Real Wealth Network

Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes Store or by visiting FlipNerd.com. So without further ado, let’s get started.

Hey it’s Mike Hambright, welcome back to the FlipNerd VIP Show. Today I have with me Kathy Fettke who is an active real estate investor, coach, and cofounder of the Real Wealth Network which teaches people how to build wealth passively through real estate investing and she is very passionate about it so we’re excited to have her on today.

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Hey Kathy, welcome to the show.

Kathy: Hi. Thank you.

Mike: Glad to have you on.

Kathy: Great to be here.

Mike: So tell us, where are you at?

Kathy: Where am I right now, physically?

Mike: It’s very sunny there.

Kathy: Malibu, California.

Mike: So, I know you are involved in all sorts of things teaching people how to invest in real estate. For those that don’t know you, why don’t you introduce yourself and we’ll talk a little bit more about things that you’re working on.

Kathy: Sure. We’re a real estate investment group based in California. We got started in the early 2000s when we started to see things get crazy. I was a mortgage broker and I saw people making really dumb decisions, banks, everybody making crazy decisions and I realized that we really needed education and that’s when I started the Real Wealth Show. I knew that I needed education so I just started interviewing experts week after week on a radio show. People who had been in the business for 30 years and understood what in the world was happening, because it didn’t make sense to me.

Interestingly enough, because I know you’re based in Texas, many of the experts that I interviewed, these guys with grey hair who had been around a few times, they said that California is completely overpriced and is in a bubble, but over in Texas it’s the opposite, it’s undervalued. If you can liquidate in California and exchange it for properties in Texas, people will be able to quadruple their cash flow. So that’s how we became well-
known, because we helped a lot of people save their equity and triple their cash flow when most people were losing everything.

Mike: There definitely are some markets in the country that are phenomenal rental markets and most Texas major markets are at the top of that, or certainly are as good as any. You know it’s crazy, I own a number of rental properties, but in some markets where we keep our own properties we’re buying them for less than half of the build price. There’s going to be inflation in this country one way or another so those are going to be great assets.

So tell us a little bit about, I know you have a lot of passion for teaching others, and some folks focus on teaching people that have no money how to get started in real estate investing. You’re on the other side of the spectrum, teaching people who do have money how to invest it appropriately and build wealth through real estate. Talk a little bit about your strategy and why you focus on that and maybe some of the lessons that you teach people.

Kathy: Sure. A lot of people struggle with trying to create money but you sometimes forget that when you have money that can be a struggle too because now you want to protect it and not lose it. I’ll tell you, we have seen people with money make really funny decisions, like sending over hundreds of thousands of dollars to a complete stranger and not do any due diligence whatsoever. It’s almost like people are so uncomfortable with their money sometimes that they just want to get rid of it.

We saw a great need for people who have money, maybe they’re uncomfortable with it in the stock market, they see that that’s really more of a gamble than anything these days and they want something solid. If you’d spend your whole life building wealth and you’re 60 and you’re ready to retire, you are not going to gamble with that money, hopefully. That’s what we’re here to do, is help make sure you don’t.

People at that stage in life really want to be able to acquire assets that pay monthly dividends so that they can retire, right? And obviously real estate can be a wonderful vehicle for that.

Mike: There are so many benefits to owning properties. So are you primarily having folks focus on single-family homes or do you do some multi-
family as well?

Kathy: We just like deals so that’s what it comes down to. I’ve learned in my short time, I’ve been through two cycles now. The ’90s, where my husband and I, out of pure luck, just timed it well and made literally made a million dollars on our property in ten years. It’s California – we bought it for 500 and 7 years later it was worth 1.5 million.

So we’ve been through a couple of cycles. If you don’t sell it’s worth nothing because in a few years it was worth 500 again. If you’re going to play that game you have to know how to buy low and sell high, not buy high and sell low.

Mike: If you’re new to real estate, a lot of folks don’t realize that the more successful real estate investors really are in the opportunity business. Folks ask me all the time, because I coach and mentor a lot of folks too, but even people that are trying to get started, do you buy houses at this level. A lot of people have heard this before, but I’ll always say, if the numbers work I’ll buy a TV. It just comes down to, is there an opportunity there. I’m in the arbitrage business and that’s simply what it is.

Kathy: That’s what it is. So back in the early 2000s we were working with builders. There was a time when we were in the boom phase so the only way we could find deals for our groups, because they want turn-
key, was to go to builders and say hey, we’ll take 10% of your inventory if you’ll discount it and people made money that way. Then when the foreclosure crisis happened, obviously we saw a massive opportunity, as did many others, to pick up those distressed assets.

It was shocking that at a time when it is the time to buy, the buyer’s market, people weren’t buying. People were terrified. I had major news outlets like CNN, CNBC and Market Watch, all these outlets calling me and saying why do you advocate buying when we’re in this recession. Because we’re going to come out of it. People are going to build wealth like they never had the opportunity to before in this time.

