JF2764: Building a Business Around Your Lifestyle ft. Tim Bratz

Tim Bratz shares his insights on starting a business, starting over, making your time count, and maintaining balance through it all. Here are some of his top tips: 

 

  • Humility is key. After liquidating his portfolio and starting back at square one, Tim realized that spending money to display wealth actually keeps most people from truly achieving wealth. Today, he prefers to spend money on vacations and experiences with friends and family.
  • Audit your time. Tim wanted to see how much time he was actually spending generating revenue each day, so he performed an audit. Every 15 minutes, he wrote down what he did, followed by either a zero or a dollar sign to indicate whether or not that activity made money. His next move was to hire an executive assistant with all of the “zero” items in their job description.
  • Focus your energy on things that are fulfilling to you. Tim did another thing when he audited his time — he followed each task with either a happy face or a frown to indicate whether or not he enjoyed it. Items that received zeroes and happy faces included spending time with family, exercising, and walking the dog. He made sure to continue to prioritize these things as well.
  • Learn to time block. Tim says that the greatest indicator of your priorities is how you spend your time. He realized that, while he constantly blocked off time for work, he didn’t do the same when it came to spending time with his family. He began time blocking evenings, weekends, and Fridays to do just that. Although he might miss out on a deal, he says he is no longer willing to miss out on his relationships to make an extra dollar.
  • Don’t be surprised if you become more efficient. When Tim began time blocking, he condensed his work schedule to seven-hour days, four days per week — and he noticed that he was suddenly much more efficient. Because he had less time, he was able to focus and prioritize better than he ever had before. His business also grew as people noticed and respected the fact that he valued relationships over money.
  • Life isn’t about what happens to you — it’s about how you respond. Tim’s Best Ever advice is to take 100% ownership of your life and your business regardless of what might stand in your way. Doing this, he says, will move you in the direction you truly want to go.

 

Tim Bratz | Real Estate Background

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TRANSCRIPT

Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and with today’s guest, Tim Bratz. Tim is joining us from South Carolina. He’s a previous guest on episode 1471. If you Google Joe Fairless and Tim Bratz, the episodes will show up. Tim is the CEO and founder of Legacy Wealth Holdings, a multifamily and commercial real estate investment company. His portfolio consists of being a GP on approximately $400 million of assets. Tim, thank you for joining us, how are you today?

Tim Bratz: Doing awesome, Ash. Thanks for having me, buddy. Excited to be here.

Ash Patel: We’re glad to have you back. Tim, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Tim Bratz: Yeah, absolutely. Again, I love what you guys are doing and I appreciate all the value that you guys put out there. It’s an honor to be back. My background is in residential real estate. I was going through college when the market was going crazy before, so in ’07, I graduated and I got involved in real estate. I think a way a lot of people do it is you get your real estate license. So I’m a kid from Cleveland, Ohio originally, I moved out to New York City, got my real estate license, brokered some deals, actually parked my license with a commercial shop. So I brokered some retail leases and office leases and I saw how much money there was to be made on owning real estate, not just brokering real estate. I was like “I want to be on that side of the coin.”

So I moved out of Charleston, South Carolina, started out in residential real estate doing single-family wholesaling, and single-family flipping. Eventually, I raised some private capital, joint ventured with some private money investors, and started buying and holding single-family rentals. I built that up to about 10 units, chased some shiny objects, almost went broke, and decided I want to get back into real estate. Some of the shiny objects were other businesses, and things like that.

Ash Patel: It wasn’t trips to Vegas…

Tim Bratz: It was buying a Mercedes, it was going on fancy vacations, it was joining the private dining clubs, and then it was pursuing other fanciful businesses that were “make more money in less amount of time” kind of a thing. I think a lot of people, at least for me, you see get rich quick on these e-commerce stores, cryptocurrency, NFTs, and a lot of different other things… But to me, real estate’s always been time tested; since the beginning of civilization, wealth has been measured in landownership. I knew that it wasn’t an experiment, I knew that it wasn’t a tech startup or something like that, that could go boom or could go bust. I knew that it would eventually work if I just stuck with it. So I got heavy back into real estate in 2000. I was really still involved, I still had a couple of properties, but went full-time back in real estate in late 2012.

Started doing everything again, fix and flip, high-end, low-end, buying and hold, single-family, and then I found my first apartment building in December of 2012. I just loved the efficiencies, I loved the economies of scale that were available there, and I went all in on apartments. So ups and downs, business partnerships, had to liquidate my portfolio in 2015, start over again… But you don’t really start over because you always have your business acumen, your experience, your knowledge, your resources, your connections. Since 2015, I built my current portfolio. Yeah, it was up to almost 500 million in portfolio value, but I sold off a bunch, and I’m actually still selling off a bunch. I’ll probably drop down to around $200 million in holdings in the next six months, and then I’m going to go back on a buying spree.

I think a lot of times, properties that got us here aren’t the ones that we want to hold on to maybe long-term. I started out in really war zones, in tough areas. Then I elevated into more C class and B minus properties. I bought some small buildings, then some big buildings, and I sold off a lot of my small buildings, now I’m selling off my C plus, B minus type properties… And really just focusing on A class, B plus class, 100 units and bigger in the Southeast. That’s where my buy box is now.

Ash Patel: You already put your time in, it’s time to move up now.

Tim Bratz: I think a lot of times, especially on social media, it’s so easy to start comparing and seeing what other people are doing and being like, “I need to start buying more.” But the reality is what I’ve seen in my businesses, we go really hard, we go in acquisition mode for a couple of years, and then we refine that portfolio. We trim the fat, we get rid of the small buildings, the management-intensive buildings, the headache properties, the bad joint venture partnerships or operating partners, whoever we’re joint ventured on in any of those, if we are… And we just kind of refine. We’ll spend a couple years growing, and then we take one step back in order to make some bigger leaps forward.

