatlinburg, Tennessee Pigeon Forge.COVID has changed everything. Even the most complex business transactions can now be made through Zoom. Click To Tweet
If you want to come and see them, we’ll take you for a tour. They’re gorgeous. All of them pretty much have this swimming pool. They got the views. The builder and finishes are amazing. One has got a bowling alley in it. They’re Airbnbs. That’s a little bit different. Outside of Tulum, those are high-end homes too, where even like the Porsche car company, we’re building a home. The Armani designer company, we’re going to do six of them for them. Those are 20% out of the box.
Inside of our day-to-day, we’re focused on affordable houses, We’re building houses for maybe $225,000 and selling them for about $300,000. There are so many exit strategies for that. The other one is we’re taking a manufactured home doing the same thing. Half of the time is the cost of building, setting it on a slab, making it beautiful, and putting brick around the front. We’re selling them for $225,000 or $240,000.
Those exit strategies not only have a huge audience of buyers but the audience of buyers can live there cheaper than they can rent. They’re buying. The worst-case scenario is if it doesn’t sell, then our first goal is to put a rent-to-own tenant in there where they give us 30% down non-refundable and then they start making payments. Our ROI goes up even more.
Out of curiosity, are you doing those in parks or in land that’s zoned accordingly or whatever comes up?
That almost leads to the downside of this investment. They’re harder to come by but we’re taking infill lots that already have the infrastructure, the sewer, everything’s there, not in a park, then you got to find a community with a local government that’ll allow it. We’ve got them all over the place but we’re buying probably 6 or 7 of them a month. We’re getting it from the retail price of those manufactured homes. We’re getting a substantial discount as a dealer almost. If someone on this show wants to get into something like that too, perhaps you could leverage our side of it and we can help you somehow on that.
A lot of people don’t realize that Warren Buffett is the largest owner and creator of manufactured homes and manufactured home notes of anybody and there’s a reason for that. He bought Clayton Homes, which was the largest builder manufacturer of those, and 21st Century Mortgage. After Green Tree Funding was gone, it became a company. He’s doing all the loans through that. The same thing, he’s got stats on that it is focused on affordable housing. I’m glad you mentioned that because I’ve always felt the same way in the note business.
Why compete on the high-end stuff strictly in the whole note when you’re dealing with companies like Blackstone? They’ve got an unlimited checkbook. Why are you competing with them? Let them deal with that. You focus on affordable housing. In our definition, it’s a little less than what you were talking about $200,000 or $300,000 homes. Most of my clients in the note business are looking underneath that because we do a lot in the Midwest and Southeast. I still think that’s the best place to go. There’s more activity. You got more people looking for creative financing. You don’t have competition from the big players in the industry. I like that aspect of it.
In real estate, we say not a sexy investment. If I showed you pictures of Tulum, that’s sexy. If I looked at both investments, the most conservative, predictable investment are the two I shared with you. They fit right into our comfort zone.
Some people are going to be interested in seeing what assets are available, how they can participate in different ways, and such. You have a portal set up on your website. I was looking at that myself. I did see the Porsche at the bottom of the list. It didn’t escape my eyes. I was like, “I wonder what that’s all about.” They’re going to want to do that. Is there an easy way to do that? What are your thoughts on that?
We have a link that I sent you. You can share that with everyone. That’ll give you the inventory of what we’ve got. It’ll set you up an investor portal if you ever do wish to invest with us.
It’s the same link but they create their own account. You all can email me about that. It’s Kevin@KevinShortle.com. I’ll get you that link and you can get an account and see what opportunities of what they have. There’s quite a bit and some diversity in that which I like. Part of my whole thing with my book was I’ve seen too many people in our industry who are like, “Notes is the only thing that you should ever do.” It’s like, “Not really.” You want to diversify a little bit. You want to combine the best of real estate with the best of real estate notes. That makes a more complete investor and portfolio as well. It seems like you’ve got the same philosophy as what you do at the portfolio division there.
