In this episode of the Creating Wealth podcast, Jason Hartman discussed millennial mobility, as well as the three market types (buyer, seller, broker) and how to identify them. He also covered updates on both the San Jose Jason Hartman University event and the Venture Alliance Ice Hotel trip.
He later spoke with Mike Moyer, creator of the Slicing Pie concept. The two discussed how one should go about partnering on real estate deals and startups with other people in ways that fairly incorporate everything that individuals bring into the deal. Slicing Pie helps factor in work, cash, goods, ideas, and time when valuing business contributions.
Hartman begins the episode on what he calls a beautiful day in a rather ugly city. He isn’t the biggest fan of Las Vegas and is considering moving some time in the near future, and he notes that it is more of a hassle to move than anything else. He is considering options like Austin, Texas, before settling down in a place that provides excellent opportunities. If you’ve got any input, let him know at www.jasonhartman.com/ask.
He mentions having read an article recently that claims that millennials are not as mobile as they’ve been believed to be. Hartman responds to the article with a common question of his, compared to what? Millennials are quite a mobile generation, but they still have a need to leave the nest. They’re often a boomerang generation because after they go away to college, they tend to move back home to pay off their crippling student loans.
Hartman mentions that Venture Alliance member Brandon is going to be contacting other Gen Y’ers with a new membership opportunity in the near future, Venture Alliance Junior, a branch of Venture Alliance aimed at the Y Generation.
He highlights that the upcoming guest has a fantastic system that he’s developed for partnership and equity-sharing. His method is called Slicing Pie and it reminds Hartman that on New Years Day 2018, he had his last slice of pumpkin pie for eleven months, unfortunately. Pumpkin is his favorite type of pie.
Managing Deals at Arms-Length
Hartman mentions that there are many different ways to slice real estate deals and a lot of them have to do with partnership. A client of his, who has 19 houses now, recently interviewed Hartman about his 280 properties with the impression that his real estate portfolio was secret. It isn’t, as he has discussed it a good deal on the show.
He states that he has sliced some pie and invested with other people, having had a lot of business partners in the past. Out of the lot of them, only one partnership ever worked out poorly. He explains that partnering on real estate deals is relatively easy, as long as neither party lives in the properties. Running them at arms-length is the best option for both partners.
The Slicing Pie model was created by today’s guest Mike Moyer, who has been a guest on the show in the past. Moyer spoke during the Venture Alliance event in Chicago and Hartman mentions that he might have him speak at an upcoming Meet the Masters event.
New Venture Alliance Members
Hartman announces that he would like to welcome two new Venture Alliance members. The two are going to attend the Venture Alliance Ice Hotel trip, which is now two people away from being green-lighted. For more information about the Ice Hotel event, open to Venture Alliance members and non-members, visit www.jasonhartmanicehotel.com.
Three Types of Markets
Hartman mentions absorption rates as they apply to real estate. They are based on the concept of how much inventory is in the marketplace at a given time. He reminds listeners that statistics on these kinds of topics can be very misleading and he would rather let the media mislead people. He is choosing to discuss absorption as a concept. There is no national real estate market, because each market is local. These markets are also segmented by other criteria, and it isn’t simple to classify.
Today, conceptually, there are three types of markets. Hartman isn’t referring to the common linear, cyclical, or hybrid markets that he usually covers, as those are geographical types. These three are market condition barometers, depending on how many months of inventory there is. Though these are sometimes named differently, Hartman refers to them as the buyer’s, seller’s and broker’s markets.
These markets are determined by the speed of absorption of properties. This means that one can look at a given time, take a snapshot of the market, and consider the months of supply. For example, if we took today and looked at the market, and we pretended that no more properties were going to appear after today, how much inventory do we have?
If there is 0-4 months of inventory left, it is a seller’s market. In this market, the seller has the advantage because demand outweighs supply. The properties do not have to move quickly, but it’s considered that if one person per month is buying and there are four homes on the market, it will take four months to absorb the supply.
In a broker’s market, there is between five and eight months of inventory, which is what Hartman refers to as a balanced market. He states that this market is common today, and that it has improved since 2009.
If there is more than 7-9 months of inventory, it’s a buyer’s market, which many people consider a “bad” market, as there is more supply than demand.
