On this episode of The Engineering Passive Income Show, Joseph is joined by Dr. Steven Kaufman. Throughout this episode Joseph and Dr. Steven take us through Tiger 21, what it is, who it’s for and why you want to be a member of this group. Joseph and Dr. Steven also discuss investments and tax rumors as well as sharing some very intelligent and helpful advice.
0:00 – Intro
0:46 – Joseph gives us an insight into Dr. Steven’s background
2:09 – Joseph explains how he and Dr. Steven met through The Fanatical Change Foundation
3:45 – Joseph states that in 2015 Dr. Steven was the world record holder for power lifting and was a four time world champion power lifter
5:46 – Dr. Steven explains what Tiger 21 is and what it does
6:38 – Dr. Steven talks about why you would want to be involved in Tiger 21
7:05 – Dr. Steven states that whether we recognize it or not, Men and Women end up synchronized with the people around us
7:58 – Dr. Steven shares a quote from Tony Robins, ‘the quality of your life is a direct reflection of the expectations of your peer group’
9:03 – Dr. Steven speaks about realizing he needed to update his peer group because he found himself as the smartest and richest person in the room when in reality you always want to be the dumbest and poorest person in the room as that it where the most value is created
11:03 – Dr. Steven speaks about the portfolio defense concept within Tiger 21
14:10 – Dr. Steven states that the PD is the biggest value offering that Tiger 21 offers as it is the most unique offering from Tiger 21
15:43 – Dr. Steven states that the average net worth for Tiger 21 members is $110m
18:20 – Dr. Steven talks about how the only thing that is allowed to be recorded in the meeting is the percentage of asset allocation
19:09 – Joseph shares information about Tiger 21’s 2020 asset allocation
19:45 – Dr. Steven explains what private equity investments are
21:42 – Dr. Steven speaks about when he bought his first rental property and how long he has been investing in real estate for
22:32 – Dr. Steven talks about what he is currently investing in and mentions how he is not an asset class investor he is a deal/opportunity investor
24:50 – Dr. Steven explains why he was and is investing in boutique offices right now
29:26 – Dr. Steven speaks about how investing real estate early on in his career has helped him to get out of that W2 mentality
31:50 – Dr. Steven shares a personal story about someone he worked with who was able to make amazing life changes and retire early from working together on investments
38:03 – Dr. Steven talks about tax rumors about 1031’s and passive losses and also talks about tax strategy and savings
44:09 – Joseph encourages you to reach out to the sponsors if you’re an investor on a deal because it’s a personal business
44:59 – Dr. Steven states that the cash allocation on Tiger 21 is really interesting as it fluctuates and shares some more information about this with us
46:57 – Dr. Steven states that Sam Zell is worth $5B and keeps $3B in cash
50:32 – Dr. Steven talks about how it’s very difficult to lose money in real estate and that is why there are so many wealthy people in real estate
52:06 – Dr. Steven mentions how Tiger 21 say that you make your money through concentration and you keep your money through diversification
Welcome to the engineering passive income show, where engineers and other professionals come to learn how to generate passive income, grow their wealth and get their time back. Your host is Joseph Bramante, an accomplished civil engineer, oil and gas professional, multifamily investor, an industry speaker. Learn about investment alternatives, the same types of investments that he used to achieve Financial freedom himself broken down like only an engineer can. Now here’s your host, Joseph Bramante.
Joseph Bramante: On the show today Episode number five, we have Steven Kaufman , and Dr. Steven Kaufman sorry about that. And Steven, well, you’ve been in the industry, geez, for the last 20 years. So some claims to fame about Steven. He was ranked according to ink magazine, Zeus his company, one of the 37 fastest growing private financial service firms in the United States. Zeus as a hard money lending company does many other things as well. But there, I mean, if you’re in Houston, you know about Zeus, I see their sign every day on I10 for they’ve adopted one of the roads. So you can’t miss it. You’ve been on international and local news Fox, ABC, CBS, CNN, Bloomberg, I mean just, and also contributing author to entrepreneur.com. You are listed by the national mortgage professional magazine as one of the top 40 most influential mortgage professionals in the United States. Man, That is really cool. And also in Houston by Houston business [01:35 inaudible] top CEOs in Houston, you’re from Brooklyn, New York. I didn’t know that about you. I didn’t realize you’re from New York. I did know you grew up in Baytown, and you have a really great story of a real kind of a rags to riches story that is really inspiring. Went to Houston, got your BS in accounting, CPA. And then from there, I mean, you are just, obviously you love to learn, right? You got master’s degree in economic development. You went to Harvard for strategic marketing program. You got a PhD in psychology with the focus on performance psychology and group leadership and organizational leadership and group trust. And then from the philanthropic side, I mean, and this is how we met right? Back in fanatical change. So fanatical change was a foundation that you and some others launched that was based in Houston. And it was a really novel concept where based to have a giant party every year and correct, if I’m wrong here, you have a giant party every year. And then all the proceeds from that party, which in the party was, these were some of the best parties I’ve ever been to. All the proceeds from those parties would go to select individuals like people, like during the party you had interviews, you had scripts of people that were in a hardship situation that were in, I’m not sure if it was voted on or at least you got to see where your dollars are going. It was like, so, and so…
Dr. Steven Kaufman: The Families in the news, the week of the event. So if you were a family that suffered a life altering tragedy, the week of our event, we hosted the party in your honor. So those writeups that you were seeing, summaries of families that were in the news that week. That’s how we selected them. We used the local news stations.
Joseph Bramante: It was a very intimate form of Philanthropy. And it was incredible. And I really enjoyed also seeing the record afterwards. Cause that was, you know, a lot of times you do, you donate, you get to charities, whatever. And that’s where it ends. You write the check, you have no idea what happens to it. But with this afterwards, you actually got to see like a video of, so and so receiving that check and all the emotions and expressions, and it was, it really made you want to continue doing it. And then just obviously if that wasn’t enough, right? I mean, in 2015, you were the world record holder for power lifting. You were a four time world champion power lifter, you’ve summited, Mount Kilimanjaro, Mount Fuji, you’ve tracked Everest base camp, done Houston to marathons. You’ve done running with the bulls, which I’m personally jealous of. And you’ve also, you are a, you finish second in the Southwest regional amateur arm wrestling championship. You’re just like an all-around cool dude. You’ve got like, just like the Mr. Cool PhD. I mean, wow! You’re like the most interesting dude of Houston.
