Sep 2, 2022
Despite the uncertainty, there are a lot of ways to create wealth during a recession.
Paul Neal, founder and Principal Funding Strategist at Vantage Point Commercial Capital, joins us to list action items you can follow to survive and thrive in a downturn. As a serial entrepreneur, Paul has owned six businesses in 30 years, and today, he brings his wealth of experience to discuss his thoughts on the market and how to find opportunities in real estate and in business.
[00:01 - 03:16] From Engineering to Network Marketing
[03:17 - 19:24] Strategies to Set Yourself up for Success in an Economic Slowdown
[19:25 - 21:27] Closing Segment
“The Pareto Principle, 20% of your expenses you probably need and 80% of them are probably fluff.” - Paul Neal
“The key is the idea, not the capital.” - Paul Neal
“Whenever I've approached a business, I've always tried to go along with it and look beyond day one and have always been willing to put money in, even when I didn't have it.” - Paul Neal
Connect with Paul at the Vantage Point Commercial Capital’s website and head over to vpc.capital/podcast-scaleCRE to get their free guide: Questions You MUST Ask Before Seeking Funding.
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Paul Neal: I would say, you know, seriously, look at, and you can do this on the business side, on the personal side, you know, take your credit card statements for the last 90 days, you know, your statements where you have auto-debits come out and, and look at all the charges coming out and try to ruthlessly, defend them, get with your accountant CPA or partner or spouse, and say, you know, you defend 'em and make sure you really need these.
[00:00:33] Sam Wilson: Paul Neal is a serial entrepreneur. That's owned six businesses in 30 years. He uses that wealth of real-world experience to help entrepreneurs and real estate investors win by funding their growth and dreams. Paul, welcome to the show.
[00:00:45] Paul Neal: Hey, thanks, Sam. Happy to be here, man.
[00:00:47] Sam Wilson: Hey, the pleasure's mine. Paul, there are three questions. I ask every guest who comes on the show: in 90 seconds or less, can you tell me, where did you start? Where are you now? And how did you get there?
[00:00:56] Paul Neal: It all started when I was in college. I got in my first business, approached by my brother-in-law who's in marketing and thought, wow, I was studying engineering and didn't like it. He said, come work with me. We partnered up and had a really successful 10-year ride with that. And how I got here now was just a series. It's really, definitely not a straight line. Multiple businesses, I had some really successful ones. I had some, some massive failures and you know, I find myself kind of back where I've always loved to be, and that is in real estate and business finance.
[00:01:24] Sam Wilson: Wow. Okay. There's a lot, a lot to unpack there. A 10-year run. You guys launched a business that's, I mean, a 10-year, run's a pretty strong run for something that's like, Hey, will you come work with me? What was that business?
[00:01:34] Paul Neal: Yeah, actually, honestly, that was a network marketing business. And so that was really my first exposure to entrepreneurship. I had always been sort of conditioned to be an engineer. Just naturally pretty good at math and science. My father was an engineer. And I worked in the field a little bit when I was in school, through co-op and I just, I sat in an eight by eight, fluorescent lighted office eight hours a day. And I remember the arguing with people for about three hours over the little rubber booties on the product we were developing and thought at that point, I'm either going to slit my throat or do something else. And so he knew, we had a good relationship and he knew that I wanted something bigger and, he and my sister had been successful. And I thought, well, okay, I'll, do something different with them.
[00:02:18] Sam Wilson: Network marketing gets a really bad rap. And people see that, they hear it, they're like, oh my gosh. But I think there's some valuable things probably that people learn when they go into network marketing. Would you agree with that? And if so, what were those things?
[00:02:32] Paul Neal: Oh, undoubtedly. So yeah, I mean, I think the big takeaways are you have to have a vision and a dream of where you want to go. You have to face down your fears every day and just kind of put yourself out there because you know, rejection is the name of the game, right? You know, it's 99 to one. And so you get really a thick skin and I will say this, well, and another lesson, actually, my wife and I got to learn to work together, which was great. We've now just celebrated 31 years of marriage. So we survived that experience, you know, but it was all about failing forward and, you know, and the encouragement we got from the leadership over the years really inspired us to get, you know, to become better and stronger. And so that helped us in the, what I call the real world of business after the fact.