You give some crazy stuff. We have a gentleman here and he’s a builder. We’re looking at a project in Albany, New York. It looks like it might come together. Aldi is going in there. I’m not sure if that’s the one with a Cracker Barrel but it is more of a development. There is some crazy stuff that falls in your lap once in a while because it’s a huge mall right next to it. This big investment company owns malls all over. The story is that the dad built it and then the son has it. The son turned directions a little bit and ran into a cashflow issue.
There’s this piece of land that’s carved out and they tried to sell it for $7.9 million. The bank wouldn’t let them sell it. They ended up getting an attorney and everything and tried to get this thing carved out. They got it carved out but by the time they got it carved out, they will let it go for $2.1 million. Anyhow, through the lending side, stuff like that falls in our lab every once in a while on the 20% side. There’s a case where we’ll take on investors where it would be debt and equity. There’s a large amount of equity like in Tulum.
We had an offer on a house in Tulum. It’s called the Wabi-Sabi house. They’re beautiful. To anyone wanting to come on a tour, it’s a beautiful location. We built that house for close to $1 million. We got an offer of $1.6 million. $1 million all in that includes the land and everything. Right here in Orlando, we couldn’t find a project for that equity. That’s why you diversify a little bit.
Last question here and you might have to differentiate here. When you’re evaluating projects on a portfolio basis, it’s different from a one-on-one note. If somebody’s coming in and looking at maybe some of the assets that you have on your site there, what are your thoughts on how they should go about their due diligence process to see if that’s a right fit for them?
I will tell you exactly how I did it and why I think this is a good setup. The reason I’m saying that is this is a private lender. They’ve been in and out of millions of dollars of projects themselves. They do all the processing and underwriting right inside this office right here in Orlando. The borrower comes to us for two reasons. 1) They want our capital. They want to leverage our capital. 2) They want our systems to look at that property and run it through exactly like we would do ours.
Many times, we find problems and we tell them, “This would’ve eaten in their lunch. You missed this in the search.” They’re thankful. They come back and the relationships grow stronger. I’m saying that because by the time the note gets to our portal, all of them have gone through the same process. It’s more so, “How much am I would I like to invest?” I will tell you that it’s not going to get on there unless it’s gone through the system. Most of them there are under the land trust. They get that whole other level.
We have many parallels on that because the way I teach people one-on-one through Zoom in my consulting program is in a systematic approach. It becomes muscle memory. This is the same routine I take on everyone and it becomes such a pattern that you become less concerned about, “Did I miss this or that,” versus you have a set approach to each one of these on what you do, what you look for, the questions that you ask, and the documents that you see. It saves you a lot of time and frustration and prevents making those silly mistakes where you flat out because forgot to do something there. That takes a little exercise and going through.
When I’m working with people on my side of things, we get on Zoom and go through it. God bless Zoom because what I do every day is helping people to learn this pattern and approach, run these numbers first, and take a look at them. That cuts down on a lot of the areas. That’s great to know as well. We’re coming up at the end here.
Everybody, I hope you enjoyed this episode. There’s a lot of good information there. Passive income is a great way to go apply to real estate. Make sure that we have collateral that is worth more than what we are in these things. Working with good people who have the same philosophy makes a lot of sense in a nice way to do business and put your money to work. Any final thoughts, Steve?
Turning 60, all of us are going to hit this number, hopefully. Do everything you can to be a student of understanding how to get your money working passively for you. You are going to want to wake up some morning either going to have to have that money or get to have that money. It depends on your health but either way, you’re going to want to be set up with passive income. Kevin, thanks for your efforts and for taking the time to educate on that because many people, according to statistics, never get to that point. Many people don’t even know what you’re talking about or never even heard of it. Thanks for sharing that.Do everything you can to be a student of understanding on how to get your passive money to work for you. Click To Tweet
Everybody, thank you for reading. I do appreciate it. I’m going to add a QR code to the new blog that you’ve noticed. If you’re interested in the various levels of training that I have available for you, you’ll be able to look up that QR code and get right there. We can set up a 30-minute phone call with me to see if this is right for you. It’s the best way to do it. Everybody, thanks for reading. Thanks to Steve for being on. I look forward to talking to you all again real soon.
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