Dr. Steven Kaufman: Joseph, no one’s ever refer to me as the coolest dude. So that’s definitely a compliment. So thank you. I don’t know if it’s a cool, it’s about coolness as much it’s about trying to prove something about self-worth or self-esteem or something like that Obviously, a guy who’s checking off that many boxes is trying to prove something.
Joseph Bramante: True. But what I notice about it is all those boxes are in such like complete opposite spectrums, arm wrestling, power lifting, PhDs. I mean, usually those don’t, but I was a little bit similar, right. I mean, in high school, I was the football jock and the chess champion. So like I had those opposite ends. I would stand, I’d be in the chess tournaments with my Letterman jacket on. Really, I was trying to intimidate the guys, but you know, that’s another story. So I get that, but it was, you know, it’s a very well rounded, you know, a lot of times you see people that are pretty narrow and I just, you’re all over the place doing everything and doing everything extremely well. Which is very unusual. And I mean, just amazing for you, but so today, what we’re here to talk about though, is tiger 21. So you are one of the Houston chairs for tiger 21. Think you became a chair, What last year?
Dr. Steven Kaufman: About a year and a half ago, about 6 months before COVID give or take.
Joseph Bramante: So for those who don’t know what tiger 21 is, what is it?
Dr. Steven Kaufman: It’s a high net worth peer group. So similar to other networking and peer groups like Vistage, YPO, EO, tech, all those similar type groups where you get together on a regular cadence or regular basis with other similar like-minded people tiger 21’s a little bit different because it’s a much smaller group, much more higher hurdle to become a member, much more expensive. And so the membership will just call it more exclusive because the net worth requirement and this sophistication of the people in the room is a lot higher. It is high net worth peer groups is a summary of what it is.
Joseph Bramante: And so why is it important, I guess, for the everyday investor who doesn’t qualify, Like, why should me, for example, like, I don’t quite qualify to be in tiger 21. One day I hope to be there, but why should I care about what you guys are doing up in tiger 21?
Dr. Steven Kaufman: Well, one reason is, and probably the reason why I mean I joined is because over time you realize that the most influential aspect of your success is what I call the power of the peer group or the law of synergy, or synchronicity. Sometimes I call it that you end up this, I didn’t know you were going to go on this direction of the conversation, but this is one of my most fun things to talk about that whether we recognize it or not as men and women, we end up in synchronicity or synchronize with the people around us. So you mentioned football earlier, you know, when you’re playing football, you play with players that are really, you get better. If you play with players who are really bad, you actually play down to their level, you may be a little bit better than them, but you’ll play down. Or in chess, you’ll play up to a master and you’ll play down to an eight year old who may not be a master. And so we’re always in sync with people and there’s a lot of, of this in life where, you know, kids join gangs to become in sync with their, not just because they want the love and affection of maybe the group, but human beings will change their behavior to earn the love and respect of their friends. And a very, a great quote that I love by Tony Robbins’s the quality of your life is a direct reflection of the expectations of your peer group. So I’ll say that one more time, the quality of your life is a direct reflection of the expectations of your peer group. If your peer group expects this, you’ll deliver this. If they expect this, you’ll deliver this. And we notice in young children who they, if you’re a parent, I’m a parent. If you send your kids for a play date with another parent, you realize when your kids come back, their behavior changed, why? Because they want to earn the love and respect of their friends, So they change their behavior to mirror their friends as much as possible, or vice versa. So in business, this happens the same way. If you’re around people doing much larger transactions all the time, or thinking big picture business wise, you end up thinking big picture business wise. If you’re around people who, you know, I grew up really poor in a trailer park. If you’re around those people, they’re always down talking, getting out of the trailer park. It’s like being in the hood or the ghetto. People very rarely leave that environment. And a big part of it is because of the way that they speak about being there. So, for me, I recognized several years ago, not a long time ago, but several years ago that I needed to upgrade my peer group and drastically to make sure that the level of success I was having was in the direction that I wanted to go. Because I ended up finding myself as the smartest, richest person in the room. And the truth is as we both know, you want to be the poorest dumbest person in the room, because that’s where the most values created. And joining an organization like tiger 21 enabled me to do that. In fact, they made me the dumbest poorest person in the room right away. And I’ve remained there ever since six years later.
Joseph Bramante: Absolutely. And you’re spot on, you know, I’ve heard that before. I think many people have, if you’re the smartest person in the room, you’re in the wrong room and, you know, I’ve kind of adopted that same philosophy, you know, forming our company, Triarch. I’m the least experienced person at our company. Didn’t know anything. Everybody around me is, you know, I just surrounded myself with super smart people. And yeah, chess, spot on about that analogy as well. When we’re training, So a little bit about me, I was a state champion in chess, and we wouldn’t play anybody who was below our rating level. You get rated. So you know your number and you’re always trying to compete with other people. And if you’re playing with people below your level, you’re going to play to that level. You’re going to play to the level of the challenge. So well, great, man, that is spot on. And so I’m listening now. So now I know why, so we’ve talked about what tiger is and why obviously we need to be listening. So tiger 21, and so from what I know about it, and how many unique things about it is that unlike the other groups, you know, there’s a lot of business groups. One of the things they do that I always found interesting was this portfolio defense concept, you know, which is really like why don’t you talk a little about it? And my analogy of it is just like, it’s constantly keeping that knife sharp, you know, and just keeping you on your toes and making sure that you don’t kind of get complacent, I would say.