[00:03:16] Sam Wilson: Yeah, absolutely. That's cool. That's cool. Today you are back in real estate business finance. I want to spend probably the bulk of our time, if you don't mind, really talking about where you see us economically in a cycle, how you're positioning yourself, and kind of where you're seeing opportunity, and what people should be doing. I know it's a lot of things to unpack so maybe we'll just start, you know, where are we right now in your view, Paul?
[00:03:41] Paul Neal: Yeah. So, great question, Sam. So, you know, we've had a hot run and obviously, in residential real estate, the economy's expanded quite a bit. There's been, you know, lots of evidence of inflation and talks of inflation. And, you know, there's a lot of reasons for that. A lot of its supply shock and you know, and how demand has shifted from products, goods, and services when people were locked in their homes and ordering everything from Amazon to now service shock, where people have gotten more than they need from Amazon and so now they want to go back out to restaurants and bars. They want to travel. As experience, I just got back from Florida, took me an extra day to get home from Florida to Virginia because they're short-staffed everywhere with the airlines because people are just traveling a mass among other reasons. And so, you know, the fed is aggressively moving to try to put the brakes on inflation. You know, they've bumped the prime rate 75 basis points twice. They'll probably do it again, come September. And you know, most people think that's a bad thing. The news talks about, the media talks about the fed hit and the prime rate rates are going up. The world's going to end. The reality is as they do that, they're attempting to put up the brakes on inflation. We're starting to see that ease. And I think we're going to see it ease quite a bit into the fourth quarter. And so the long end of the yield curve starts to come down so longer interest rates start to ease. We saw an increase on the 10-year note. It went from right at about 1% in December, peaked in June, right before the fed hit the gas pedal the first time. And it had peaked at like 3.5%. Well, it's since retraced all the way down to, it's battling right around 2.7 now. So, you know, people talk about the converted yield curve and so forth. So that's a signal that we're moving to recession. I will tell you this though. The other interesting thing is normally when we go into recession, you see a major upturn in unemployment. We have not seen that. And you know, there's a lot of, you know, people scratching their head, you know, from COVID taking a lot of the upper-end workers that could retire out of the workforce early that didn't come back to, I think, I heard the other day there maybe 3 million in that neighborhood, people who have perhaps have long COVID. And so they're not, you know, they're not coming back in the workforce either. So they were affected kind of adversely. So for whatever it is, we're not seeing unemployment really turn up sharply. So that's interesting, but. But I'll tell you this. I think really the key is to position yourself right now. That's what we're looking to do, you know, in the event of an economic slowdown because that always brings tremendous opportunity.
[00:06:12] Sam Wilson: When you say that, what comes to mind? Like, what are some action items? If you said to me, Hey, Sam, today here are three things or two things, whatever comes to mind, that you should be doing right now to position yourself.
[00:06:22] Paul Neal: Yeah, man. Absolutely. I'll keep it really simple. I think three things. The first thing would be, Hey, 80- 20 your expenses. You know, we talk about 80-20 principle, Pareto's principle. 20% of your expenses you probably need and 80% of them are probably fluff. I would say, you know, seriously, look at, and you can do this on the business side, on the personal side, take your credit card statements for the last 90 days and your statements where you have auto-debits come out. And look at all the charges coming out and try to ruthlessly defend them. Get with your accountant CPA or partner or spouse and say, you know, you defend them and make sure you really need these. I don't know about you, but you know, many times I end up signing up for some service that, you know, four months later, I forgot I signed up for and don't use, but they're tapping my credit card, right? So how many of those do we have, right?
[00:07:07] Sam Wilson: I don't know what you're talking about, Paul.