We really liked the single-families, now we’re still finding some distressed apartments. Hard-earned in Texas for sure but in certain parts of the country we’re finding a lot of deals still in the judicial states that have a backlog of foreclosures, and we’re partnering with builders again. Here we are back into another part of the stage where instead of working after the builders have built homes we’re helping them build them and partnering with them and helping them acquire and entitle land so we’re on the development side and that’s exciting too.

Mike: Wow, that’s interesting. I know you were in the mortgage business before too and when you say that people started to see a lot of crazy things. Three years ago a lot of people thought surely that’s never going to happen again, we’re never going to get sloppy like that again. Doesn’t it feel like we’re going really close to where we were before?

Kathy: I’m getting old enough to say that I remember the banking crisis of the 80s. We do cycle and we forget quickly. As the public forgets
– I don’t think that the powers that be forget because any time that you can lend money and if that doesn’t work get bailed out, well that’s not really a big risk, is it. You and I wouldn’t do that but if we knew that there was insurance behind it and government backing well then it makes it a lot easier to lend. So we are back in that situation.

Just last weekend we held a really large event where we had a lender, Blackstone, which for those of you who aren’t familiar was one of the largest hedge-funds that bought up distressed properties and now they’re not finding the cash flow they want, so now they are in the lending business.

Mike: B2R. One of my good friends, [inaudible 00:09:59] is there now.

Kathy: He was just out to speak at our event. Well he’s one of three or four companies doing that same thing with blanket commercial loans. It’s just interesting to see again that the money is coming back, it’s going to be flooding the market soon, and already with low interest rates, people are able to buy more than they normally would. I have a friend buying a $2 million beachfront vacation home which really isn’t costing them much on a monthly basis because the interest rates are so low. They would never do it if the rates went up even 1% which they will.

So I’m wondering what will happen again as all this money floods the market. I think you and I would probably agree that it’s going to force prices up even more, more people going after not very much product.

Mike: Which is another reason why it’s great to own rental properties. There’s a lot of folks who truly will probably never own a house again, some of the ones who have owned in the past who have credit issues, or they’re at market entry levels where lenders may not want to lend, some at sub 50, sub 60 thousand.

I think that the American dream of home ownership was oversold and a lot of folks are coming back around to say that it’s okay to not own, it’s a liability for some folks. I think that demand for home ownership may be down a little bit. I don’t have anything to prove it but I feel like some folks are more okay renting now than they were in the past.

Kathy: Well the thing is that they always have been. Even at the peak of the boom when anyone could get a loan, a homeless person could walk in and get a loan, home ownership was at about 68%, so there was still about 30% of the population that wasn’t going to buy no matter what though they probably could have. But that was always going to be there.

I would probably challenge that and say that people do want to buy but they’re just having a little difficult time competing against cash buyers at the price points where they can afford. There’s just so much coming in. My experience is certainly in California where people are making… we have clients at Real Wealth Network who listed a property in San Francisco that is a complete tear-down that they said their agent said to list it for a million, no one will pay more than that. I said, well, we’re in a crazy market, let’s list it for 1.3 million; they got 1.5 million. A builder came to them and said, paying even more than 900 thousand won’t pencil. There’s craziness.

But that’s an example of someone that I’m there to help and say okay, you’ve got a million and a half that you’ve inherited this money, you don’t know what to do with it, and we’re going to help you buy investment properties, rental properties around the country that are going to make a lot more sense than San Francisco.

Mike: Talk a little bit about your model for helping folks that are in your network find deals in other parts in the country, a little bit about how that actually happens.

Kathy: Well someone who comes to us and really just doesn’t know what to do with inherited money, they don’t know what to do with their IRAs, they’re nervous because we know that the stock markets have peaked and there’s only one other direction that that usually heads, and you’re getting into a point in life where you don’t want to lose money one more time. People want help. We go out and find, first and foremost, areas that have job growth. That is number one. You’ve got to be in an area with job growth.

Number two, population growth, and those go hand in hand. If there’s jobs, people go. And the third piece, which we don’t have in California, is the affordability. So when you get those three things and then add to it some good weather or something attractive, maybe a city that’s investing in itself, then you really have a home run. Some of these cities that you know have just been… I’ll ask a room, what do you think of Pittsburgh, Pennsylvania. And they go, dirty, blue collar, and I’ll say when was the last time you were there? They’ve never been. So it’s reputation.

I don’t know if you’ve been to Pittsburgh lately but it’s a lovely city. When you can buy property there for $50,000 in a decent neighborhood there’s only one direction that can go in my opinion, when Google is moving their headquarters there. So that’s what we look for, distressed cities that are on the way up and changing their reputation, just like Texas did over the past 20 years. Just completely transformed into the highest job creator in the country.