Dr. Steven Kaufman: Yeah. So it is the most unique thing, like you said. In fact, I’ve never heard of any other organization doing what tiger does and if they want to get away with it and when I say get away with it, it means make people comfortable with it. Including people like me, I find myself though, I’m all over social media, that’s all fake presentation stuff. It’s not my real life as you know, I mean, I talked about having children here, but rarely do I even talk about my children anywhere or my real life anywhere. And the wealthier you get, I have found that most people prefer, unless you’re in the business of marketing, like Grant Cardone or Tony Robbins, where you’re making your business, all social media, most wealthy people that I know and especially those in tiger, who are some of the wealthiest people in United States they want more privacy. And part of that is keeping financial privacy because you become more of a target in essence, the more you have. And so the bullseye becomes bigger, I should say. But tiger does this really unique thing called the PD or portfolio defense where once a month, one member, a typical group has 15 members. And once a month, one of those members is going to do a portfolio defense where they get an hour and a half dedicated to them where they’re spend 45 minutes doing a qualitative presentation, meaning presenting about their life, getting everyone to know them, pictures, story, background, and then 15 minutes of financial presentation, the quantitative piece. And this is unique because most people never do this in front of anyone other than a banker or their spouse. And I can tell you, there’s a lot of anxiety around it. However, once you do it, you realize how beneficial it is. And well, once people do it, they typically want to do it more frequently. Because like you said, you realize you’re all of the fears with you, No one really cares on the audience. It’s your life, not theirs. So all the other members do care about you, but they don’t care about your number or, you know whether you are the richest or poorest guy in the room. They don’t care about that. You care about that more than they do. What they’re interested in is what they can learn from you presenting. The irony is the person presenting the PD has so much anxiety about their financial information. But the irony is everyone in the audience watching is trying to figure out what can I learn from him or her doing this presentation right now. And when I say financial presentation, it’s fairly detailed. It’s not an audit from the IRS and it’s not a colonoscopy type presentation, if you will. It’s a presentation. I didn’t know what you were going with that. So thanks for adding in the CPA. It’s basically, you’re providing a financial statement On screen to everyone to look at. And one of the main conversations is asset allocation, concentration of risk. And you disclose as much as you want, or not as much as you want, it’s up to you as little as you want, I should say. And you direct the question. So as a chair, I work with a member. I was a member for four years and became a chair, right? So I know from the member side, and I know from the chair side. On the chair side, my members who are in my groups, I’m coaching them on how to get the most value out of the presentation. And the PD is the biggest value offering that tiger offers, cause it’s the most unique thing that it offers, other than being around high net worth individuals. The next best thing it offers is this ability to do a financial presentation and ask any question you want. And once you get over the fear of, oh, I’m going to show my financial information. Imagine if you just let go of the fear, I don’t have to worry about my financial information. And you can ask all of these people who are your peers, who have nothing to gain from their advice. They’re not a financial advisor. They’re not a lawyer selling the state planning. They’re not a CPA selling tax strategy. They’re just other high net worth people. You get to ask them for advice. And they know exactly where you’re coming from. That type of advice is priceless because they get to see where you’re at and where you want to go. And they tell you how to close the gap between those two things. So very, very, very, very valuable exercise. And then again, it’s why people typical actually do their first one and they realize it’s not a big deal. They want to do it more frequently. I did a, there was a PD this month, a guy’s done it 10 times since portfolio defense, 10 different times. I did mine as a member five times in four years. So once you do it, It’s a value add for you.
Joseph Bramante: And I just want to hit on something. So we’re saying high net worth, high net worth is a very loose word in our industry. And just to give some context, we’re saying high net worth here, we’re talking, I think just to be a member, the minimum threshold is a 10 or 20 million net worth. But in practice, I mean, you got guys in there at the hundreds of millions of net worth if not billions, I mean, these are some really big fish in that room.
Dr. Steven Kaufman: The average net worth for a tiger out of 900 members is about 110 million. That’s the average. It’s not the mean, but it’s the average. The minimum, like you said, is 10 million. But every time you’re in a meeting, they break down other than Manhattan and LA. So Manhattan and LA are the exclusions. But if you’re in a meeting, 40% of the people in the room have a net worth of 10 to 25 million, 25 to 75 million is the next 40%. And the following 20 percent’s made up of 75 million plus into the billions. And the founder of tiger is a billionaire. [16:16 inaudible] you know, every week. And he’s still a member participates as a member in the organization. And he’s a person who started the organization, at this point with 900 members is a pretty decent sized organization. The irony is, the entire budget’s not even a rounding error on his balance sheet, but he still participates because he sees the value in being totally transparent, even has a billionaire. So you have a billionaires showing their net worth and the breakdown.
Joseph Bramante: Imagine that, imagine doing a PD and you’re the richest guy in the room you’re getting critiqued by, I mean, that must be one, that’s very humbling, right? He’s got a, it speaks very well for the character of the group and whatnot. But I was just, man, it shows you that the level of respect that everybody has within that group for each other, regardless, as you said in the beginning, it’s not a number thing. Nobody really cares what your number is. Everybody’s equals in that room, you know, as far what you’ve told me and it’s yeah and if you’re telling me that the top guy in room is still continue to do it every year, cause he’s getting so much value for it, man, I don’t know. I’m kind of speechless cause now I’m like, I’m just seeing myself like man, how close am I becoming a member? Like what do I got to do to get into membership.
Dr. Steven Kaufman: It’s expert advice from practitioners, not theorist, no one in the room is theorizing. They’re there. They’ve done it themselves. So their advice is very…
Joseph Bramante: It’s experience based sharing versus what something you’ve learned in a book or whatever.
Dr. Steven Kaufman: Right, Exactly. Well, very well-articulated. You said it better than me.
Joseph Bramante: Alright. So the other thing in tiger is you guys have something called your allocations and this is a public document I was looking at last year’s. And so basically they come with these allocations and it shows like how, I believe it shows how all the members are investing. So because you’re doing all these PDs, right. Everybody knows where everybody’s money is. And so I guess, are they somehow figuring out that, okay, the average for the group is this percent.