San Jose Event
Before introducing his guest for the episode, Hartman reminds listeners of the upcoming San Jose event. Jason Hartman University will be taking place on March 3rd and early bird pricing will be going away soon. The event is centered around the interactive part of real estate including math, numbers, analysis, and portfolio building. For more information, visit www.jasonhartmanuniversity.com.
Start with Knowledge
Hartman introduces Mike Moyer to the show, inventor of the Slicing Pie system, as well as a speaker, author of several books, and entrepreneur who has presented his concepts all over the world.
Moyer explains that in business deals, there is the occasional chance of losing everything, and that it’s a very real risk. In other businesses, there is the potential to lose some things, but there are a few out there that can result in the loss of everything.
Hartman mentions having used the Slicing Pie system in a deal before and it worked out quite well. He then asks how two people might use the system if they wanted to begin partnering on real estate deals.
Slicing Pie in Real Estate
Moyer explains that the main contribution in a real estate deal is cash, but there are cash and non-cash contributions involved. If you’re purchasing a property to use as a rental, the pair would divide the equity by the cash put in. If one partner puts in 70% and the other puts in 30%, a 70/30 deal would be wise. However, if you’re planning to flip the property and you invest time, you can factor time with Slicing Pie as well. There are several components involved.
He states that it wouldn’t be fair to split equity 50/50 if one person did all of the work and invested all of the time into the project, so it’s important to factor in both cash and non-cash contributions.
If there was a bank loan involved for financing, it is not a risk factor, because it did not involve time or cash out of pocket. It’s considered non-risk for this reason. Down payments are risks, as are investments of time.
Hartman backs up momentarily and explains that in a relationship, people contribute different things. Slicing Pie covers contributions of intellectual property, equipment like computers in a startup, cash, and time. They’re each valued differently in the model. There are different factors that a person can contribute to the business.
Moyer explains that when partners share the equity when they share the risk. Risks come in the form of not being compensated. For example, if a person spends a year of their time working for a startup without being compensated, but they’re worth $100,000 per year in an open market, they’re risking $100,000 per year. If they bring their laptop into the startup and it’s worth $2,000, that’s a risk of the same value.
Cash and Non-Cash Risks
Moyer states that when we acquire things for a company, we pay market value for those things. No matter what it is, or what it’s for, we still pay the fair market price.
For every non-cash contribution that someone makes to a company, they contribute two slices. Contributing cash is worth four slices. This way, people can account for what they’re not being paid and times it by the number of slices in the pie and they’ve got their share.
The reason why there are differences between cash and non-cash values is, if a person paid another $50 per hour to work, and that person also wanted to buy something for $50, it would take more than an hour to have enough money to purchase the item. This is due to employment tax and sales tax when working and making purchases. Also, cash is more of a scarce resource than a service.
Pie Slice Multipliers
Hartman notes that when someone makes a cash contribution to a company, it has already been taxed a thousand times, so they are contributing in post-tax dollars. The contributor had to labor to make the cash, and then pay taxes on it. Cash has the highest multiplier in the slicing model at 4:1 for this reason. If you contribute $1,000 to the business, it has a four-times multiplier, making it worth 4,000 slices.
Moyer explains that the value of a slice is similar to the value of a poker chip. Slices are only used to determine things in the deal. It’s important to note that if a person finances something, it isn’t worth any slices at all, because it isn’t their money. Finance money belongs to the bank. If the money came out of the person’s bank account, it would be worth slices because the money actually belongs to the person.
He explains that time is worth two slices per dollar. It’s worth noting though, that your work might be worth more in a real estate deal because you’re an experienced contractor versus another person that doesn’t know how to work on a house.
The reason for the multipliers is to create some consequences if someone leaves the company, Moyer says. If you fired someone on your team for no good reason and take their equity, that wouldn’t be fair. If someone is fire for a good reason, the loss of their equity might be fair. Since people don’t want to lose their equity, they try not to get fired. If you were to fire someone for no good reason, they keep their slices of the pie. If they’re fired for a decent reason, they don’t keep their slices.