Mike: How do you help people, or what’s your role in helping them, do you have syndications or are you helping pair people with individual houses that they can buy?

Kathy: Yeah, once we find an area like Pittsburgh, or there’s about ten cities that we’re really hot on right now. Once we’ve identified an area as an emerging market, and cities are investing in themselves, and jobs are moving there, then we find really good teams there, property management, renovation teams, turn-key property sellers. Boy, I’ll tell you, most of those are anything but turn-key but we find the really good ones. Just people who can really source us the property, get it fixed up, and get it rented out at the top and highest level possible that have systems in place and great integrity.

We build our list and refer our members to those people. Now we’re at 14,000 members now and growing really rapidly so if there’s a property manager in town that is not doing what they said they would do, believe me we will hear about it and let our network know. So it’s the power of numbers and the power of the network.

Mike: That’s fantastic. One thing I want to know, since you used to be a lender, there’s this all this talk of Fannie and Freddie maybe going away and the government getting out of the lending business which is hard to imagine considering what portion of the loans, and I don’t have the percentage but the majority is FHA loans. Do you think that’s going to happen and what do you think that would do for the free market? In all honesty I would prefer the government is not in the business but what’s it going to look like if they’re not?

Kathy: I would like to see the government gets its hands out of a lot of things.

Mike: Wait a minute, aren’t you from California? Californians don’t usually say things like that.

Kathy: I was born and raised with very conservative parents. Shocking, I know, in California. I think my mom always did want to live in Texas and my dad liked guns. No, I don’t think that that’s going to happen in this country at this time. There’s far too much reliance on housing for our GDP growth.

Being somebody that the media calls every day because there’s anything happening in housing Wall Street wants to know about it. They want to see houses built, they want construction, they want to see people buying homes. It really stimulates the economy and I agree with you that there are lots of other countries that don’t subsidize housing or loans and they still sell property, property is still valuable. No, I’m not worried about that changing any time soon.

Mike: Tell me a little bit about your club. With 14,000 members, how is the club structured, and how do you meet? For folks who don’t know, how much of your knowledge and information is online versus in person? Talk a little bit about the structure of the organization.

Kathy: We have a podcast called the Real Wealth Show. It reaches an international audience in 27 countries. Then we have a blog which of course, is everywhere. At this point our live events are in California but we have property tours every month all over the country so people all over the country or the world can join us on those tours. We’re going to start making those tours also an event so our events are more national. So we’re really helping people from all over the country.

Our Real Wealth Investor Academy is an online educational program that is in my opinion the most affordable with the highest level of value and quality that I’ve seen out there. It’s only $97 to join that and you get access to all kinds of videos on asset protection and loans out there and information that will hopefully help people make much better decisions this time around.

Mike: That’s fantastic. Tell us how folks that maybe aren’t a member or want to learn more about it how they find your group and how they find the academy.

Kathy: Sure, it’s realwealthnetwork.com is our website. So real like real estate, wealth, network, dot com. Realwealthshow.com is the show. They’ll all go to the same place. You’ll find out all about the tours online. You can join for free and we love your input and feedback because the things that we’re looking back is input; we want to be the network that you’ll come to and say, do you know a good property manager in this city, and I know a good property manager in this city. We want to be able to provide that information and be a force against what is often an industry that really attracts a lot of shady people.

Mike: I want to feel like that’s getting better.

Kathy: Yes. It’s getting better.

Mike: I believe it is. I don’t know how to put a pulse on that but my feeling is it’s getting better. Real estate investing is becoming, with hedge funds, and the B2Rs of the world it’s becoming a legitimate industry. It’s always been a legitimate industry but it’s been made up of mom and pops, individuals. Now more than ever it’s an institutional product.

Kathy: I think the internet really changed everything. You can’t rip people off and get away with it anymore without it going on the internet. And if your price, you do a little Google search, and unfortunately a lot of people don’t do this. I’ve literally talked to people who send their money over to somebody and didn’t check to make sure that that person might have some feedback on the internet.

Mike: Do you all play a role in the actual… is it just educating people on how to make investments and maybe where to make investments and then the networks connects them with property managers and brokers. Do you play a role in transaction?

Kathy: We started to about four years ago when we realized there were just so many large projects that went under and they were not in anybody’s ability to pick up. A single-family home, most people can afford that at some level. The huge apartments and developments, hedge funds can do that. But there was this middle range between a million and ten million that was just too small a deal for the hedge funds and too large for the individual; no one was buying this stuff. It was cheap.