Dr. Steven Kaufman: The only thing from a PD, I think I know where you were going, sorry to interrupt you, but this will frame your question probably. I don’t know exactly where you’re going, but this is important. The only part of the PD that’s allowed to be recorded in the meeting is the percentage of asset allocation. That’s it. And that’s an actually reported to corporate in Manhattan who then produces this chart that you’re referencing. So every month all these members are doing their PDs throughout the globe. And that information is conveyed, not the dollar amount, but the percentage of how people allocate their money. What do they invest in? That’s given a corporate and they maintain this by chart.
Joseph Bramante: Absolutely. So there’s a pie chart out there and you can Google it tiger 21 allocations. I’ve got the one from 2020 and basically gives you a percentage of how everybody’s money is allocated, which they’re getting from these people’s confidential PDs. So this is real live data here. And so it reads 27% real estate, 26% private equity, 22% public equity, 13% cash, 7% fixed income. 3% hedge funds, which I thought was interesting, right? Cause I’ve watched, you know, you see shows like billions and all this and you would think, oh, all these rich guys are all part of hedge funds. Like that’s how they make their money. Only 3% of these guys are putting their money in hedge funds. So that was some learning for me. And then the rest is commodities. Like 1% commodity, 1% miscellaneous. So I think we all know what real estate is generally, but what is like the difference between like a real estate and private equity? What would be private equity?
Dr. Steven Kaufman: Okay. Private equity would be investments in, it could be oil and gas. It can be some operating companies if you’re investing in a chain of restaurants, if you’re investing in medical, anything that is not real estate or not public is the easiest way to understand it. So if I’m not investing in real estate and I’m not investing in public stocks like public equities, then the remaining category by default, pretty much, if you think of anywhere, you could put your money, it’s going to be in private equity where you’re investing in something that’s not publicly traded, but it’s not real estate. So typically it’s going to be a, it doesn’t have to be a startup, but it could be a startup company, but it could be an existing company raising more capital or anything of a sort, everything in between there. Everything from whoop, if you sing the whoop bracelet to that biohacking bracelet, it’s kind of like the aura ring that tells people about their sleeping habits. Both of those were funded seed a capital in tiger 21. So it could be something like that or it could be, some investors will even classify a hotel chain investment as private equity because they’re not valuing that investment from the real estate perspective. They’re valuing it from the operations perspective. So even some investors will say that’s for me, that’s private equity. I don’t consider that real estate. I only consider real estate where it’s the hard asset and I’m valuing the asset, not the operator. So that’s the difference between the two.
Joseph Bramante: Gotcha. So my big takeaway or one of the other big takeaways is real estate is the largest percentage. I mean, 27% private equities are 26, not much larger, but still compared to the whole pie, It’s a substantial piece. So we both have backgrounds in real estate. I’m on the multifamily side, you’re also a multifamily, but you’re doing all kinds of stuff, right. You’ve been in real estate for like how long?
Dr. Steven Kaufman: 25 years now actually, sorry, I’m 44. So, I bought my first rental property when I was 20 years old. So 24 years, I bought my first rental apartment when I was 20, I own three single family homes before I was 21 years old. That was a goal. And so I’m 44. Sorry, It keeps moving up every year.
Joseph Bramante: So you’ve been through like two or three cycles now, and which is, I mean, first of all, it’s, you know, to survive a cycle. I mean, those are cleansing effects of the economy. And so to get through that really speaks well for you. But so you’ve been in real estate for the last 20, 24 years. And it’s been, you know, you got an entire company around it, right? You’re on the lending side for real estate, but also your own private investments. What are you investing in as an investor?
Dr. Steven Kaufman: I referenced Sam Zell, who by the way I met through tiger 21. I’ve met him four different times. I’ve spent hours with him. I’ll reference the billionaire real estate investor, Sam Zell, and say this, I’m not an asset class investor, I’m a deal investor or an opportunity investor. Anything that I can invest in that I can wrap my mind around, I can cover the downside risk and I can partner with someone very, if I’m going to partner and if I’m not going to manage it myself, if I can partner with someone very credible, like you, you mentioned a multi-family, I mean you and I have done $50 million of multi-family and a big part of my ability to do that is because I really trust you and your ability. The stuff that we do in house and managing in house, it’s got to be simple enough that a simple guy like me from a trailer park in Baytown can understand the economics and can I cover my downside risk? My biggest, I’ll do any investment where I have collateral, so real estate, I have downside risk protection. So I can’t lose all my money. I will probably make money, even if I don’t make as much as I want. And based on what I know I’m probably going to make in the mid to upper teens, I don’t need to hit it out of the park on every transaction. I don’t want to do that. I don’t mind getting rich slowly. I want to be doing this for the next 40 years, not the next four. And as you know, if you lose money on a transaction, what it takes to make up for that transaction is significant time. So I’d rather make a little bit less, but know I’m going to make that or be in the ballpark of that, then, you know, try to hit it out of the park. I’d rather, again, I rather earn 8% IR with a pretty good assurance, I’m going to make it very high accuracy than 28% knowing that I couldn’t miss that target. So I’m looking for investments like that. And that’s for me, boutique office, multifamily with a proven operator like you, retail, and healthcare assets.
Joseph Bramante: So what is boutique office? Because obviously everybody’s heard the horror stories about office just getting absolutely destroyed last year. You’ve done well, not only well, but you’ve doubled down. You’ve been buying more office throughout this entire pandemic. And man, I was, you had me really scratching my head there this whole time and I’ve passed by your facilities and they look gorgeous.