[00:07:08] Paul Neal: Yeah, no, it never happens, right? So, 80- 20, you know, and including, sort of out of the box. You know, maybe you need to look at your staff and do you have anybody that's low producing or not effective. Maybe now's the time to trim some fat. Or how about this? Maybe buy out a partner. If you're an entrepreneur or a business owner, maybe, you know, they're getting close to retirement, maybe they don't want to go through a recession, maybe this is a good opportunity, right? Second thing, I would say shore up that balance sheet. Look at your debt. You know, is there anywhere you can, I would say pay off, but my next point's going to sort of preclude that. I would say, you know, can you extend your terms anywhere? Can you consolidate, can you get better rates in terms of what you currently have? Do you have some assets on there that aren't performing that maybe you could turn into cash, maybe a property you could sell that's not performing like you'd like it to do? Or just some, I don't know, maybe you've got a car laying around that's not, you just don't really need. Turn it to cash. It's a great time to do that. Which brings me to my third point in that is really focus on cash. Get some dry powder, you know, opportunities are going to come. I think it was Warren Buffett who said be fearful when others are greedy and greedy when others are fearful, right? So this is when most wealth is created, I believe, in a downturn, not in an upcycle. Things go on sale. Properties go on sale. Businesses go on sale. So from a cash standpoint, you know, get a line of credit if you need it. Look at your AR, accounts receivable. I see so many businesses that, you know, they take forever to get their money in the door. There's ways you can improve that, aggressive follow up, any deposits up front, maybe factoring. Different ways to do that, but really focus on cash for those opportunities that come up that will inevitably come to he who's ready for that.
[00:08:41] Sam Wilson: Yeah. I like that. I like that a lot. And I know people are going to laugh at me and say, well, gee, Sam, why didn't you do this a year and a half ago? But I've had no debt, even on my primary residence forever. And I'm like, I'm looking at it right now and I go, gosh, if I'm going to start stacking cash for an opportunity. So yeah, I'm looking at getting debt on my primary, which is one of those things it's kind of, you know, everybody's got their own view on what you should or shouldn't do in that respect, but it's one of those things just, in line with that, you know, stacking cash, on that comment though, if you're stacking cash, how do you protect that from the effects of inflation? I've got some business accounts and things myself that are, that have been, you know, it's idle and it's not a small sum of idle capital, but what do you recommend in that regard? So, Hey, we're stacking cash, but what do we do with it in the meantime?
[00:09:22] Paul Neal: Yeah. I mean, that's a good question. And I'll be the first to say, I'm not an expert there, but I would say that, you know, who is it that said, I forget, somebody famous said, I'm more concerned about the return of my investment and the return on my investment. And so I think in times of transition and turmoil, 'cause I think we're in that state right now, nobody really knows what's going to happen. Preservation of cash versus, you know, deployment of cash might be in the short term the more poignant question in my mind, I know it's a conservative approach. I tend there after having a business blow up in 2008, a business that was a multimillion-dollar business position to sell. And then liquidity went to zero. I had not expected that I knew we were going to have a slowdown. Didn't know. So you just don't know. And so again, I would say safe, liquid, and readily available and then reevaluate that in 90 days. You know, the world's going to look different in, I believe, October, November than it does today. And again, I think we'll have a little more sense of stability. We've got a midterm election coming up. There's a lot of things going on. So the plates, you know, it's going to look different at that point.
[00:10:26] Sam Wilson: What would you say to somebody maybe that isn't in that position where they can liquidate assets or they can shore up balance sheets or even go out, maybe even their expenses are pretty low? Let's say they're just getting started, right, and maybe maybe again, they don't have that capital to necessarily stack quickly. What do you say to that person right now? How can they position themselves to win in a recession?
[00:10:47] Paul Neal: I think obviously point number one of really seriously looking at your expenses. I think that you need to look at allocating some savings. I mean, you've got money coming in right now. I think that's critical to get in the habit of savings. And then I think you should really align yourself with people that are a few steps down the road ahead of you, that have been there. 'Cause we all started, well, I don't say we all started with nothing. I did. I didn't inherit any money, you know, I wasn't fortunate enough to have a famous last. So, if you're not in that camp, like, I wasn't then align yourself with people that are down the road ahead of you, or particularly in real estate investing, there are a lot of people you can follow. Obviously, Sam, is a great one, and learn from them. And then you can start looking at building and assembling a team. You know, really the key is the idea, not the capital. If you can come up with the ideas and you will, if you immerse yourself with the right people, then the capital will show up. You will have opportunities. It may not be to, you know, to buy a 30-unit apartment building day one. But you know, not everybody starts there.
[00:11:47] Sam Wilson: Absolutely. Let's talk about that for a minute. What are you, you said today you are involved in real estate, in business finance, where are you seeing opportunity right now in real estate?
