237 How Do You Mitigate Risk? | Real Estate Investor Show - Hard Money for Real Estate Investors

Passive Income, Active Wealth - Hard Money for Real Estate Investing

Jonathan Davis

00:00:01

Hi everyone today we're discussing risk mitigation. And what are some of the risks that you may not be thinking about while investing right after this?

Jonathan Davis

00:00:35

So I'm stepping in for a bill today. He usually gets through the, the whole intro, but just, you know, bear with me here we are. This is the real estate investor show. We are Carolina capital management. We are investors and lenders for the real estate space. In the Southeast. We are private lenders for real estate professionals. And if you would like to invest into real estate or get a loan, go to Carolina, hard money.com and click on the apply. Now tab, we also have a fund for credited investors. So if you are interested in receiving passive returns and getting outsized passive returns, then go to the accredited investor tab. Don't forget to like share, subscribe and hit the bail. And then also Wednesday with Wendy,

Wendy Sweet

00:01:42

They

Jonathan Davis

00:01:43

Were quick. I like it. Yeah. I know Wednesday with Wendy, Wendy donates all of her Wednesdays to help you in anything to do with real estate or business. She's a great resource. She's booked out usually several months in advance, but go ahead and it's a Calendarly or it's a HubSpot meet up. There you go. Just click on that link and you can schedule a time to talk with her and, you know, just kind of dive into everything that is business and real estate.

Wendy Sweet

00:02:10

You know, what was really cool this past Wednesday, which was yesterday as far far as I know, I do five calls a day and all five calls were faith-based. You know, how do you balance your business and your relationship with Christ? It was majorly cool that all five people, that was their intention. So it was kind of a Jesus best. It was neat.

Jonathan Davis

00:02:37

That's awesome. That is awesome. Quick though. Before we bring on our guest today, I do want to just some quick news,

Wendy Sweet

00:03:08

We're giving CNN a run for their money. Aren't we,

Jonathan Davis

00:03:12

I know right before I get into the news, I just have to say how concise and moving forward this show seems to be compared to bill.

Wendy Sweet

00:03:24

What do you mean?

Jonathan Davis

00:03:25

Yeah, no. So, so I, I do wanna discuss a couple things. The first being, you know, mortgage applications, mortgage originations, the volume of mortgage is at a 22 year low, not, you know, anything groundbreaking. We know that when the rates have, you know, doubled in the last, you know, year and you know, housing prices haven't really come down. Yeah. It's, it's hard to afford a house and volumes will go down. So that's not terribly surprising, but it is a 22 year low. The other piece is BlackRock, I believe has just now finalized their 30 billion fund to take advantage of the upcoming months and years of what they anticipate to be a lot of opportunity in the real estate space to buy at, you know, high volume to get great discounts. Mm. So that is a signal I think, to everyone else, it's like be patient, keep some powder, dry, do your due diligence and also understand risk mitigation. Understand it. So without further ado, when we wanna talk about what is risk mitigation and what can we do about that? I want to bring on Rob Napolitano. He's a friend of ours and he has been working in the NPL space, which is the non-performing loan space, the insurance space, you know, gosh, pretty much everything that has to do with, with real estate. So I wanna go ahead and bring Rob on,

Rob Napolitano

00:05:10

Hey guys. Thanks Wendy. Jonathan. Thanks for having me. I really appreciate the, the time we're spending together today.

Jonathan Davis

00:05:18

Absolutely. No, we appreciate you being on. Yeah,

Wendy Sweet

00:05:22

Billy's listening. So we can't make fun of him. We highly respect him. We love him. He's my brother. I have to love him.

Rob Napolitano

00:05:31

What, what are the subtitles coming across saying? Don't believe anything Wendy is saying I'm

Jonathan Davis

00:05:41

Oh yeah. That's good. Well, again, thanks for, for coming on. I you've just recently made a, a big move from the Northeast down to the Southeast, right? That's

Wendy Sweet

00:05:53

Correct. To the dark side.

Rob Napolitano

00:05:54

That's correct. Yeah. I, I, I, I not only am a man of many words, but I'm also a man of action and I voted this year with my feet and picked up my family and moved out of the Northeast where I was just tired of the, the loss of freedom that I was experiencing. Mm. Yeah. So yeah, I'm

Wendy Sweet

00:06:17

Outta there. You less people there.