Ash Patel: Tim, when you had to start all over what was the hardest part?

Tim Bratz: Well, I kind of pressed reset twice. One was in 2012 when I chased all those shiny objects. The difficult part on that was just having the humility. I had a Mercedes, I traded it in for a 2005 Honda Accord instead. I owned my own home, I had to sell it and then go and live in a family-owned property for a couple of years just to get my finances back organized and get that going again. I think a lot of people try to still maintain the lifestyle. Here’s what I find – they try to prove something to other people, fake it till you make it. And that entire mindset of spending money on garbage that gives you a perception of having money actually denies you the ability to actually make money. Buy those things once you have assets. It’s wildly ironic that you trying to show off wealth by buying fancy clothes, fancy cars, fancy watches and gimmicks, and all this other nonsense, is actually the one thing keeping you back from actually achieving wealth.

I think having the humility early on of saying, “Hey, I was a bad steward of money…” By respecting money and giving it the respect that it needs, I’ve become a much better steward of capital. Now I don’t buy fancy things even though I can. Knowing that I can is enough for me. I’m not trying to fill some void because I didn’t have money before. I was trying to fill a void by buying fancy things that really didn’t fill that void. Does that make sense?

Ash Patel: Yes, such an important lesson. Everybody wants to flex with the cars, the watches the clothes. Once you have the ability to buy all that, it doesn’t bring any satisfaction to you.

Tim Bratz: No. Now here’s the thing, you can tell that to people 100 times and they’ll be like, “Ash, let me figure that out for myself.” You know what I mean? I was too strong willed that I was like, “Let me go and screw this up, let me achieve that, and then figure it out for myself.” But it’s an absolutely 100% true and accurate to what you stated. If you get it and you’re like, “This is it?” I’d much rather today spend that money buying back time to hang out with my friends, to hang out with my family, to go on awesome vacations and trips, and do experiential type things. I have no problem spending money on that stuff, but spending money on material objects just doesn’t give me a rise or fill my cup at all.

Ash Patel: A crazy segue or question, but Tim, knowing that the young people in their 20s, the young Tim in his 20s, wasn’t going to listen to that advice… Still, what would you say to that young Tim to try to ingrain this advice into him?

Tim Bratz: I’d say, “Hey, listen. You can go and buy the toys, just buy the assets first. Have the assets that then pay for those liabilities; or take that liability and turn it into an asset.” I’ll give you an example. I fell into this psychology back in 2017. I’m from Cleveland originally, I had moved back to Cleveland after I went broke in 2012, and I lived in Cleveland for about seven more years, and moved back to Charleston about two years ago, three years ago, four years ago, I don’t even know this. Anyway, I lived in Cleveland when the Cleveland Cavaliers won the championship, they beat the Golden State Warriors in 2016 and I had season tickets that following year in 2017.

The season ticket person emailed me when the Cavs went back to the playoffs and they said, “Hey, we have a suite to the Cavs, the last suite left. Do you want to buy the suite? It’s for the Eastern Conference Finals against the Celtics. It’s $30,000 for the suite.” I was like, “What?!” I remember sitting in my chair in my office reading that email, deleting it, and being like, “Who the hell would pay $30,000 to go to a basketball game?” Then I thought audited, I started thinking about my thoughts. Why am I saying that? Because obviously, other people are buying these suites; it’s the last suite left. Chances are, it’s probably one of the worst suites because it’s the last one left. I was like, “Somebody’s buying these things. Okay, well, who’s doing it? Are they making it a business expense? Are they paying for it? Are they getting somebody else to pay for it? Are they selling tickets? How are they monetizing it?”

It led me down this path of “How can I take this liability of going to a basketball game and getting a badass suite, how can I turn it into an asset?” I thought, “Hey, maybe I can put 15 people.” They gave me 18 tickets to the suite, I was like, “Maybe I can put 15 people in a room, host a one day roundtable mastermind event during the day, and then package that up with a suite. I might be able to sell tickets for $2,000 apiece.” Because I don’t think I can sell a ticket just to a basketball game for $2,000. Could I sell it to a mastermind for $2,000? Maybe, but really attaching the suite to it made it that much cooler and enticing. So I put it out to seven of my buddies that were in real estate or entrepreneurship and I said, “Hey, two grand, one day mastermind with a ticket to the suite to the Cavs Eastern Conference Finals.” I went seven for seven of people saying yes.

So I put the suite on my credit card and I filled up the last eight seats, I had hosted a one-day mastermind. Then I was able to come in full circle, to your question, of how do you take a liability — I was able to take something that was a liability, that would usually take money out of your pocket, and I was able to turn that into an asset, get people to pay me to come out and do this event. By the way, from doing that event, I raised $700,000 of private money, I wholesaled a small multifamily property and made about 25 grand on it… So those are things that that came that I didn’t even think would come from turning this liability into an asset. I was able to do that just by thinking a little bit differently; not just spending the money, but trying to figure out how you make a liability into an asset.

You could do it with Airbnb, you could do it with Turo on cars, you could do it with all these different things. Take cool vacation homes or second homes, or a cool car and exotic car and rent it out, get it to cash flow and pay for itself, instead of you paying for it out of your own pocket. So that’s what I would try to tell 20s Tim on how to not blow all your money and go broke.

Ash Patel: What an extreme example. I love how your mind works. Man, very few people would have thought along those lines. Thanks for sharing that with us. One more challenge to you, Tim… I had a conversation with somebody earlier, maybe a couple months ago. It was me telling them a story where I would go out and replace a toilet in an office building, just because I could. I’ll do it when the kids go to bed, it’s 10 minutes from my house, I’ll do it… And then I realized how stupid it was, because it took me two and a half hours fiddling my way through this. The Home Depot sign said “Installation for $99.” And what an idiot I was. My wife brought up the fact that at a young age, they have more time than they have money. So young people don’t understand the value of time; we do now, because we’re a little bit older than our time is stretched thin. We don’t always get to do everything we want to do, so how do you have that conversation about time with young people?