Dr. Steven Kaufman: Thank you. Well, I mean, here’s the thing about office. You have to remember, it’s a Warren buffet quote. When people are, you know greedy be afraid. And when people are afraid be greedy, and if you want that type of asset, this is the time to buy it. Because like you said, everybody thinks because of COVID that people are staying home and that’s true. And there’s more sublease space available in Eastern Texas than there is actual office space available in Houston, Texas. And the absorption’s very slow. In fact, there’s negative absorption right now going on. But that’s the entire office market. But if you look at what we call infill locations, and I’m not sure everyone in your audience would know what that is, but in Houston, we’ll say inside the loop, we’re very close to the CBD or close to downtown quality locations, irreplaceable. What we call recession resistant if at best or at worse, but we maybe could even say recession proof locations. But we don’t say that. We’ll just say recession resistant locations. People want to in those areas want to work near where they live and they don’t want to go to a tower. And they don’t want to park in a parking garage three blocks away, and they don’t want to go through security that takes them 10 minutes just to get up to their floor. They want be at a park, get out of their car and get in their office and they want to be to control their own thermostat as you would know. They want to be able to control their own air condition and HVAC and their temperature in their office. These little things make a boutique office space really valuable because if you’re an architect, engineer, CPA, lawyer, housewife, who wants to go back into the market after your kids have left the nest, and you want to go back into the workforce and you want your own office space to be an away from the home now. All of those things make boutique office and to us boutique office is 50,000 square feet or less. We focus on about 30,000 square feet. That’s our sweet spot. And the last asset we bought was 28,000, so we’re shoot for that. And we’re about to build something ground up in Dallas. That will be about 25,000 square feet. So we’re shooting for office space in that size, because still there are lawyers, architects, CPAs, who want to work around where they live and they still want an office. They don’t want to office in their home. I don’t all about you, but I think you’re better at this than me for sure. And it could be generational. I don’t work well at home unless I absolutely have to. I mean, for this zoom or this podcast, I left home to be on this specifically, cause I keep my home as like a sanctuary of no work, as much as possible. And I keep work where work is. So it may be generational. I can tell you, there’s a lot of misinformation going on about whether companies are going to ever have their people come back to work or not. You can see very traditional companies are saying, stay home indefinitely, but then you have other companies like Deloitte, who’s expanding their office space in Houston because they’re no longer going to cubes. They’re take all their cubicles. And so they’re going to private offices or much larger open space with partitions. They’re adding two full floors downtown right now because they can’t get everyone back to work in the space they have. They’re actually adding real estate. IBM adding real estate, Google of all companies said they want people back to work and they are adding office space, Amazon added office space. So it’s kind of weird. You don’t know which company’s doing what right now. And there’s definitely a decline in occupancy. No question overall. But again, if you look at the market overall, that can be dangerous, because on a micro level, I think boutique office still has a lot of upside potential. And it also has other uses. You can condo the office. It’s just like you can condo apartments if you’re in trouble, you can always convert it to condos and there’s always the land value. So the last part I would say is we’re trying to always buy assets that have very, in essence, almost a covered land play long term, because we know the land value is very strong, very high.
Joseph Bramante: So you’re doing all this amazing stuff in real estate now. But as you mentioned earlier, maybe been doing this for a very long time. And so at some point though, and let’s go back to the beginning. So you start off, you were at W2 for somebody I imagine, right? You were working as an accountant and you had these three houses by the time you were 21, which was a goal of yours. And then, so how has real estate kind of early on in your career helped you and pivot to become this very successful investor and get out of that W2 mentality?
Dr. Steven Kaufman: Easy answer is long term time horizon. If the longer the runway, the more room you have for mistakes, by the way, well, you know, this better than me, the longer the runway, the more time you have for mistakes, that because they’re not mistakes, if I’m going, you know, 12 inches, if I get it wrong, it shows up. But if I’m going, you know, two miles, I have a long way to get there, to be on track. And I’ve made plenty of mistakes and I’ve learned from those, but I’ve always thought I’m going to be in this for the long haul. So everything I’m choosing, it needs to be for my reputation, the type of credit that I get, my banking relationships, my investor relationships, 94% of our investors who’ve ever invested with us, still invest with us. In 24 years, that’s probably my biggest compliment is that 94% of the people who have ever given me a dollar to invest with me beside me, even though I’m usually the largest investor, those people still want to partner with me, which is a really a major compliment. I know part, I know part of that is that I’m thinking very long term. I want to be doing this for a long time. And so early on, I thought I want to be doing this for a long time. I don’t want to just go in and buy a house and flip it and make, you know, which everyone starts with or has you know, you didn’t, you’re the only guy I know who started buying apartment complexes outside the country, or when you were outside of the country. You’re an anomaly for that. You’re a unicorn, but most people are going to start investing the single family homes, cause they’re comfortable with that. And they’re going to see there’s profit in flipping it. I thought there often holding it, let me hold it and see what happens. I think that was the difference.
Joseph Bramante: So you were on the appreciation side of real estate, not so much on the passive income side and we all know what happened to at least early on. We all know what happened to values over time, right? I mean, things have just gone crazy. And that’s one of the beauties about investing in real estate is that it blows [31:21 inaudible]. Like if it has great cash flow, that’s awesome. But it’s also going to appreciate, and you know, one might be an appreciating asset. One might be strictly a passive cashflow asset. From your 94% investors who’ve continued to reinvest with you, How have you seen their lives change just from doing these deals over this law long period of time with you? Has it allowed any of them to kind of make life changes that you’re aware of?
Dr. Steven Kaufman: Great question. I’ll talk about just one guy to start his name’s Mike and he’s been investing with us for a very long time. He’s retired and all of the transactions that we’ve done, they fund his retirement. He’s invested in our commercial assets, our equity, but also in our debt. And he makes, you know, his monthly distribution that he gets on our debt 8%. He lives off of that. And he let me know which I don’t want to get emotional about one time about six months, maybe a year ago, he called me just to let me know how important I was in his life, actually in the latter, you know, the final, he’s in the fourth quarter. And that’s what he says. He said I’m in the fourth quarter and how important my relationship. We met each other randomly and he just wanted me to know how important it’s been that he met me. And it was extremely touching because he’s retired, he retired earlier because of some of the deals we did early on together and his monthly cash flow comes from work that I do every day to help my investors and myself.
Joseph Bramante: So this was a guy who probably had no aspiration to do, like what we do, like as an active investor, go hunt, all that. And he say, you know what? I got this guy, Steven, he knows what he’s doing. And so like can you say like over what period of time has he been investing or when he make his first investment?