Jonathan Davis

00:06:21

Excellent. Excellent. Yeah. Well, we're glad to have you down in the Southeast, you are one of the many who have, have made that move smartly. We like to think, but, but now

Wendy Sweet

00:06:31

We, and you're like really a neighbor, like you're in our town and stuff like that. That's really cool. It's good to have you down here.

Rob Napolitano

00:06:37

Yeah. I'm not officially anyone. Should I start talking and saying y'all, but I haven't gotten

Wendy Sweet

00:06:41

Her yet. That too shall come. Or it'll

Jonathan Davis

00:06:44

It'll sooner than you think

Wendy Sweet

00:06:46

Sooner. Bless your heart. Yeah.

Jonathan Davis

00:06:50

Well, I, I, I, I want to give you an opportunity, Rob, to kind of tell everyone a little bit about your, your background, how you got into the space and where you are now, before we start getting into, into the meat of what we wanna talk about.

Rob Napolitano

00:07:05

Yeah. For great. And I, I appreciate you having me come on and talking about this, but I wanna say one thing first, what the hell is risk mitigation? Risk mitigation is the term that common people don't use. That's what big banks and, and people use. But although we do it every day and part of my story talks about risk mitigation and what risk mitigation is, is just keeping what's ours, right? It's what we accumulate. What's ours. And then kicking somebody's butt. If they try to take it, it's all it is. And coming from the Northeast of New Jersey, you know, actually that's part of where my story starts. I was always that kid in the, in, in, in grammar school, that was always in detention because I was always caught in a fight in the schoolyard because the bully was always beaten up on the kid that couldn't defend themselves.

Rob Napolitano

00:07:46

So I ended up always being, you know, getting inside of a fight, defending somebody else who couldn't defend themselves. And there's some risk mitigation, right? Like me and it, it, it ended up, it ended up, you know, maturing throughout my career. As I started in real estate investing many years ago, 20 something years, I've been investing in real estate. And I went through the normal course that everybody does. You go take a course, you pay the money, you buy a couple properties. You, you, you get some mortgages and you take all the risks that you want. Then you don't know everything. And you learn as you go, it's a school of hard knocks. And I ended up getting caught up in the, the 2008, 2009 financial crisis. At that point, actually, I had gotten into the mortgage business a few years prior. I was doing writing loans, learning about the banking industry, started my own mortgage bank, doing some private lending.

Rob Napolitano

00:08:41

The sub subprime mortgage crisis happened, caught me off guard as well. And so personally I went into a chapter 13 bankruptcy, and I had to learn how to get myself out. I, I, I actually hired an attorney. And at that point I was so interested in what was going on with the crisis that I actually went to law school, become a paralegal and learned more about how the mortgage backed securities and the securitization process all worked. And I started a legal litigation support services, where we were helping attorneys to help homeowners stay in their homes. Because a number of those foreclosures going on back then were being done illegally, hence forth the bully coming in on the homeowners, me stepping in trying to beat up on the bully. But I found that was a hard way to actually make a living. And at that point I had just started my new life as a new husband and father.

Rob Napolitano

00:09:34

I need to actually make a living as well. And so we did that and I learned, learned the legal system, how it all worked, got involved, a number of, of, of cases. Matter of fact, one of my briefs decided in the state Supreme court of Massachusetts and, and what I've learned is taking on the bank's head on was a Herculean task. And what I wanted to do is, okay, so if these banks own these loans and you know, they have problems processing and paperwork, and they didn't want to do all the heavy lifting of trying to modify loans. I wanted to be in that business. So we started a fund in 2014, buying loans raised a bunch of money doing it. And one of the things that I found in my experience and going through what I went through is that all the banks were always covered.

Rob Napolitano

01:10:22

And they always had this insurance on their bets that they made not to get too technical, but they were, you know, credit, default swaps and different ways that they covered their losses. And I said, wow, there's no real insurance for the risks that we take as actual real estate investors. How do we get that covered as well? And so I found another product and I started a second fund of, of, of buying life settlements with partners there as well. And we used the life settlements as a way to cover and, and absorb some of the risks that we take on the buying of the notes that we buy. So now we're buying notes, doing private lending and also buying distress life insurance policies as a suite to cover ourselves and mitigate simple, let's say keep a lot of the money that we're making through the insurance pot.