Tim Bratz: That’s a great perspective to look at it. They maybe have time, but they don’t have money, and they can use that to their advantage. There are people like me who don’t want to work as hard as I was willing to work in my 20s. Somebody with that, “Listen, I will run through a brick wall. You can call me 24 hours a day, seven days a week if you need anything from me. I will list your property or joint venture with you, or I will run into those war zones. I’ll manage that stuff, if you just believe enough in me.” That’s a really cool angle that you can take as a kid in your 20s who may not have the business acumen or the access to resources that maybe you or I do, but that gets him a seat at the table.

I remember when I first got started in real estate, I reached out to a guy actually here in Charleston, his name is Patrick Riddle. He’s big in the copywriting space and that kind of stuff. He used to be like a guru in real estate back then and I remember sending a message. I was like, “Dude, I will shovel dog crap in your yard for free two to three days a week. I’ll do anything, work for you for free, two to three days a week, if you just pour into me.” He’s like, “You know what, dude? Nobody really reaches out to me and offers to work for free, or do anything I need them to do for free. That’s a different mindset that you have. You’re worth sitting down and grabbing a cup of coffee with.” You know what I mean? A lot of people are like, “Let me pick your brain.” Think about your brain being picked, Ash. It doesn’t sound very appealing… And they don’t lead with value.

I think what people, especially young kids, don’t understand is that money is a measurement. It’s like a ruler measures distance, or a clock measures time; money is a measure of value. The more value you can create for other people, the more money you can attract to you. So you’ve got to go out there, you’ve got to figure out a way to how do you provide value to somebody who really doesn’t need more access to money or they have the business acumen. Instead of you just sitting down and trying to take, take, take and pick somebody’s brain, lead with value.

I think that’s a big deal of how you can get yourself into the right circles, the right networks, and attract attention from somebody who has the business experience and the level of success that you’re looking for, especially at a younger age. I think that’s a big deal; and you use some of those things as your advantage. “Hey, I’m willing to work for you, I’m willing to take phone calls in the middle of the night, I’m willing to do whatever it takes to show you that I’m willing to pay the price here.” I think that’s just a different angle that you can definitely take and use to your advantage as a young professional.

From a time perspective, I think the simplest example is just understanding $99 for something that would take you two to three hours to do. Essentially, you’re paying yourself $33 per hour, if it takes you three hours on that. Do I want to make $33 per hour? You start doing the math and you make –I don’t know what the number is– 50 grand a year, 60 grand a year, whatever. If that’s what you want to make, then yeah, go ahead and do those kinds of activities that yield that dollar per hour. If you want to make $100,000 or $500,000 or a million dollars a year, then you figure out what the hourly cost is on that time. If you’re working 40 or 50 hours a week, you can reverse-engineer the numbers and say, “Hey, my time is worth $250 per hour.” Now, anything that’s $250 per hour or less, you’ve got to staff it out.

I think it’s hard to think that way early on, when you don’t have access to a lot of money or you’re trying to do everything, get your hands on everything… I was doing accounting, I was doing bookkeeping, I was swinging a hammer sometimes, I was collecting rent, I was taking the maintenance phone calls, I’d find deals, sell deals, raise the money… I’d do everything. It’s hard to let go of some of those things, I think. But when I really put it in perspective of what are the revenue-generating activities, and what are the not revenue-generating activities, and I just audited my time.

I took my calendar for a full week, and every 15 minutes, I wrote down exactly what I did, every 15 minutes. I woke up, went to the bathroom, got cleaned up, had breakfast, walk the dog, worked out, went to work, spent two hours on social media wasting time, did this, did that, did all these different things. I audited my time after an entire week of everything that I did. For every line item, every 15 minutes, I wrote either a dollar sign or a zero next to it. Meaning did it make money or did it not make money? Is it a revenue-generating activity or is it not? And my first hire was all the zeros on there, that was their job description. This is your responsibility now, this is your roles and responsibilities for my personal assistant, my administrative assistant. That was the first hire; they took all the non-revenue-generating activities off my plate, so I could then focus on the revenue-generating activities.

2014 was the first year ever made six figures, I made 130 grand. I hired an assistant and did that exact same thing. I hired the assistant March 1st of 2015. In the next 10 months, I tripled what I made the year before. I made $400,000 in 10 months, because I just focused on revenue-generating activities.

So understanding the value of time and what you’re spending your time on – if you can learn that early on, it’s irreplaceable. It will set you up — and stuff compounds, it gives you quantum leaps forward in your life and in your business, if you’re spending your time on the things that actually count, that move the needle.

Ash Patel: Incredible, powerful advice. I had a visual of the scales of justice; on one side there’s money, and the other side there’s time; it’s a constant balancing act. I’ve got to ask you – I struggled with this for years… Yeah, sometimes my time could be worth thousands of dollars an hour, but other times I’m idle and it’s not worth anything. So why wouldn’t I go out and do some of these menial tasks? What do you tell that person who hasn’t fully grasped what you’re saying because they still have a bunch of free time?

Tim Bratz: There are certain things… I remember early on, there’s a lady who came in and spoke at an event that I was at, let me tell her story. She goes, “I own my business. It’s a consulting business.” She started out as a solo consultant; she would go in and coach executives of companies on how to live a more balanced life; I don’t even know what it was. Or be more productive, whatever. She goes, “The company started growing, I got all these contracts, I’d hire other people. Other people then went out and I found myself running the business, essentially being the HR person, managing all these different consultants, and all these people. I didn’t enjoy my business any longer.” She said, “Just because I own the business, it doesn’t mean that I can’t go out and do the certain tasks that fulfill me.” So she loves going out and coaching. So instead of hiring other consultants that were kind of lower-level on the totem pole, she hired a CEO to run her business. Even though she owned it, she paid a CEO a salary, and then she went back to doing the things that fulfilled her. So if going out and doing those activities is fulfilling to you, then by all means, go and do it.