First a builder can to us and said they found a 27 waterfront town homes in Portland that went to the FDIC because the bank failed. There was nothing wrong with the project, nothing wrong with the developer, it was the bank. So halfway through completing this the developer had no more money. The construction money was gone. I got this opportunity to raise $3 million to acquire the whole thing. I went to our investors and said 50,000 each, do you want to do this, and we raised the money instantly. Of course, that’s a syndication, that’s SEC stuff, we had syndication attorneys putting together the PPM and the documents and background and all of that. We would only work with the very best builders who do this time and time again so as to not put anyone at risk.

That was a fantastic project. All we had to do was finish it, it was 70%
done, and sell it. Investors made over 20% [inaudible 00:22:47]. We’ve been doing it ever since. We picked up another 4200 lots just north of Tampa that was in escrow for 160 million. We picked it up for 16 million again through a syndication. Just over and over. We did a deal like that in Dublin, California where we thought maybe once we picked it up and sold it we’d get 14 million. We just got an offer for 20 million. We go where the opportunity is.

Mike: Well that’s fantastic. Tell us a little bit about one of the neat things about your club is that a lot of real estate investors, I really like them to be in my back yard. Let me tell you the funny thing about that. I own a bunch of rental properties and I will purposely go out of my way to not drive past one; I just don’t want to know. I have a property manager, I don’t manage them myself. I just don’t want to know. My sponge is full and I don’t need to have in my mind that somebody has parked their car in the front yard or something that I don’t want them to do. I just don’t want to know.

With that said, I still want them to be here so that if I ever had to do something I could. That’s something I have to overcome but your network, you’ve taught them to overcome them being at a distance and therefore you can move around the country as markets change and as things shift, so that’s fantastic and opens up a lot of opportunities.

Kathy: When somebody told me that they wanted to spy on their daughter who was going to a party for the first time and they drove by and saw her in the window kissing a boy and they were like, I don’t want to know, I’d rather not see this. So I know what you mean. Rich and I own property nearby and we never went by it. You could still have your property manager inspect it and do all those things but you don’t necessarily want to see it.

So yes, that is probably the biggest thing that we do, to help people overcome that fear of not being able to touch or drive by and fix their own properties and so forth. It requires a tremendous amount of trust.

However, if you’re to build any business, and to be successful at any business, you have to learn to delegate. It’s that simple. Pick up a book and learn how to be a business owner and you’ll find out that it’s all about that same thing, trust. How do I train this person to do what I don’t want to do or don’t do very well. Or in this case, how do I vet out or hire somebody and know that they’re going to take care of this. And today there are so many ways, there are so many third party people that can help you make sure that your property is okay. You just have an inspector go in and check the fire alarms every few months.

There are just so many ways to know what’s going on and make sure your property is being cared for, whether it’s next door or not. If your property is right next door to you, how many times do you go in and see that they haven’t painted the walls purple? You don’t know what’s going on inside necessarily, so you’ve got to have somebody that you trust go inside and stay on top of that. I think that’s where we come in, too. With so many investors we find out real quick if a property manager is not taking care of property.

Mike: Speaking of which, there’s a couple of franchised opportunities that are popping up all over the place which makes it easier to manage than traditional individual mom and pops or husband and wife teams or real estate teams. Real estate is extremely fragmented and you never know what you’re going to get.

Kathy: If I could go back a few years I would have started that franchise. You’re right, these are mom and pops, and what happens when mom gets sick or pop… you just don’t know. There’s the four Ds. Death, drugs, disease, and divorce. So it happens to people and suddenly a property manager who was great could be horrible the next month.

This happened to us. We had a guy that was wonderful for years and then his cousin was shot and his wife got cancer and things went downhill. You’ve got to pay attention to that. As soon as you see something wrong with your property manager you need to move.

Mike: So where do you think the market, since you guys operate in any market, I guess nationally where do you see the real estate market going from here from the perspective of the passive real estate investor that you serve?

Kathy: Right now we’re kind of back where we were in the early 2000s. We’re helping people get their money out so it’s a seller’s market in California. Like I said, if you put your property on the market you can sell it for top dollar and do nothing to fix it up. Then take that money and buy where you can still get good deals.

The country just operates on different cycles, there’s no one cycle. I can tell you that California and several other coastal markets and generally hot markets, they have peaked. And yet there’s still parts of the country where they have a backlog of foreclosures due to their judicial laws where you can still buy like you said at half the cost to build where the cash flow is 2%, the rent ratios are 2%. So you buy a $50,000 home and rent it home and rent it for $1000. This still happens. That’s what we’re focused on, helping people liquidate where they should be selling in a sellers’
market and buying in a buyer’s market.

Mike: Fantastic. If you’re interested in learning more about Kathy or learning more about the Real Wealth Network go to realwealthnetwork.com, right? Well Kathy, thanks so much for being on and I appreciate your time.

Kathy: Yep. Thank you so much.

Mike: Keep up the great work that you’re doing in the industry. And when you come to Dallas, let me know.

Kathy: I will.

Mike: All right. Take care. Have a great day. Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.