3 Simple Tips for Successful Investing - Gary Davidson, Castle Law

Matt Rodak:

Yeah, awesome to have you. To get us started, Gary, give us a little bit of background on how you came into working into real estate and what your firm does in Chicago.

Gary Davidson:

Yeah. Really briefly, I was one of the main municipal attorneys in the Chicagoland area. My old firm represented probably at least 12 to 15 cities. When I left that firm to go to the current firm that I'm at, we started representing a lot of developers that were developing in those municipalities. So, I was a commercial development attorney. Very, very high end, big box, retail commercial development. When the market collapsed in 2006 or 2007 I took that sophistication as a commercial development attorney and a commercial real estate attorney, and I brought that to the residential real estate investor who is really engaging in commercial real estate, albeit with single family homes. We started representing a lot of banks, hedge funds, private equity groups, high net worth investors, and just average people that are looking to create a life worth living, and a legacy worth leaving. That's what I've been doing ever since.

Matt Rodak:

Very cool. So a few pivots from public practice to private practice to listening to the market and doing something else. It sounds like you've found a nice little niche there in Chicago. Very cool. One of the things I wanted to ask you, because I think you've got a very unique point of view in the sense that you represent -- and in full disclosure, Gary represents Fund That Flip in the Chicago land market. Obviously, we have a very high opinion of what they do out there. You have a very unique perspective, I think, in representing lenders. You represent operators. You mentioned you represent hedge funds and different types of asset managers. So, you see a lot of things probably done right, and a lot of things where people are making mistakes. I'd love to get your ideas or sense of -- if there's two or three things that you think are commonalities between the folks that get it right -- what are those? What are those two to three things that, for the listeners, they should be thinking about developing in order to have a successful real estate business?

Gary Davidson

Absolutely, Matt. I'm going to take this a little bit in inverse. I want to start with saying this: Many people, many companies get into real estate because they think it's going to be easy. With HGTV and other network programs that see people making $40,000 or $50,000, $100,000, $500,000 in a 30-minute episode, people get into this for the wrong reasons. So let me make it very, very clear to every single person that's listening. If you're getting into real estate because you think this is the golden nugget and you're not going to have to work hard, you should turn off the station right now because if you want more than the majority, you have to be willing to work harder than the majority. Real estate creates more opportunity than any other activity in the world. That's the foundation of the United States. Yet, it is not the golden key to success where we can sit back at home and watch The Price Is Right.

Let me just run through the three things that I see which are most important. Real estate investors tend to run 1 million miles per hour in no particular direction. So, if we want to have success -- and it doesn't matter if it's real estate investing or manufacturing widgets -- we have to start with:

1.) A clear goal and a clear dream life. We have to determine what lights us up and pays us well to save time. That's defining what is the one thing that you can do. Gary Keller talks about this in his book, The One Thing. What's the one thing we can do every day to separate ourselves and make things easier? We have to perform a powerful habit to achieve that type of a mindset. So, mindset is #1.

2.) Secondly, we have to focus on the details. It's those little details, Matt, repeated time after time, the extra hour, those extra reps with consistency that leads up to that massive difference. So, clearly defined goal and consistency of delivery. McDonald’s doesn't produce the best hamburger, but you know what, they have labs, they have details where everywhere you go -- it doesn't matter if we're out in New York with you, or you're here in Chicago or Beijing -- those fries are coming out exactly the same, the exact same amount of salt every time. We have to deliver a consistent product consistently.

3.) The third thing is, I would say, we need to both learn to take calculated chances as well as learn to bounce back. In real estate investing, we have to take calculated chances. We have to underwrite. There is no such thing as luck. We need to make sure that we know every single step of the process. This is not about hope. We hope we make a profit, we should know in advance. Yet, with those calculated chances, we know there's certain risk. When we have a property -- say a single family residence that the foundation goes bad and we have to spend $30,000 on it -- we need to learn to be able to bounce back from it and have an exit strategy. So those are really the three things.

You have to have a sense of humor. You know I like to joke, but the reality is, create one thing. Don't be involved in flipping, buy-and-hold, buying industrial buildings, and retail. Start with your one thing if you're a brand new investor. Master it, and then go onto the next thing.

Matt Rodak:

That's great. The thing that I like about your three things is that they all work together. It makes sense. If you're focused on too many things -- your first point is have a plan. Have a clear goal. Understand who you are, what you're excited about, and stay focused on that. If you're not doing that, then it becomes very difficult to build that consistency, build the process, and actually get it right. It also becomes very hard to take calculated chances because everything is different and you can't develop any type of really deep knowledge about how to take those calculated chances. I really like that because it all makes sense. You can't get to the next thing if you don't have the first thing. We agree. It says it in our name, Fund That Flip. We do one thing. We've tried to do it very well, and I think it's been a big part of our ability to grow the business because of that single focus. So, love that.