The other thing that I did when I audited my time – I didn’t only do a dollar sign or zero, I went back and I put either a smiley face or a frowny face also. That was like, “I want to do the activities, even if they don’t potentially make money.” It’s hanging out with my kids, walking my dog, working out. Those are things that got smiley faces but they had zeros next to them. Those are things that fulfill me personally, that I still had on the calendar. The things with a frowny face and had a zero next to it, that’s the stuff that I gave really, to my admin.

So if it’s things that still fulfill you, great, go ahead and do it. If it’s not something that fulfills you and you’re just like, “Yeah, well, I’ve got extra time”, I’d say spend that time on something that actually does fulfill you, that does give you some sort of enjoyment. Why the hell are we doing this? We’re doing this to actually enjoy some life and buyback lifestyle. We’re focused on doing things that’s going to make more money, that then you can pay somebody to go out and do those activities.

So go out and source more deals, raise more capital, focus on operations or dispositions in your business. Those handful of things are really the things that move the needle, and will give you the highest return on your time, until you get to a level where you got a team built out doing those things for you. Then it’s probably doing things that are painting a vision, building out the organization. That’s the next level of what I spend my time on today.

Break: [00:22:37][00:24:33]

Ash Patel: Such incredible advice. Best Ever listeners, if you know somebody that’s younger, starting out, that can appreciate this advice, please send them this podcast. Because I wish I had a lot of this advice when I was starting out. This is incredible. I want to share a quick story with you, Tim… I was at a dinner, and I met a guy who was a score counselor, but he was also one of the most well-connected people I’ve ever come across. I wanted to pick his brain or get some of his time and advice, because I know he could add a lot of value to me. But I didn’t want to just come out and ask for it. I knew money wouldn’t move the needle. He was retired, did very well, he’s not looking to make any more money.

The way that I approached it, I said, “Hey, Lee, I would love to get some of your time.” During the dinner, I found out what his favorite restaurant was. So “Happy to meet you at this restaurant, buy you dinner. In return, let me know what I can help you with, whether it’s things around the house – cleaning the garage, hanging a TV, odd jobs that just need two people to get done.” He was blown away, and we’re very good friends to this day. It’s important to add value. Tim, one of the things that you’re known for is building a business around your lifestyle. Man, that sounds like a T-shirt. Let’s dive into that.

Tim Bratz: Not always. Before, it was work, work, work. It kind of bought into that bag of goods that I think a lot of people do… Just like, “Let me work my tail off and tell myself I’m doing it for my family.” Does your family care if you make an extra 10 grand a year, even 100 grand a year? I guess maybe it depends… But once your basic needs are met – you’ve got a roof over your head, you’ve got food on the table, you’ve got clothes on your back, you live in a safe neighborhood where you don’t have to worry about getting broken into or robbed or whatever – once those basic needs are met… And in most communities, that’s $50,000 to $60,000 a year in household income. It doesn’t make a difference if you make 70 grand a year or $70 million a year to your happiness. There’s statistic after study after study after study, metrics on all this stuff, there’s no difference in level of happiness once your basic needs are met.

Now, it’s about fulfillment, now it’s about making impact – that’s the stuff that actually moves the needle, not making more money potentially. “Well, let me try it out for myself”, and I did. I just kept on trying to make more money, and it got to a point where… I had a daughter, she was two years old, and I came home from work one day from the office, and we had dinner as a family… And after, I quietly sneak into my office, I answered some text messages. My little girl, right after dinner, right before bedtime, I haven’t seen her all day and she comes in, she’s tugging at my shirt, “Daddy, daddy, will you will you come and play with me?” I was like, “Yeah, yeah, yeah, hang on one second.” I don’t even look at her, I’m texting, and I’m sending this text. “Daddy, Daddy, will you come and play with me?” I was like, “Yup, baby, hold on one second. I’ll tell you what – why don’t you just go and play and I’m going to be over there as soon as I’m done sending this message, and then we’ll play together.” “Okay, daddy.” She goes over to the play room, which I can see from my office; she’s over there playing by herself. I finished sending the message, and I look at my daughter playing by herself, because I just sent her over to play by herself… I looked down at the message and I realized it’s not urgent and it’s not important; it could have waited until tomorrow. Potentially, I could have just deleted it and not even responded at all and it would have handled itself. Yet, my daughter came over to me and she’s tugging on my arm wanting to spend some time with her daddy, and I’m trying to make an extra dollar. And I’m ignoring my daughter; whether she knows it or not, I’m planting a seed subliminally in her mind that this phone and this work is more important than she is. How many times do you plant that seed before it actually takes root, before it actually starts being cultivated over and over and over, and then it actually grows? Then all of a sudden, she associates daddy, not with love, comfort, safety, and somebody she can confide in, somebody she can laugh with, and have a good time with, but instead, of being ignored. She all of a sudden associates love with being ignored, and not being treated the way that she should be treated, as a little princess.

All of a sudden, she starts dating guys in high school who would treat her like [bleep [00:28:56] or who are [bleep [00:28:57] or tries finding fulfillment in different ways that nobody wants to talk about their daughter doing; through sex and drugs and other horrible stuff. This all happened to me, as I’m sitting there after dinner, looking at my daughter… I canceled everything the next day. Next day was a Friday, and I cancelled all my appointments. I realized I block out time for a podcast, I block out time for a phone call, I block out time for lunch meaning, I block out time to post on social media or whatever; why don’t we do that for our family? We time block for work but we don’t time block for our family.