Rob Napolitano

01:11:12

So we kind of self-insure ourselves, but that came through, you know, my experience of what I went through. I had to go through, you know, the doldrums and it was a very lonely place going through bankruptcy and long story short, I ended up coming outta that bankruptcy suing two of the big banks to the major institutions. They ended up paying off all my creditors, paid my bankruptcy state, paid all my attorneys, and I actually walked away with a profit outside of my bankruptcy. Wow. So it's a very rare case. And, but yeah, I had to go through all of it. So I, I, I learned how to get to the very bottom, find out how it all works and then build upon something upon that as well. And it's not, it's not nice what these banks and these financial institutions do to people. So I've always been now that advocate of helping people to generate their wealth.

Rob Napolitano

01:12:02

However they choose to do it. I think real estate's one of the best ways to do it, but it doesn't come without risk without failure, without pitfalls. And you, you're never gonna know everything because there's always outside forces involved as well, but there are certainly ways to protect yourself. And, and, and I'll give you maybe as a, as, as, as, as an anecdote to it, it's like playing any professional sports. I mean, we're here in the United States. There are gonna be people elsewhere listening outside the United States, but let's use American football. As an example, we have an offensive team and we have a defensive team. So in that scenario, if we are playing in the super bowl and we're up by three points with two minutes left to go, how do we protect ourselves? How do we protect lead? How do we protect that trophy?

Rob Napolitano

01:12:52

That's right in front of us all relies on the defense. And when we talk about this risk mitigation, it's just about financial defense. How do we protect ourselves from the risk and risk is nothing more than the potential of something going wrong. And the probability of that happening, we live in risk, right? So it's always there. So how do we protect that probability and work on the defense and nobody ever talks about defense, right? The super bowl it's, you know, the quarterback was great. And did you see that play, that wide receiver caught that not running back, did that great. Never talks about the defense. Right. And so it is in, in, in our financial side and no one talks about the defense, how do we protect ourselves? But it's important. It's important.

Wendy Sweet

01:13:40

Yeah. You know, I think, I think that's probably the biggest mistake that people make is they don't put the defense into place. You know, the thing that I lo the part of your story that I love the most is the scars. Yeah. That, that you've acquired. And, and you're not afraid to tell people, Hey, here's what I went through. Yeah. And that's, I would much rather invest in people that have been up against the wall that have felt the pressure of, of being at the bottom that understand, because that makes you so much more risk aversive. I mean, you're, you're really looking, you're really looking to make sure that doesn't happen again.

Rob Napolitano

01:14:26

Absolutely. No, I listen. It's absolutely. I mean, and I, I I've said that to people as well for too, you know, when they try to compare, well, you know, we like to see people's historical track record. Why that's gonna happen again? What do they always say after historical track record, past performance, not an indication of future future

Wendy Sweet

01:14:44

That's right.

Rob Napolitano

01:14:46

Basically saying, I'll show you the numbers, but don't believe any of this B BS that I'm about to show you because I may screw up moving forward. So it's, you know, it's, it's a forward looking thing, but you're absolutely right. No one knows it's gonna happen moving forward. It's a risk that we're taking, but don't, you want to be with those that have been through the DLL drums already so that no matter what comes forward, no matter what happens, no matter what's in front of us, we want to be with the people that have been there already, because it is scary. Right? We're not about this stuff. So having the right partners, having the right people, that's why I love doing stuff with you guys. Okay. You guys have been through the worst of the worst as well. You know, you guys understand this stuff. The, the three of us here, we don't know everything, but we know how to get through everything.

Wendy Sweet

01:15:31

That's the key.