Gary Davidson:

Matt, set yourself as an example, real quick. I know we've got a lot of topics to cover, but Fund That Flip wants to be the nation's premier choice for flipping. You saw yourself at the top. Experts always say it's important to visualize success. That's why I said we have to start with that clearly defined goal because we can't arrive at that destination if we don't know where it is. It's the secret formula. It doesn't matter what business you're in. Investors need to do it exactly the same way.

Matt Rodak:

It sounds super simple, but once you get into business and all of these opportunities start presenting themselves to you, it's really easy to chase the shiny object, as I like to call it. "Oh, this big commercial deal came in and they need $10,000,000 of lending. We should try to do it." We see those every day and everyday I'd be like, "That's not who we are, guys." It's a cool $10,000,000 or $20,000,000 project, but it's not who we are. Let's let it go, or let's make an introduction to someone that does focus on that type of business. It does take a lot of discipline. It's easy for us to say this, but realizing that you have to commit to it, and you have to realize that there are going to be opportunities that are super interesting that come into your sphere once you get going, and you've got to get good at saying no.

So, really good stuff. As you know, Gary, the theme of the show is Real Estate Investing Unscripted. It doesn't matter how much we talk about planning in this business is what I found -- and it doesn't mean you shouldn't plan, you should definitely have a plan -- but, eventually what we find is that you get into these deals, you get into situations and things happen. Again, from your perspective, give us something that you've learned or you've seen from someone else where things didn't go exactly as planned. What was this situation? How did you or the person that you helped work their way out of that situation? What's the thing to be learned from that?

Gary Davidson:

Obviously in real estate we encounter turbulence all the time that are unexpected or you cannot plan for. In the Chicagoland market right now, it's no surprise to anyone that Illinois has very, very high property taxes. The city of Chicago specifically, the rates for taxes have increased dramatically. So, if you bought a property five years ago and you had a specific rate of return you wanted to hit, you may have planned for all of that. Yet you did not plan for a 30% or 35% increase in property tax. Now, all of a sudden, you are sitting with property where you were hitting your yields and perhaps now you're not hitting those yields. We all have a certain finite amount of capital, so we want to redeploy capital and maybe get rid of that asset. So how is it that we do that?

Well, there's three or four techniques that I've used for my clients when they call me with these situations where they're in despair. They say, "Boy, we're stuck in this, taxes are going up." Number one, I happen to represent a lot of international funds -- a lot of buyers from other countries who have a significant amount of capital -- but they want to move that capital out of their country because perhaps in their specific country they have a lack of stability. So, we represent clients from Indonesia, Vietnam, the Middle East, and Africa. They're looking to invest their money in US soil, to move that money out of the country and get it in a more stable asset. These folks need a very low yield relative to what we might look for. Other things that we can do in situations like that is, there's an opportunity to do tax appeals and say, "Hey, regardless of whether you need the money to run your government, this assessment that you have, the value that you have associated with this, is not justified and we can bring down the taxes that way."

There's a number of different techniques. We just need to be able to think out of the box when we're faced with these situations, and we make lemonade out of lemons. Selling a portfolio to a hedge fund and redeploying that capital is not the worst thing in the world for investors. Buying properties now that may be even more distressed and re-engaging your portfolio so you even have a higher yield.

Matt Rodak:

Got it. Taxes are a thing -- what's the saying? There's only a few things that are certain in this world; death and taxes. It's hard to get around that, but there's creative ways to think about still getting a return you wanted just maybe realized sooner by liquidating the portfolio. Interesting.

Gary Davidson:

One other thing, Matt. We've used the technique called Contract for Deed. I don't want to get into the legalese, but basically we can sell a property to someone on an installment sale contract. So, rather than the Bank of America or Fund That Flip giving the loan, it's the Bank of Gary Davidson. Now, when we sell a property on contract, the party who is buying that property on contract or the tenant, now becomes the owner of record or the equitable owner of record, and thus they're eligible for the homeowner's exemption. Homeowners exemption in Illinois, takes $11,000 off the tax assessment. So another real unique technique. People should talk to their lawyers. Just don't feel like there's no way out. There's all sorts of ways to crack an egg if you're willing to be innovative.