So I essentially deleted everything that I had the next day, I canceled everything, and I time blocked the entire day. Not answering the phone, not taking a phone call, not doing any meetings… I took my daughter to the zoo. We went to the zoo, my wife, me, and we hung out at the zoo that day, we had a great time. I was like, “I’m not going to let this happen again.” I started time blocking in the evenings also. So “Hey, you want me to jump on a podcast, or do you want me to come out and speak at an event, or even attend a meeting or something in the evenings? I can’t. I have an appointment. It’s with my wife, it’s with my daughter, it’s with my son who then came along, it’s with my family.”

I started time blocking in the evenings, I started time blocking the weekends, and then eventually Fridays. We call it Friday family fun day; it was a fun thing to come up with. Before the kids got in school, Friday family fun day, Friday family fun day! It was fun. They get to decide whatever we wanted to do, go to the park, go to the zoo, go hike in the woods, go to Chipotle, just go play at the playground; whatever they want to do, it was up to them. You’re like, “Damn. Well, Tim, I’m building my business. I can’t not be available. I’ve got to take that phone call. It could be a client, it could be a private money lender, it could be this person, it could be that person.” I was very clear with everybody I did business with that I do not take phone calls after five o’clock. I put my phone away, that way I can recharge the batteries, personally, and spend time with my family.

If I miss out on a deal or if we don’t do a deal because of that, I totally understand, but I’m not willing to sell out my relationships to make an extra dollar. You know what happened by time blocking and creating constraints with my work schedule? Because now I’m only working 10 to five, Monday through Thursday – what is that? That’s 30 hours a week.

Ash Patel: Did you become more efficient?

Tim Bratz: I became more efficient. Now you’re not wasting your time on a bunch of crap that didn’t matter. Now you’re in the office and you’re like, “I’ve got to get things done.” You zoom through emails, you zoom through messages; you don’t drive a half hour to go grab coffee and then drive a half hour back, waste an hour in a meeting that could take a 15-minute phone call. I started doing things like that, that made me way more efficient, that actually I started growing the business more because I focused on those things that moved the needle. The other thing that happened is there were people who are now business partners in my organization, that before they were just clients, or like — my business attorney is who I’m thinking of right now.

He was my business attorney, he’s like, “Dude, I respect you more because you don’t value money over relationships. Because of that, I want to do more business with you.” He eventually came in-house and is now a partner of mine. We’ve bought hundreds of millions of dollars of real estate together because of that. So you think you’re going to lose out on business – I actually gained business from it; I actually grew my business because I created those constraints in my schedule. It’s a powerful, powerful notion is to time block for yourself personally, to work out, to meditate, to read a book for personal development, whatever that looks like, and then for your family, for your friends, time block some of those things; schedule a date with your wife, schedule a date with your daughter, schedule a date with your son, go and play putt-putt.

Here’s what’s important to understand – we all play the psychological game of ourselves of “I’m doing it for my family. Eventually, I’ll be able to retire. I’m going to do it for my retirement.” I get it, I actually forego a lot of present, where you give up present benefits…

Ash Patel: Living in the moment.

Tim Bratz: Yeah, for long-term benefits kind of a thing. Here’s what I found, though…

Ash Patel: Are you thinking like short-term pain, long-term gain?

Tim Bratz: Yeah, I’ve always believed in that. But the reality is, by creating those constraints, you’re going to be happier. Because you’re going to be happier, you’re going to show up better to work, you’re going to be more productive at work. People are going to hear on podcast and in phone calls, and in your business dealings; it just moves everything forward so much more. So time blocking – the greatest indicator of your priorities is how you spend your time. We tell ourselves, “I’m going to work, and I’m working all these hours because it’s for my family.” The reality is you’re prioritizing work, not your family. It’s how do you spend your time, and that’s the greatest indicator of your priorities.

Ash Patel: Again, just mind-blowing advice; a lot of good points in there. A lot of excuses that we all use, “Okay, listen. If I can get to X number of dollars, I can retire.” And you keep moving that needle; “Well, that might not be enough. “Okay, I’m going to get to this dollar amount.” In all honesty, we’ve established that once you have enough discretionary wealth to buy whatever you think that’ll make you happy, you don’t end up buying it. So really, why do you keep moving the needle? I’ve never seen anybody happier at a $2 million net worth versus a $500,000 net worth. Such great points… The efficiency – you think back to college or high school even, when kids had jobs, they get better grades, and it’s proven. They get better grades in school because they have a scarcity of time, they use it more efficiently.

Tim Bratz: To your point, I think that’s so powerful and something that needs to be addressed. Because I remember in high school, my mom told me, she’s like, “No, you need to play a sport or do something every single season.” I was like, “Why?” “Because if you don’t, Tim, you’re going to get in trouble, because you’re going to have too much time.” So I always played three sports. Hi, beautiful. This is my little girl.

Ash Patel: How are you?

Tim Bratz: She’s almost seven years old.

Ash Patel: Tell me your name.

Tim Bratz: What’s your name?

Penelope Bratz: Penelope.

Tim Bratz: Penelope.

Ash Patel: Penelope, my name is Ash. So good to meet you. We were just talking about you.

Tim Bratz: We were just talking about you. So one of the things that my mom told me, she’s like, “If you’re not busy, then all of a sudden you find trouble. You go and find things to make yourself busy. Typically, it’s not good, positive, productive, positive influences in your life.” That always resonated with me, because I watched the kids who weren’t busy, and they were doing drugs after school, or they were at the mall, stealing stuff, or they were just getting into trouble and not getting good grades. I had a finite amount of time to study because I had work, and then I had fun time, or whatever. I had to go and study and get it all knocked out, be very productive with all that stuff, because I was constrained on time. If you want to move the needle forward, don’t have too much time. Time-block for these specific things and really be all in during those time blocks.