Jonathan Davis

01:15:32

Well, and that's, you know, that, that's one of the things that talk to tons of people about, and it's, it's like, you know, everyone wants to say, you know, the, if we talk about real estate, it's, you know, it's cyclical things, you know, things keep happening over and over that are similar. Sometimes, almost exactly the same, but there are never caused by the same thing. And that's what risk mitigation is. It's knowing that there is going to be a loss of some kind. And the mitigation is how do I position myself in my investments, in a place that reduces the amount of loss for the unknown thing that's going to occur that I know is going to occur. I don't know when, and I don't know what it's gonna be, but it will occur. So how do I position myself in that best place?

Rob Napolitano

01:16:22

Yeah. Absolutely.

Jonathan Davis

01:16:23

Position the assets in the best place. So, yeah. I mean, that's, that's all we like, we know it's coming. We just don't know what it is.

Rob Napolitano

01:16:30

Well, let's, let's look back at the football game. Right. Does anybody expect to win a super bowl without ever letting the opposition ever score any points against us?

Wendy Sweet

01:16:41

That's

Rob Napolitano

01:16:42

Right. No, that, that, that, that's just totally ludicrous to have that expectation. Of course the other team is gonna score. The idea is to obviously score more than them or slow down how potent their offense is. So they don't score more than us, but don't have the expectation they're not gonna score.

Jonathan Davis

01:17:00

Yeah, exactly.

Wendy Sweet

01:17:03

You know, the other thing too, I think that's really important for people to understand whether you are an investor or whether you are lending. You need to have a healthy fear, but you can't live in fear. No doubt finding that balance of, of, you know, here's your plan a, but here's my plan B my plan C and my plan D you know, you, you try to make sure that plan a is gonna work, but you have to have the risk mitigators in place to be able to follow up with plan B, C, and D, and make sure that what's the worst thing that can happen. Can you live with that?

Rob Napolitano

01:17:52

So I call that awareness very simple, right. I have a 12 year old daughter, and we're in the conversations now of my 12 year old daughter and, and dealing with drugs, not that she's dealing with drugs, but we're making, we're telling her, she's

Wendy Sweet

01:18:07

Dealing drugs again.

Rob Napolitano

01:18:08

Yeah. You tell her, stop touching my drugs now. So we talk about, we talk about drugs and at, at her age at 12, and in the next couple of teen years, she's gonna be experiencing that and she's going to be exposed to that. Right. And we show her some of the things that can happen with drugs. We talk about it. We talk about things that, not that I'm trying to be doom and gloom, not that I'm trying to scare her. Cause some of these things are scary. And I tell her this, this is not to scare you. This is not to stay, stay away from people that you don't know or, or, or, or, or all your friends. Cause you can come from anywhere. Okay. But it's to make you aware that as you go out into the world, this exists, you can have friends relationships, you can go out and you know, other people's houses, parties, and, and other events and stuff and everything enjoy life, but be aware and be in tune that these risks are out there as well and act accordingly and be prepared for it.

Rob Napolitano

01:19:04

So by being prepared, it's not necessarily a doom and gloom thing or out there to try and scare it. But it's a matter of awareness. And honestly, that's, that's, that's part of the distinction between winners and losers in this business, right? I mean, being aware, being able to absorb the risk, embrace the risk, embrace the loss, embrace the failures and know how to move forward from there is a key difference and anybody can do this. I mean, anybody can accept a failure. Anybody can, you know, take the right mindset and move forward and move through things. Anybody can do that. So anybody can make money in this business or any business really. There's no real secret to it. You can do it. That's

Wendy Sweet

01:19:43

Right.

Jonathan Davis

01:19:44

No, there's, there's, there's good risk mitigation and good timing. And that's, that's probably about it.

Rob Napolitano

01:19:51

Timing. I think timing only really applies in, I forget what the second thing was, but the first thing was sex was timing. And the second thing I guess, was racing. I thought it was sports, sports and sex. And we know two things that timing was really important, but I don't know, someone else told me that earlier today and just stop whatever, but you can't time a market that you can't do.

Jonathan Davis

02:20:15

No. It's it's time timing. Yeah. I mean, it's just coincidence.