Dr. Steven Kaufman: About 12 years ago is when he started. And he started very small about probably 50 to a 100K, which was small for him and us. And you know, over time, you know, when you were making, in one of our deals where we accidentally made 41% IR over three years, that was an accident. We were not targeting that we were targeting about 17% on that transaction, but it did very well over three and a half years. He had a good amount of money in that asset. And it’s just, I won’t say every dollar he has is with us, I don’t know, but I know that significant portion of his net worth is with us, which also puts a lot of pressure on me to do a good job and to be responsible. And, you know, I care about that a lot. I care, I’ve always cared about my, I don’t care about my reputation in general. I can’t control that. What I can control is my character and how I deal with the people who are closest to me and I take it so serious. And it’s an honor, really. It’s truly an honor that he trusts me like that. And yeah, thanks for asking that question. I don’t get to reflect that very often.
Joseph Bramante: You know, I love that that timeline was kind of right in 12 years and I tell people all the time like, look, this is not a get rich quick kind of thing. Like this is like, Hey, you’re going to be putting in money to this, but this is a realistic opportunity for you to be done, you know, in 10 years, 10 to 15 years, if you’re doing this one deal a year as a passive investor onto these deals, and you don’t know, as you mentioned, you might put into a deal that’s supposed to be a 17% IRR and it becomes a 40, I mean, I’d say there’s probably a greater chance of that than there is of a deal investing that’s supposed to be a 17 and it becomes like a zero. Like, I think there’s a greater chance for the upside of these deals than there is for the downside. But absolutely I think when you’re investing for when you have a real estate expectation back to your example of, you know, 12 inches versus 12 miles, you have a realistic expectation of, okay, I’m going to be investing in real estate. I think the initial, what kind of turns people off maybe is in the beginning, you know, they had this really high W2 income and that first year of paths of income checks is very small, you know and they’re like, what the hell am I doing?
Dr. Steven Kaufman: They may not get a check for the first year or two as well.
Joseph Bramante: Yeah. They may not get anything and they’re, you know, so there’s this kind of mental resistance, if anything, because, you know, on paper that it’s going to pan out or supposed to, and you’ve seen the history of it, but in practice, you know, that experience investor mentality initially isn’t there. And so you just got to have that discipline to be like, no, I’m just going to keep investing. Because it does snowball very quickly. I’ve been doing this for 10 years and now our deals are starting to snowball as well. And it ramps up very, very quickly. And you end up with, you know, now you’re like hunting for deals, cause you’ll have a couple deals. You know, if you’re a passive investor and you’ve done a deal a year, there’s going to be a couple years towards a last half of that 10 where you got multiple exits at a time and you’ve 2X on returns or whatever. And now you’re like, crap, I put in a hundred now I’ve got 200 from this deal. And 200 from that deal. And now you’re putting in half million dollars or so into deals. And then it just really snowballs. And I think people, you know, kind what Warren buffet talks about with compound interest, but with real estate, it’s even greater cause you’ve got that, Not only that cash flow on the money, but just that appreciation that really takes it up. Now let’s kind of shift gears and talk about the tax side. Cause that’s another component that people, I mean they know a little bit of the tax, but there’s a distinction that I really want to hit on, which is passive income and passive losses. A lot of times I know when I started off, I was like, oh man, I’m going to write off all my income. I’m going to have these losses. And I didn’t know the difference between a passive income and active income. I just thought, oh, this depreciation applies to everything and it doesn’t. But it’s still you know, what I’ve been teaching people is that what it does do is that it basically ensures that the money you’re making is for the most part tax free. I mean, you make enough losses to wipe out those returns.
Dr. Steven Kaufman: Just for clarity, you mean like Phantom loss to like depreciation paper losses, right?
Joseph Bramante: Exactly. So Phantom losses like depreciation, which is the big one. And then on the exit, when you do have those big capital gains, we got luxuries like 1031 where we can just carry all those profits forward. And so you obviously had the expert here, talk more about that and get your thoughts on the tax side.
Dr. Steven Kaufman: Yeah, I’m not sure, I’m not an expert in this topic and I’m actually a little bit worried about 1031s with the current Biden tax strategy. There’s a lot of rumors that, that could go away. There’s even a rumor that the pass of loss could go away, that limit of 25,000 is actually on the people are predicting that will actually go away, that you will not be to take that against other losses or other gains, excuse me. So really crazy time. You know, I think depreciation’s a beautiful thing. I think if you’re investing in real estate and you’re making money and you’re able to write that off with Phantom losses through, and when I say Phantom, I just mean like depreciation. I don’t mean anything in the gray, I just mean through depreciation and amortization. So that you’re deducting something that didn’t cost you money just for anyone who’s listening, who thinks when I say Phantom, I mean truly made up. I’m not meaning that at all. I think that’s a beautiful aspect of real estate. I think tax savings and tax strategy is significant. I read, you know, depending on what your opinion is of Donald Trump, President Trump, I’m not talking politically, but I read one of his books early on how he talked about when I was in my early twenties about how you have to manage for taxes, because if you’re paying, you know, 30 to 40% of your income in taxes, you are only, you’re going to hope to make in the mid-teens on an investment. And to think that you’d be paying more of than that percentage in tax access is absolutely asinine. And I remember that. And so I’ve always been thinking, and I’m not a CPA because of that. But as a CPA, I was always thinking, how do I mitigate taxes and things like cost irrigation studies and other tools and techniques that operators use to reduce taxes for investors, I think is super. And I think we should deploy as many of them as possible, as soon as possible. The problem with cost segment, as you know, is that if you wait to do it until you’re done, if you do it too early, you don’t get the benefit fully because you’re still doing renovations after. And if you wait till the end, people are, you know, in that three to four years until you actually do get it, or two to three years, when you actually do get it done, you’ve gone two to three years where they don’t get the benefit. So it’s a catch 22. I’m a fan of them and I love them. For the cost, It is so obvious that it should be done.