Ash Patel: Tim, I want to touch on a couple of those things. I had a pivotal moment as well, where I think my daughter was one or two, and just learning how to walk… I’m sitting on the sofa, on a laptop, and she would come over and try to close the laptop. I didn’t think much of it other than, “Well, listen. I’ve got to get this work done, blah, blah, blah,” all the excuses. In reality, that was the same thing that you mentioned earlier, is that was competing with her time. I’m glad you had your daughter just come in here when she came home from school… I hope we don’t edit that out, and I’m asking that we don’t edit that out. Because I used to let people know, if I’m on a podcast, if I’m in a Zoom meeting, my door is closed, these studio lights are on, you can’t come in. Now the rule is, come in anytime. If you need something just come in; know that I’m on a podcast, but if you need me, come in. Same thing with your phone – guys, take baby steps. My phone would never leave my side before, and then it’s incredibly powerful to know that you can leave your phone on your desk, in your office or wherever, go to the kitchen, hang out with the kids… It’s just refreshing, man. You don’t have to be glued to these things.

Tim Bratz: It boils down to awareness. The reality is these phones are created to be addictive. They feed the same dopamine in your mind, the same thing that the cocaine does, the same thing that drugs do. It’s meant to do that and to be addictive; there are studies on it. If you feed a bird, they tap, tap, tap, tap, tap five times, and then you feed them a piece of seed, they tap, tap, tap five times, you feed them a piece of seed; tap, tap, tap five times, you feed them a piece of seed. They get to know that every five taps, they’re going to get a piece of seed. If you feed them randomly, and they tap, tap, seed, tap, tap, tap, tap, tap, tap, tap, tap, seed, tap, seed, tap, tap, tap, seed, and you feed them randomly instead, they will continue to tap, until they essentially fall over out of exhaustion. That is what happens with our cell phones. That’s exactly how social media is created.

You scroll, scroll, scroll, scroll, scroll, dopamine; scroll, scroll, scroll, scroll, scroll, scroll, scroll, scroll, scroll, dopamine, scroll, dopamine; and it feeds the exact same thing until eventually, two hours, three hours later, you’re like “What did I just do with my time? I wasted all of it.” When you realize, when you have awareness that you can actually put the phone away, not be addicted to it, and it doesn’t control you, and instead you control it, it’s a game changer for sure.

Ash Patel: Tim, we’re heading to the end of our allotted time. Normally, I asked what your best real estate investing advice ever is. Today, I’m going to ask you, what is your best advice ever?

Tim Bratz: Oh, man… I’d say, I think the big thing that I want to convey to my kids is take 100% responsibility. You are who you are where you are. There are some external forces that sets you up, but the reality is, once you’re an adult, you are where you are because of the decisions that you make, or don’t make. It’s the rooms that you put yourself in or don’t put yourself in. The books that you read or choose not to read. The shows that you watch or choose not to watch. All those things feed into who you become as an individual, and it’s your decisions. It’s all 100% up to you of are you putting yourself on a path of progress, or putting yourself on a path of more regression or stagnation? What does that look like? You are 100% responsible for you.

Yeah, the economy happens to everybody, social impact happens to everybody, all these different things happen all of us; we all have negative influences on our life. But it’s like what Jim Rohn said, he said, “All these winds blow on all of us.” Social winds, economic winds, political winds; all these winds blow on all of us. We’re all like little sailboats. The difference is not the wind that blows, but it’s the set of sail. If you set the sail, it’ll take you anywhere that you want to go, and it’s up to you. All these external things; not about what happens to you, it’s about how you respond to what happens to you. And if you take 100% ownership over your life and over your business and over your family, I think it’s going to set you on a path to really move things in the direction that you want to go, knowing that you have control over it and you can dictate what your life is going to be designed to be like.

Ash Patel: Tim, do you do any coaching now, or is that part of the plan in the future?

Tim Bratz: A little. I’m really active on social media. Connect with me on Facebook and Instagram, I’m real active on there. I do a little bit of how to scale from a single-family into apartments, I’ll do that maybe three times a year, two or three times a year. Then I have the mastermind group as well, where we get together a few times a year and talk about business and life and all that kind of stuff.

Ash Patel: What’s it called, the mastermind group?

Tim Bratz: Legacyfamilymastermind.com, that stuff is cool. It’s a lot of real estate people, but we have a lot of other general business folks too. It’s more about business building and stuff. We offer a lot of real estate type things, insights and concepts. I’m just a real estate guy, so most of my network is real estate, but it’s more business building, lifestyle building, and it’s a powerful group. We get a lot of good people in there and it really checks all the boxes on fulfillment for me. It’s not the biggest moneymaker for me; actually, probably last in line, but it’s the most fulfilling thing that I do. I love doing the coaching, I love helping people see themselves as more than maybe they can see themselves on their own, and connecting with the resources, help them fast-track that success.

Ash Patel: I think when this podcast airs, a lot of the Best Ever listeners are going to reach out through that website. Tim, are you ready for the Best Ever lightning round?

Tim Bratz: I love it. Yeah, let’s do it.

Ash Patel: Alright. Tim, what’s the Best Ever book you’ve recently read?

Tim Bratz: Who, Not How, it’s really good. It’s all about instead of you saying, “Hey, I need to take on something new and put it into practice. Oh, hey. I went to this conference and got a lot of amazing things and I’ve got to add all these things to my plate.” Instead of saying, “I have to add all these things on my plate,” you say, “Who do I need to hire to then implement these things in my business?” It’s a totally revolutionary thought process. It’s a really, really good book.

Ash Patel: Yeah, that was a huge eye-opener for me. Tim, what’s the Best Ever way you like to give back?

Tim Bratz: Doing the coaching, social media. I get people “Hey, can I pick your brain? Can I do a lot of this stuff?” I love social media, because if you use it to create content, not necessarily consume. Or if you are going to consume, make sure it’s a very disciplined consumption. But for me, I can reach out to a lot of people, I can make a big impact across many people; it’s a one-to-many platform that can be used as a phenomenal marketing tool. So I try to put out as much valuable content on social media as I can.