Matt Rodak:

That's really interesting. You mentioned the Chicagoland Market in Illinois generally is having some tough times. We read about that, but a lot of good things are still happening. I know you're super plugged in to the Chicago REIA there. Talk to us a little bit about why you got involved with Chicago REIA, then maybe more generally why you're still bullish on why investors should consider Chicago as a good market to invest in?

Gary Davidson:

Chicago REIA stands for Chicago Real Estate Investor Association. Chicago REIA actually has the largest number of members of any real estate investor association in the United States. There's a reason for that. In Chicago, people are still earning higher returns than virtually anywhere in the country on rental portfolios and flips. People are coming from all over the world to invest in Chicago. I want to give you a real quick nugget. This is really cool. I bet you don't know this. Just south of Chicago is a town called Elwood. It's the largest inland port in the world. When you go to Beijing, China, it is listed on the map. It is the only place in the continental United States where every major railway intersects. It is the only place in the continental United States where you can get one day semi-truck to either Los Angeles, New York, New Orleans or wherever you might be going up north. So we have all railroad stopped. We have major waterways. You've got the Mississippi River and all of the canals.

So, it is literally the only place -- the transportation hub of the United States. What is the economic engine of the United States? To transport product. Amazon opened their largest facility in the Chicagoland area. Why? Because it's easiest to transport those goods. When you have that kind of economic drive that is a boom for the real estate industry, that's not going away because you can't move geographic locations. It's just strategically located. So that's what makes it so unique.

Matt Rodak:

That's really interesting. I think Chicago did a nice job, too, as the industrial shift happened in the '60's, '70's and '80's of diversifying into a lot of different things from financial services to healthcare to higher education, and as you mentioned, logistics. It's a very diverse economy, which is what we like about it too, despite some of the challenges that the state government is dealing with. Thanks for sharing that.

So, if people want to get a hold of you, Gary, how do they get a hold of you? What's the best type of investor that you work with? I would imagine you work with international investors. I would imagine you also work with out of state investors that may have a perspective on owning properties in Chicago. How should people get a hold of you?

Gary Davidson:

We have 20 attorneys here, and I'm actually fairly accessible because I have a lot of people that DO and I focus on helping other people BE. My email address is gdavidson@castlelaw.com, our website is www.castlelaw.com, or the phone is 708-801-8000. While I represent a lot of large players in the industry, the meat and potatoes of our company is representing people just like you and I who are looking to buy their first investment property or have a small portfolio. We're glad to help those people. At this point in my career, I enjoy working with people who are looking to have an opportunity to live a life that they want and achieve the dreams they're looking to achieve. I like helping a pull people up and I like helping people achieve their goals. I don't like to have to shake my cup for business. I like people helping to grow and learn. So that's my "why" when I make up in the morning is helping people achieve that legacy worth living.

Matt Rodak:

That's awesome, and I can speak from experience -- it's not just lip service. When we made our first move into the Chicago market, we got introduced to Gary and learned pretty quickly that he was the guy connected to the residential real estate investment space, and has been a big help to us both understanding the market as well as getting in front of the right people. So, if you're in Chicago already, look him up. If you're interested in developing an investment thesis in the Chicagoland market, look him up. Great guy that, if nothing else, can point you in the right direction. Really appreciate these insights, Gary.

This has been great. I'm going to try to summarize this. We covered a lot. I think my salient points that I pulled out of this -- which I agree with wholeheartedly -- first one is this is not easy. Real estate investing is not easy and it's not meant to be easy. I liked what you said: "If you want to be better than the majority, you've got to be willing to work harder than the majority." I think that's particularly true in real estate.

The next one was define a clear goal. What's the one thing that you want to stay focused on and how can you develop habits and a mindset around reaching for that one goal. To go along with that is, focus on the details related to being the best at that one thing. Consistency of delivery is super important. If you do those two things then -- I agree with this totally -- you get to be better at making calculated decisions around risk so that you can get those returns that you want without necessarily risking it all. Those were my salient points. Anything to add to that, Gary?

Gary Davidson:

I think that's great, Matt. I love promoting Fund That Flip. Love the fact that you guys are in this market. You've been a tremendous help to my clients and I appreciate spending some time with you today.

Matt Rodak:

I appreciate the kind words and appreciate you being here as well. Thanks again, Gary.

Thank you all out there for listening to this episode of Real Estate Investing Unscripted. For more great resources or to get funding for your next project, head on over to www.fundthatflip.com. Until next time, your host, Matt Rodak, signing off.

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Thank you for listening to this episode of Real Estate Investing Unscripted. For more resources or to fund your next project, head on over to FundThatFlip.com. 

Contact Gary at gdavidson@castlelaw.com, www.castlelaw.com or at 708-801-1000.

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