Joseph Bramante: So a cost seg for those who don’t know is basically where you got these companies, which is like a CPA, an engineering firm combined that will go in and you’ll have a breakdown of all of the different components of your building. And then they’ll determine, okay, well, these carpets, they depreciate at, I think, five or seven years, but these walls, they will depreciate at, you know, 27 and a half years. And so they’ll break down the building into all those different components, and understand that some components would depreciate faster than others and typically we’ll do this during a renovation because it’s a lot easier because we just spent a $1 million, $2 million renovating a property. We have a contract, we can tell you exactly what we spent and you know, what was done and makes it easier for those firms to go in there and say, okay, all these items are going to depreciate at, you know, five years. And the rest of this stuff will be 25. And so what happens is you just get a big chunk of depreciation right up front which is great for lot of investors.
Dr. Steven Kaufman: Yeah. Perfect. Absolutely perfect. I mean that offset and you get to write that off potentially if you have a tax strategy that allows you to being able to write that depreciation off is really a major advantage to you. It’s figuring out if you can write it off, it’s a challenge these days.
Joseph Bramante: Exactly. If you can write off and that’s other thing is, you know, and really this comes into play big for people who have multiple investments already. So say you’re invested in deal number 10, but you know, deals number one through nine, they don’t have any more depreciation. Maybe you’ve been holding them for a long time. So you’ve burned off, you know, now your passive income’s higher than that depreciation. So now you’re starting to pay tax on that passive income. But if you were to do deal number 10, for example, up, maybe just get a big windfall of depreciation that was cost seg upfront, accelerate upfront. You can only wipe out some of that, but then I believe it also carries forward. So whatever you don’t get to use in that year, it just rolls to next year.
Dr. Steven Kaufman: Yeah. It does. It rolls indefinitely, but again, the hope is you’re able to take the depreciation that you’re getting from one investment and write it off against other income elsewhere. And as of now that’s the case, but that could change.
Joseph Bramante: It could change, you know, I’m optimistic that it won’t, I think there’s too many people in politics who have real estate as, I mean, it’s used by so many, including tiger 21, and it would really be shooting yourself in the foot. And so I just don’t, you know, I don’t see it happening. I see a lot of roadblocks, but, you know, like I said, we’ll see. And just because it changes doesn’t mean it can’t get changed back in the future.
Dr. Steven Kaufman: Sounds good.
Joseph Bramante: Well, great, Steven. Well, Hey man, thanks for coming on. Thanks for kind of breaking down tiger 21, the allocations and what is tiger 21 and of why people should care. I mean, obviously I’ve learned so much just from our conversation today and, you know, I knew about the allocations, but I didn’t realize it stemmed from those portfolio defenses that are, I mean, so it really makes those allocations a lot more accurate. And just kind of that background of, you know, the importance, which wasn’t really the intent. I’m really glad we went down that route of, you know, those PDs from not only the bottom guy or the smaller member, but the guys all at the top, they’re all getting value from it. And then we touched on that, the story, that very emotional story with your passive investor for the last 12 years, who’s been able to retire early because of the investments he’s made with you over the years over that 12 year period, and was so nice to reach out to you. And, you know, I’ve had investors reach out to me and if you’re an investor on a deal, please reach out to the sponsors. You know, [44:08 inaudible] it does mean a lot. You know, really estate is a very personal investment. That’s why I like it as well. Cause it is personal. It’s like a marriage, every deal you do, you’ve got your group of investors and it’s your job as the active to take care of them. And it’s, you know, it’s always nice. You don’t really expect anything, but when they do tell you, Hey, thanks for, you know, the great returns it’s you know, it does mean a lot. So I’m glad that, that’s probably just one of many stories you’ve got with people like Mike. But no, Steven, thank you for your time. I know you’re a super busy guy. Is there anything else you wanted to close out with?
Dr. Steven Kaufman: No. Think you’ve hit all the important topics. I think we didn’t talk about the cash allocation.
Joseph Bramante: Well we got time.
Dr. Steven Kaufman: I’ll tell you. It’s really interesting because it fluctuates. What’s interesting about that chart. If you have a minute, I’ll just tell you one cool thing about it.
Joseph Bramante: Plenty of time.
Dr. Steven Kaufman: Okay. One cool thing about it is that you read it off that, you know, you said about the hedge funds, only 3% are in hedge funds or have 3% of their allocation in hedge funds. That’s because people realize pretty quickly. In my opinion, that hedge funds are only good for one person and that’s the hedge fund manager. And the reason why some of these go defunct or belly up or lose is because the person making a lot of the money and allocating [45:31 inaudible] the management team. That’s my opinion, from what I’ve heard, I could be wrong about that. I’m not an expert, but I think the kind of the curtain’s been pulled back, if you will, on hedge funds and that I won’t call it a gimmick because it wasn’t, a lot of people have made a lot of money, but definitely hedge fund managers have really done well. And I think most people who are in the know pretty much, that’s not the way, but what you’ll find interesting is that cash and cash equivalents, meaning just cash money or something that’s liquid, it fluctuates. And so during 2020, you have to realize that it was during COVID, that chart came out and we haven’t seen the updated one for 2021 yet, but it will come out soon with just, you know, through the first quarter. And I can assure you that the cash number has gone down a little bit. And it’s a conversation that comes up very often, which is how much should you keep in cash? And you have people in the room, the problem with this chart is that you have people who are a billionaire, and then you have a person who is worth 10 million in the same room. And so does the person who’s worth 10 million keep, you know, one point, you know, you know, a million dollars in cash because that’d be 10%, and does the billionaire keep a hundred million dollars in cash? It’s a fascinating conversation. Actually it’s a little nerdy, I know. It’s a little nerdy, but I’m fascinated by it. And I’m fascinated by the different opinions of what people say, but you’ll be surprised Sam Zell is worth $5 billion and keeps $3 billion in cash. And so you’re thinking like, well, he wants to do deals. He’s a real estate guy and he’s like me or I’m like him, I should say respectfully to him. I’m not an asset class investor. I’m an opportunity investor. So I’ve got to be ready. I got to stay ready. And so he’s just looking for deals that fit his box, like a thesis like me. And so but with you, you need cash at some level. But you have guys like him who are, you know, worth billions who keep a very high percentage and then you have a guy worth $10 million as I joke who has to borrow money from you, walking out to pay the valet, you know? And so it’s like, which one do you, which one of these guys do or gals do you want to be? But it’s a really interesting conversation. The chart does show that it’s about 10% and it’s a little bit down in 2021, just so you know.