Ash Patel: Tim, how can the Best Ever listeners reach out to you?

Tim Bratz: Hit me up on Facebook, Instagram, I’m very active on those two platforms. I even have a TikTok, LinkedIn, and stuff now. But Facebook and Instagram I’m most active. Hit me up there, and if there’s anything that I can help you out with, a resource that I could connect you with, or a direction I can point you in, happy to do so. I appreciate you, Ash. Thanks so much for having me, brother.

Ash Patel: Tim, thank you. It’s been our pleasure to have you. We didn’t have an agenda but, man, what an incredible conversation. Thank you so much for giving up your time today and sharing that with us.

Tim Bratz: Thank you. Appreciate you, man.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode as much as I did, please leave us a five-star review, share the podcast with someone who you think can benefit from it, follow, subscribe, and have a Best Ever day.

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JF2762: An Airbnb Speakeasy? How To Make Short-Term Rentals Standout ft. Rich Somers

How do you create a unique short-term rental that will attract renters? Rich Somers, founder of FortuneCribs, reveals his strategy for creating “Instagrammable” STRs, selecting the right market, and pitching to investors.

Rich Somers | Real Estate Background

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TRANSCRIPT

Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Rich Somers. Rich is joining us from San Diego, California. He is the founder of FortuneCribs which helps clients buy short-term rentals that they design and manage. Rich is also the managing partner at Pac 3 Capital, a multifamily and short-term rental syndication company. Rich, thank you for joining us and how are you today?

Rich Somers: Ash, doing well. Thank you so much for having me on the show. I’m excited about this conversation and I’m doing very well. How are you doing today, my man?

Ash Patel: I’m doing great and I’m glad you’re here, Rich. Let’s get into it. But before we do, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Rich Somers: Yeah. I grew up middle class. My mom was an immigrant from Taiwan. My parents both know the value of working hard and saving your money. I was always taught from a young age to go to school, get good grades, go to college, and get a job. For the most part, that’s what I did. I have a background in sales. While I was going to college, I started selling cell phones and then cars, and that was the first time I realized that I could impact how much I made. I really wanted to sell commercial real estate when I got out of school.

In 2008 I graduated, I interviewed with a couple of commercial brokerages, CB Richard Ellis and Grubb & Ellis. They were both like, “Hey, we love your hustle but this is not a good time to get into the industry.” Everything was starting to come down, they pulled these internship positions that I had interviewed for… And I had found myself on a car lot selling cars, in 2008, not a lot of job opportunities out there, figuring out what the heck I’m going to do with my life, and I act into a career as an air traffic controller, working airplanes for a living. I ended up doing that for 11 years, but along the way, I remember real estate, I read the book Rich Dad Poor Dad, and just figured out a way to restructure my life and jump into the real estate investing realm.

I did, at the time, what a lot of people told me not to do; they said it was too risky. I cashed out my 401K, I pulled out a home equity line of credit against my primary residence here in San Diego, and I started buying some cash-producing real estate. The first deal was an 11-unit building in Cincinnati. Shortly after that, I partnered with a couple of my partners who I syndicate with today, and we joint-ventured on a 32-unit building in Indianapolis. We launched a podcast, we learned how to raise money, and last year, we took down a couple of larger syndicated deals. The Arbors 150-units in Greensboro, North Carolina with our investors, and Timber Creek Apartments, 145 units, also out in Greensboro with our investors.

Along the way, we started buying some short-term rentals. This year realized, man, it’s been hard to find multifamily to pencil when we underwrite. There’s a lot of competition out there, yields have come down, cap rates have compressed, and it’s very competitive out there. Along the way, realize, man, these short-term rentals are cash flowing so great, the tax benefits are awesome. So I thought, “Hey, man. This year 2022, let’s focus on building the short-term rental side of the portfolio.” My partners and I, we’re going to launch a fund to go buy short-term rentals with our investors.

Also, we recently launched a company which you alluded to, FortuneCribs, where we help investors buy short-term rentals in select markets around the country, that we help them close on; they own 100% of the property, but our team will do all the work. We’ll design, furnish, and manage all the day to day operations, making the experience truly hands-off to the investor. That’s really my story in a nutshell.

Ash Patel: Rich, that first property in Cincinnati – were you in San Diego at the time?

Rich Somers: I was in San Diego.

Ash Patel: How did you buy a property in Cincinnati as your first property?

Rich Somers: I was looking for cash flow, and I was looking for a property that was going to be a good first property to get into, something that didn’t have a ton of risk, good cash flow, buy at a high cap rate, and I could add a little bit of value. So I was looking in select markets, my research took me to Cincinnati, and that’s how I was able to get it done, man. There were a lot of mistakes made with that one, hired the wrong property manager, the rents were low, had a lot of deferred maintenance… As soon as we closed on it, a bunch of people moved out… But we got in there, we started turning the units. Fast-forward to today, I actually closed on a refi not too long ago and was able to pull all my initial capital out, plus a little bit on top, and we’ve been able to almost double the gross income on that property over the last two and a half years.

Ash Patel: Did you have partners in that first property?

Rich Somers: No, it was just me.

Ash Patel: What were some of the challenges in terms of remotely managing this property?

Rich Somers: I think the biggest challenge was finding the right property manager; like I alluded to, I hired the wrong one initially. She said all the right things. That’s another tip for your listeners, is that a lot of these property managers, the third-party ones, especially with these smaller buildings, are a little bit more mom-and-pop, but a lot of them tend to say the right things in these interviews. But I quickly realized after closing within six weeks that she was not the right fit. I pivoted to property manager number two, who I should have gone with from the jump. That one I met through the listing broker who had sold the deal to me. Since then, I’ve been using them and it’s been a night and day, a much better transition. They’ve done a great job and, yeah, it’s been fun.