[00:11:56] Paul Neal: Yeah, we see a lot of new construction on the investor side. We have quite a few builders that we finance and their, you know, inventory is super low on the residential side. Depending on where you are in the country, I mean, if you're in a, you know, New York City or California, you're probably not going to have to high demand, but if you're in the Southeast or where people want to move to, there's a lot of demand and there's just not a lot of supply. And that's not going to slow down. I mean, you have 40% of the mortgages in residential real estate are below 3%. So people in those homes aren't going to sell, that inventory's not coming on the market, unless they're just forced to move. You have a large percentage of 'em are actually paid off. You have this big, the largest cadre of a demographic population coming into the I'm now ready to buy a home for the first time, the millennials that, you know, they want to move out of the apartment. You know, a lot of 'em are working hybrid work schedules, so they want some more room. They're moving out of the cities, they want homes and they just aren't out there. So I mean, I think single-family, if you can get that is great just from the demand. I have a lot of entrepreneurs because I find a lot of real estate investors are also business owners, entrepreneurs, and professionals, doctors, veterinarians, that sort of thing. Those that haven't are looking to buy the buildings they're in the buildings aren't cheap, but you know, what a great investment there from a commercial standpoint. They lease out part of the building, helps defer some of the costs. There's a lot of tax advantages there. I have a client, good friend of mine. She's an OB-GYN. She had a practice, bought her building about 13 years ago. Anyways, looking to retire in the next couple of years, has paid the building off. She was just recently acquired by one of these larger medical groups and they're not only paying her to buy the business, they're paying her a salary for a few more years, but they're going to rent the building back for her for $9,000 to $10,000 a month of cash flow for just, what a retirement cash flow, right?
[00:13:41] Sam Wilson: That's amazing. Absolutely love that. Yeah. It's stuff like that that makes a lot of sense. Let's talk about business finance. What are some things you're involved in right now, I guess, on the business finance, if you don't mind talking about that?
[00:13:53] Paul Neal: Yeah, sure.
[00:13:53] Sam Wilson: Finance side of things that you say, Hey, these are unique areas where I see opportunity. And I guess specifically inside of that, what type of businesses do you see that are, I guess, inflation and recession-resistant?
[00:14:05] Paul Neal: Well, I think service businesses are inflation and recession-resistant. I mean, you know, you've got to have your, well, you look at lawn care for instance, you know, but any business where it demands a, you know, someone to come do something for you, those are in high demand. They're always in demand, right? You can't Amazon those, right? You can't shut that out of, you know, or offshore that. That's always a safe investment. We see a lot right now, we do a lot of business acquisition funding and we see a lot of partner buyouts. You have a lot of businesses that are well established, that the principles are aging out. They've done it. They've been there done that. They've got the t-shirt and they're, like, they want to sell. And a lot of times it's to maybe a junior, it's a family member, or someone in the company. But not always, there's a lot of turnovers. I mean, all these baby boomers are looking to retire, so I think that's a great opportunity. I have a young client. He's probably not 30 yet. And he's in the gourmet popcorn business. And so yeah, I know it's kind of funny, right, but he had, he has a very successful gourmet popcorn, retail establishment. And he's acquiring other established, that's his business plan. So as he adds additional popcorn businesses to his portfolio, he's growing his cash flow and his balance sheet. And he's been really successful at that. So there's a lot of opportunity out there.
[00:15:20] Sam Wilson: What are risks, I guess, that you are actively avoiding when you look at business acquisition, if somebody comes to you and they're looking for acquisition funding, what are some things that are just red flags that you go thanks for the call, but no?
[00:15:34] Paul Neal: Yeah. So, startups. We don't do startup startups are usually risky. We want to see businesses that are cash flowing well. We want to see, you know, if you want to buy a business, we want to see that you have the ability to manage and grow the business. So some sort of experience, it doesn't have to be necessarily directly in that business, but you know, you have to have some relevant management business experience that can, you know, transfer over. Because the last thing we want for you or for us is for you to acquire the business and then, you know, to fail, you know, a year to two years later, 'cause you just didn't know what you were getting into. We try to stay out of the sort of risky industries, you know, your vice industries, things like that. Although they could be hugely profitable, just not our area. But you'd be amazed at the calls we get. So yeah, so I would say really it's basically cash flow is the key things, what's the history of the business, and if you're doing the acquiring, do you have experience? And a lot of times it's a business that's already in that field and they're just expanding their operations through little mergers and acquisitions, picking up a $2 million, you know, branch here, a million dollar branch over here, that sort of thing. And that again can be a super effective way to grow, particularly in a recession when, you know, you also may have a competitor that may not be as systematically effective as you, doesn't have the systems and the processes, and you've kind of nailed it and you can acquire them and turn that around. So their cash flow may not have to be as strong if you have the demonstrated ability to do that.