Joseph Bramante: Gotcha. So another thing on that topic though, is when you’re dealing with the amount of equity that they have the amount of cash. And so the advantage that the smaller investor has over the larger, the guy who has less cash, where the guys have more cash does, it’s hard to find deal. Sam Zell $5 billion, He couldn’t find a dealer to put $5 billion into [48:14 inaudible], like he’s going to be, you know, there’s a cap to in generally, if, you know, maybe, you know, you could pretty easily find deals for $10 to $20 million to put into, which is a lot, right. But for a guy who’s got 5 billion in cash, I mean, how many deals is these you want to put into? I mean, he’s got, he’s got to have a whole army of people to deploy all that money. And that becomes a challenge as you, I mean, you know, first world problems, right? As we get richer and richer, you’d be like, damn it, I’m too rich to find deals. I got all this cash standing by. But that is interesting. So your prediction is that it’s going to go down even more.
Dr. Steven Kaufman: I just surveyed my members last month and asked them, Now, this is a sample of 15 to 30, not 900 members throughout the group. But most people are trending the number down. I’m interested. I’m always fascinated. I’m the kind of person in which is thinking you should have a very strong nest egg if cash, a lot of members, a lot of investors. And I relate to this, but I just it’s troubles my mind. They will invest absolutely every dollar possibly to make a yield. And so it’s just really interesting. In our business we’re pretty lucky because like you and I have some, if a limited ever came to me and said, I need my money back. If I have the cash, I give it to them. In fact, Mike, that guy actually, I meant referenced about eight years ago. He wanted some money for some purchase [49:40 inaudible], I bought them out of the deal. But why [49:46 inaudible] buy him out? Cause I keep cash. He deployed all this cash and said, I don’t want any cash. I want it all working. So it was just interesting philosophies. I mean, it’s just, I’m fascinated by the people who can invest every dollar and not worry. And then there’s guys like Sam Zell who hoard it, are hoping for, to find an option, like you said, where could you invest? It’s one thing I learned about tiger about being around some of these guys who make their money in different ways. Cause It’s fascinating, a billionaire member in Houston tiger told me the problem with real estate, he said the benefit with real estate with what you do is that you have so much downside protection, that you’re probably the reason why there are so many wealthy people in real estate, because it’s very difficult to lose money. You would have to, someone have to commit fraud for you to lose money or you, you’re the operators. He said, you’re the sponsor. So you probably will never lose money. You’re going to make money for the rest of your life doing this. But the problem is, you’re limited as you keep making more and more money, you’re limited on what you said this earlier, I’m saying it a different way. He said you’re limited on what you can invest in because there are only so many deals that are going to keep meeting your standards. And so if you received a ton of money, how do you go? He said, if I wrote you a check for a hundred million dollars today, and [51:00 inaudible] I like you, I respect you, what would you go invest in? And I was honest, I said, I don’t have a way to deploy a hundred million dollars. He said, that’s the challenge with real estate.
Joseph Bramante: And you know, I want to point out something that if it’s not clear to people, so we’re talking about investing, you guys are investing it, they’re investing as passive investors in deals, and these are all passive investments are making. And so they’re not active investors. They’re not hunting the deal, whatever. The deal is being brought to them by somebody like you or me. And then there is investing passively alongside that. And that’s how they’re making their money. I mean, they’ve may have got other means to make these sums, large sums, but that’s how they’re continuing to maintain their wealth and grow their wealth with through in a secure manner. A relatively secure manner unless volatile manner is through real estate.
Dr. Steven Kaufman: Yeah, for sure. I mean, the phrase that is thrown out a lot for financial advisors, but also it’s almost cliche in tiger 21, which is you make your money through concentration and you keep your money through diversification. And part of that diversification strategy is working with other people to pass [52:11 inaudible] work with other people passively to help you maintain your wealth because you’re spreading out a little bit, either in different real estate transactions or even different operators. I mean, I invest with other investors. I invest with you and other operators because I can’t be in all places and I want to deploy the money and I want to cover my downside risk by diversifying. So fascinating conversation. I know it’s a little nerdy for people who are tuning in, but I really am fascinated by it.
Joseph Bramante: No, absolutely. And we can go on and on this and I appreciate that you [52:40 inaudible] cause that’s, you know, it’s one thing to have a passive investor invest with you because they don’t do this for a living, right. Maybe they’re an engineer somewhere and they are working and they don’t have the time or the means to go out and not only, you know, find the deal, but then maybe they don’t have the $20 million or $10 million that takes to take down that deal. But they also have an active investor come in and invest who now you could do this on your own. Like your specialty, you know, is in that office. You’re also doing some ER. I don’t even know what your specialty is, to be honest. Cause you’re doing so much. But it’s, you know, it’s an honor though, for me to have you investing in our deals. Cause it’s like, man, like this guy, actually you do own some multi-family out by yourself that you’re a sole, active on. And so it’s, you know, but it just kind of goes to show you that, you know, a deal is a deal. And even me, like if I see a great deal, I’m going to invest in it. And they were all, at the end of the day, we’re all investors. Some of us do this for a living, others, we have a living that allows us to invest. Yeah. Well I just thought of it on the fly now. I’ll coin that one. So Hey man, I really appreciate the conversation. It’s been amazing. I’d love to get you back on the show sometime in the future. We can continue this conversation later about some other topic maybe.
Cool, I am in, I loved it. Thank you.
Alright brother, well, Hey, it was great chatting with you. Take care. Have a good evening.
This was another episode of Engineering Passive Income with Joseph Bramante, download resources and join our private investor group at www.engineeringpassiveincome.com. Then be sure to leave us a review on apple podcast. Thank you for listening. And we’ll see you on the next episode.