Hartman explains that this is the key to life, aligning interests. The relationship between an income property owner and a property manager is often much less aligned than it should be. Managers want to collect rent because they get paid, and owners want their properties rented. When interests become misaligned, problems arise. He mentions having problems with a partner who wanted to quit the partnership. He spoke to Moyer about it and he was able to settle the debate. If the partner quit, he would lose the time he contributed to the pie, but he’d have kept the equity he made.
Moyer states that we cannot put ourselves in a position where we can steal other people’s money. For example, if a person invites a partner into a business relationship so long as they invest $10,000 and then that person is fired right after, it would be stealing if the initial person kept the investor’s money. It’s reasonable to fire the investor and return the money, but they don’t get their time equity back.
Negatives of Time-Based Vesting
Hartman compares time equity in Slicing Pie to earning a vesting of equity as an employee. Owners sometimes reward their employees for their service, usually starting at 3-5 years, by vesting that employee a certain percent of the company’s value yearly. It’s equity in the company and if the employee leaves too early, they will not have the vestment.
Moyer explains that time-based vesting is often used to mitigate damages done, but it isn’t a very good tool. It only considers time and not contribution. In order to use it, he has to estimate what someone is going to be worth in the future and allocate a chink of equity in advance. He states that if he is worth $200,000 per year and he doesn’t get paid, he contributed that money in unpaid salary. Those differences need to be accounted for. It’s hard to predict when one can begin paying their team in a startup. Nothing is preventing a team member from quitting after vesting and nothing is preventing them from being fired before vesting.
He recalls a client that wanted to ensure that his team of scientists would sty onboard with him for fifteen years, so he had a very high chunk of equity that vested when the fifteen years was up. This was equal to several million dollars. If the scientists were to leave or were fired for no good reason, the equity would be prorated. If they left or were fired for a good reason, they stood to lose all of that vestment.
What Counts as a Startup?
Hartman asks if the Slicing Pie method for partnering on real estate deals works for startups, and what Moyer’s definition of a startup is.
Moyer explains that when a professional investor is in charge of valuing an opportunity, they’re deemed to have the skill set needed to do so. Entrepreneurs are not deemed to have the skill set to value their own opportunity because they will always be too optimistic.
When there is a reliable market value for your company, you can use that as a denominator for your deals. Moyer states that if stock is worth a dollar a share, and you’re worth $50,000 in equity, he can offer 50,000 shares. If one doesn’t have stock value, then stock value can’t be used to determine how many shares a company has.
Hartman notes that most startups and new businesses don’t go well. The odds are against these people. Looking at it from an analytical point of view, it would be crazy to attempt, and no one would take the risk. He asks if Slicing Pie works when a business is going badly, giving an example that a partner doesn’t like his deal anymore because though his share is getting bigger, the pie itself is shrinking.
Moyer explains that there’s no way of telling if the pie is actually shrinking or if it’s just perceived to be. We can’t predict the future, whether Apple is going up or down tomorrow. All we can do is make decisions. If we believe in the company, we stay. If we don’t, we go and if we want to go then we have to start figuring out how to get some of our equity back.
Hartman mentions that it requires a lot of faith for entrepreneurs. In the morning the world could be falling apart but in the afternoon we can receive good news. We have no idea what will happen. There’s need for a lot of faith and maturity so that we can delay gratification until we’re sure it’s working. Something can happen that changes everything at any time.
Moyer notes that in startups, there is sometimes the mentality that if one person came up with the idea, they deserve more equity. While he understands this mentality, it can be problematic because new companies often pivot away from the original idea to develop more ideas. The original idea might not even be used in full anymore.
Ways to Slice Pie in a Business
Moyer explains that the elements of the pie include: time, money, ideas, relationships, facilities, supplies, and equipment. Pretend you’re funded when you consider money. If you had the money, how much would you be willing to spend on services?
Think about it not in percentages, should you pay an advisor 2% or 5%, but think of it as if you had the money to give. How much would you be willing to pay the advisor? If you have the money, pay it. If you don’t, use slices.
In closing the episode, Hartman reminds listeners that Mike Moyer has several books on the market, as well as his Slicing Pie software. He also has a deal in the works to combine software with Harvest. He has a referral network of attorneys who use the Slicing Pie system. For more information about Mike Moyer or his Slicing Pie system, visit his website at www.slicingpie.com. He has information about how to get started, books, online videos, and consultation calls.