[00:17:00] Sam Wilson: Right, right. No, that's absolutely true. I love that idea of expansion in a time of recession or when everybody else is contracting, I think that's a great time to go out and take market share. And I think that's really, really great there. Tell me this. If you rewind the tape, you look back at your last 20 or 30-year career, what is one thing that you feel like you've done very well that other people should emulate? And what is one thing maybe you'd say, Hey, here's a pitfall that somebody can avoid?
[00:17:27] Paul Neal: That's a great question. I think, I don't know. I think doing well, I try to make long-term choices. Like, my wife is a long-term choice for instance and I chose well there. I don't know how that happened. God was good to me, you know? And whenever I've approached a business, I've always tried to go along with it and look beyond, you know, day one and have always been willing to put money in, even when I didn't have it, realizing that, you know, I couldn't do everything myself. The bad decisions are the times where I felt like I could do it all myself and, you know, to be the Jack of all trades and then the master of none. And so the guy who's building the business is also cutting the grass, so to speak. And that just, it didn't work. And it was because, you know, I thought, well, A, I can do it and B, you know, we can save a few bucks on the ramp up or whatever. And you know, inevitably it was just a bad decision. It would cost me time and ultimately a lot of money.
[00:18:26] Sam Wilson: Right. Yeah. It's the time to market. It's the ramp-up speed. It's getting in your own way. It's the, you know, you're the bottleneck. And I think many of us, myself included him constantly reviewing things like that where it's like, why am I, this is, I am in my own way right here.
[00:18:41] Paul Neal: Totally. Yeah. Well, that brings me to another point, you know. It's like, so I've had a business coach on and off, but mostly on for the last 20 years. And I'm actually a certified business coach. I went through the process and had a few clients, really just to sharpen my own ax. I don't actively do it today, but we all need somebody who can look over our shoulder and say, you know, ask that question, like, Hey, you know, why are you doing that? You know, so defend that for me. You know, and I'm like, I really can't defend that for you, you know?
[00:19:12] Sam Wilson: Right, right. And that goes back to your credit card statement, defending those expenses where it's like, oh, whatever it is like, okay, yeah. I probably can't. So maybe you should cut it out.
[00:19:22] Paul Neal: Right, right. Probably don't need it. Yeah.
[00:19:24] Sam Wilson: Probably don't need it, man. That's awesome. Paul, thank you for taking the time to come on the show today and really just kind of give us your history of business, how to position ourselves to win in a time of recession, kind of your thoughts here on the market. You've given us three very easy-to-follow steps on things that we should be doing right now to be ready for a downturn and how to, increase our market share in a time of recession. Certainly appreciate your insights on where you're seeing opportunity in the real estate space and also in the business side of things. It was great having you on the show today. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
[00:19:56] Paul Neal: Yeah. Thanks, Sam. So I've set up a free resource. I've put together the key questions that you've got to ask and answer before you seek funding. I think this is a really awesome guidebook to kind of help you think through the process, to make sure that you really have to ask a lot of questions. It's a serious consideration when you look for funding of any type. We're spinning up a special page just for this, just for your listeners. It's my website, VPC, Victor- Paul-Charlie.capital. That's VPC, Victor- Paul-Charlie.capital/pocast, with a hyphen or a dash, scaleCRE.
[00:20:38] Sam Wilson: Fantastic. We'll make sure we put that in the show notes there, vpc.capital/podcast-scaleCRE. That link of course will be there in the show notes. Appreciate that. That's something, I'm actually, when we hang up here, Paul, I'm going to go download myself 'cause I'm really curious what's inside it. So thank you again for providing that for us and our listeners. And thank you again for coming on the show today. Certainly appreciate it.
[00:20:58] Paul Neal: Sam. It was a pleasure. Thank you for inviting me. I certainly enjoyed it.