Rob Napolitano

02:20:20

Yeah. You know, you know what just, you said before Jonathan too, is that, you know, you see these things happening over and over again. This is so we're going through right now. And, and, and in not only here in our country, but in the world, we're going through one of the greatest wealth transfers that our time has ever seen right now. But just because we haven't seen it before, doesn't mean this hasn't happened before empires have grown and fallen all throughout the course of, of history and humanity. Okay. We just happen to be on the downside of a, of a falling empire going on. When you say, when you say transfer of wealth, what are you referring to? There's always when, whenever, whenever, so a couple of things going on here, I don't want to get too overly, hyper technical with it, but many times we'll keep it real simple for principle purposes.

Rob Napolitano

02:21:09

I know we're limited on time, but many times civilizations rise and fall based on consumption and debt and, and, and money and the use of money. And, and, and, and, and, and the control of money gets to a point where gets outta control. It. It's like, it's like keeping your own credit card and your own house and order your own balance. You know, you get two outta control, you end up in a bankruptcy, right? Cause you, you have to take too much debt. You don't have enough income and it's just, you know, regular economics, 1 0 1 and economies go through that. And, and, and world powers go through that as well. And we're at a point now where we've taken on, not just here, but around the world, too much debt with not enough consumption. And we're seeing the loss of, of power in purchasing power, the, the us dollar as a world reserve currency.

Rob Napolitano

02:21:53

But again, I don't wanna get too macro, but the point of it is that when you, when that happens, it's similar in real estate. When people take on too much debt on their real estate and they go into foreclosure, okay, the debt has to get restructured either has to be cut in half, not half, but it's gotta be cut, take a haircut and it's gotta be resolved and it's gotta be unlevered. Okay. And when that happens, there's not many people that know how to do that, to understand the money and how the wealth occurs. You set it before that BlackRock is, is, is, is, is ramping up to, you know, pick up all these distressed homes. Okay? Perfect example. They're getting ready for the wealth transfer to take homes from people who can't afford it into their own portfolio and their investors. It's the same thing with debt.

Rob Napolitano

02:22:36

We're gonna see a lot of transfer of, of wealth and financial assets and real estate coming. And we're gonna see a great opportunity to, to grab some of this piece of apply for ourselves. Okay. We're gonna, I mean, there's, opportunity's gonna be tremendous. Everybody should be getting involved one way or another with the right partners. Because remember, while there's always one party that's winning on the other side, there's always another party that could be losing too. So who you pick as your partners and who you go through this with is very, very, very important. And people must be doing, doing this. The challenge that I see with, with, with, with investors out there, and I'll come back in real, into real estate, but I'll make it more generic is that people agate the responsibility of building their wealth to financial advisors, traditional financial advisors that want build into traditional stocks. And guess what, maybe before inflation that worked, but that doesn't work anymore, right? That model is gone. People need to take back responsibility for building their own wealth for their own family and make their own decision and stop abdicating that out to some other financial advisor. Who's gonna put you into something where he's betting against it, that you're gonna lose. I mean, that's part of the game. Part of the game is they put you into things and they bet against it. You're gonna lose. Okay. Yeah.

Jonathan Davis

02:23:53

That's, that's just like we had Chris miles on here a week or so ago. And you know, his father, you know, did the whole stock market, had a financial advisor. He retired. And then he met with, with, with him and said, you know, how much time do, how much runway do I have? And he was like, well, dad, you you've gotta die in five years. Cause that's, that's all you got. And it's like, and he is like, well, where did I go wrong? He's like, you didn't, you did everything that you were supposed to do, everything that you were told to do. Yeah. And that's because that model doesn't work. Yeah. Yeah.

Rob Napolitano

02:24:31

And I think people need to look at, look, I talked to a lot of people. I think the real issues out there today is, you know, now we're in the aftermath of a multi-year pandemic that affects different people, different ways, right? Whether we're going into a session, depending on how you wanna define a recession, you know, people are in a recession. People are not in recession the way you are. We have runaway inflation. Taxation is going off. The rails mortgage rates are going up. Crypto is crashed over 50%, right? We get massive layoffs. We're getting scarcity and resources and supply chains. We're getting energy crisis wherever we are. And then you got all this increase in violence and social stability. This all has to do with money. This all has to do with, you know, survival of the fittest financially. Okay. And going into stocks, look at where that's gotten us, look at where we are, right. Doing it personally for yourself, with real estate, with the right partners and taking responsibility for yourself is what people have to do. Which goes back to what I said, four, I did it with my feet and I picked up my family. I moved them elsewhere, mitigating the risk of living up there because of taxation, number, other reasons, but because of taxation as well, it's part of the risk mitigation, part of keeping what you've earned.

Wendy Sweet

02:25:43

That's right. And you know, you also talked about being with the right partner. Bill, put a statement in, I don't know if he's actually in the air now and he can't hear us anymore, but he, he wrote in the comment section in the right real estate space, your investment can be both growth and defensive. And I think what people need to understand is there's different ways of protecting your wealth. You have a fund, we have a fund. When, when you put your money into a fund you're you're with other people, you are mitigating your risk by being spread out of that's right. A number of loans or don't number of notes.

Rob Napolitano

02:26:22

That's right.

Wendy Sweet

02:26:23

One goes bad. You're not, you know, when the toilet, if you're one on one, you're in the toilet, that's

Rob Napolitano

02:26:29

Right. All your eggs are in one basket at that point. Right. And that's why I'm a big advocate, especially, you know, so that's diversification, right? You wanna diversify your portfolio, right. You wanna diversify as best and as, as granularly as you can. And so your point there is that when, when someone invests in a fund you're diversifying and spreading your risk across all the assets inside their fund and not just one particular asset that's right. So yeah, that's, that's absolutely a good move to do for diversification. That's

Jonathan Davis

02:26:57

Right. Yeah. I mean, we, we, we talk about, you know, geography, diversification, asset diversification. I mean, there's many different ways to diversify also wanna point out there are many ways to over-diversify. Yes. So, you know, pick the things, diversification in the places and things that, you know, best, not just everything and try to shoot a shotgun pattern, you know? Yeah.

Rob Napolitano

02:27:24

Yeah. And that's why the cookie cutter portfolio stuff doesn't work. Right.

Wendy Sweet

02:27:28

Because

Jonathan Davis

02:27:28

This is perfect. It's shotgun. Yeah.

Rob Napolitano

02:27:30

It's, it's, it's, it's, it's, it's personal. Everybody's, everybody's in a different stage of life. Everybody has different dreams and aspirations. Everybody, you know, has, are on a different path to have different types of successes in their life. Okay. When's the last time a financial advisor, you know, other than coming over to pick up a check, actually sat and, you know, talked with your children and wanted to know what they wanted to be when they grew up. Right. Had that intimate with your kids. Yeah. I haven't seen that happen.

Wendy Sweet

02:27:59

Yeah, you're right. We are over our time limit already by really fast

Jonathan Davis

02:28:07

It's time flies when you're having a good conversation. It's good stuff.

Rob Napolitano

02:28:10

I just started slowing down my speech. I just started catching my breath, flowing up.

Jonathan Davis

02:28:14

Just got settled in.

Wendy Sweet

02:28:17

We're gonna self destructive. We don't close it up.

Jonathan Davis

02:28:20

Well, before we do wrap up, I do everyone out there. Our question of the week. I wanna go ahead and throw that out there. I guess we're not gonna have a graphic for that's. Okay. How do you mitigate risk? We want to know. I mean, there's all kinds of ways to mitigate risk. We mentioned, you know, diversification through assets, through geography. What do, what do you do? So we would like to know, know that

Wendy Sweet

02:28:48

And that they can go right online. And even the recording, you can respond to that question on this recording. We will see your answers on this. And Rob, you have been just a wealth of information. We'd love to have you back.

Rob Napolitano

02:29:03

Oh, I, this is, this is a lot of fun.

Jonathan Davis

02:29:06

I, I told him already, we're gonna have to have a part two so that, that that's gonna have to happen.

Rob Napolitano

02:29:12

All right. We'll have to have part two. Okay. Fine.

Jonathan Davis

02:29:15

Twist your arm. Well, all right guys. Well, thanks so much for joining us on the real estate investor show. We are Carolina, hard money, Carolina, capital management. If you are a rehaber or a real estate investor, you can go to Carolina, hard money.com and click on the apply. Now tab, if you are an investor and seeking outsized, passive returns, you can click on our credited investor tab and don't forget to like share, subscribe, hit the bail and join us next week. We'd love to have you.