Ash Patel: How are you exposed to the world of short-term rentals?

Rich Somers: Man, it’s funny you asked that. Actually, I backed into a short-term rental. A couple of years ago I had a pre-approval from a local credit union here in San Diego for a highly leveraged loan, and I thought, wow, why not take advantage of it and see how it does. I’ve always heard San Diego was a good short-term rental market, let’s try it. I bought a two-bedroom condo, brand new construction here in San Diego, furnished it, threw it up on Airbnb, and this thing has just been full ever since, it’s just been cash flowing like crazy.

Ash Patel: Have you taken any of your multifamily properties and converted a portion or all of them to short-term rentals?

Rich Somers: No, I have yet to do that. I’ve definitely made a couple of runs at some smaller multifamily properties in hopes to transition them to short-term rentals, but haven’t been able to find anything that really fit that mold. I have yet to do that.

Ash Patel: Is it all single families that you’re converting to STRs?

Rich Somers: Yeah, mostly single families. Some of the client properties that we’re bringing on are smaller multifamilies, duplexes, and up to four units. My partner, Mike, actually has a fourplex in Cleveland. That was all long-term when he bought them; operated it that way for a couple of years, and recently converted them all to short-term. The cash flow is just so much better, from what he’s mentioned, at least.

Ash Patel: Rich, what do you tell somebody who wants to dip their toes into short-term rentals? What advice would you give them?

Rich Somers: Well, I’d say this… If you’re an investor out there and you can only afford to do one deal in the next couple of years, and maybe it’s your first deal, whatever it is, I always suggest to investors all the time, you probably want to consider going the short-term rental route. People all the time are like “Man, I just closed on my long-term. I’m making 150 bucks a door.” I’m like “Dude, that doesn’t even get me out of bed.” If you’re looking for cash flow and passive income, and you only have the ability to do one deal every couple of years, I would highly suggest going the short-term rental route. Do your research, reach out to someone that’s already done it before, make sure you go into the right market, and you understand the fundamentals but you also understand the projected revenue, the seasonality, and the occupancy in any given market that you go into.

Ash Patel: Rich, the fund that you’re starting, what are the anticipated returns?

Rich Somers: The fund that we are starting, we are looking at cash on cash returns in the 20% range for the investors. Overall returns are a little bit more challenging to measure because this is not a value-add multifamily where we’re forcing our appreciation. We never want to bank on long-term appreciation, but cash-on-cash returns in the low 20% range.

Ash Patel: Is that available immediately or is there a hold period or waiting period?

Rich Somers: It is not available at this very moment. We are putting together the fund now. We’re probably looking at sometime around May of 2022 before we launched this fund.

Ash Patel: Let me rephrase the question. Once somebody invests their capital into this fund, do they immediately start getting returns or is there a lockout period, a hold period?

Rich Somers: Yeah. It won’t be immediately but it’d be pretty quickly. Because it’s not like multifamily where we’re going to start a fund and then we got to go find these deals where it could take potentially a long time to find the right deal. With the short-term rentals, it’s a lot easier to find deals that actually pencil. The hold period or the wait period might only be six weeks before you actually start making some money versus multifamily where it might be a little bit longer.

Ash Patel: Got it. You mentioned that you help clients design and set up their short-term rentals. What is that?

Rich Somers: We have an awesome design team with our company FortuneCribs. They will actually fly out to whatever market that we purchased the short-term rental for the client. They’ll fly out, design, furnish, come up with a house manual, set up the cleaning, the maintenance, and all that sort of thing. The furnishing and the design for any short-term rental is one of the most crucial pieces to this investment vehicle because you want to bring something that’s unique to the marketplace.

A lot of guests that travel and stay in short-term rentals are millennial demographic or younger and everyone is looking for that property with that Instagrammable feature. We try to include an Instagrammable feature on the property whether it’s inside or out. We like to use unique styling and concepts that do well in that particular market. We’ll do market research and see what the top-performing properties in that market, what they look like from a furnishing standpoint, and we’ll try to match that so we’re not guessing.

Break: [00:12:43][00:14:40]

Ash Patel: What are examples of Instagrammable experiences?

Rich Somers: I’ll give you an example. I just closed, about a month ago, it’s a luxury home in Scottsdale. It’s a $2.5 million project, going to put about $500,000 into a full renovation. Right now, it’s like six-bedroom, seven-bath, we’re going to convert it into eight-bedroom, eight-bath. It’s a 7600 square foot property. Our Instagrammable feature is that we’re going to include a speakeasy on the property. We’re going to have this library-looking wall with like a secret door that pivots into the speakeasy. We’re going to have a cool bar, a tiki-style looking bar in there, like a lounge area. That’s going to be our Instagrammable feature for this particular property.

To give you an idea of what these things make, this particular property in Scottsdale, the comps out there in the neighborhood are bringing in anywhere from $500,000 to $800,000 a year in gross revenue. In this short-term rental asset class, about 50% of your gross revenue will drop to your bottom line and be your net cash flow after all expenses and after debt service.

Ash Patel: That is insane and I want to stay there. I want a speakeasy in my short-term rental. That is awesome.

Rich Somers: You’re welcome to come out anytime, man. You’re more than welcome.

Ash Patel: Do you still look for multifamily deals? Is it on your radar?

Rich Somers: Yeah, we’re still operating the ones that we have but we focused our attention, at least for this year, away from searching for multifamily. We’re just pivoting over to short-term rentals. We might get back in multifamily maybe next year, maybe the year after, I don’t know. But for this year, where it’s solely focusing on short-term rentals.

Ash Patel: Let’s play devil’s advocate for a minute. A lot of cities are cracking down on short-term rentals, hotels have incredible lobbying power, where do you see the future of short-term rentals going? What are some of the headwinds you’re going to encounter?

Rich Somers: That is the biggest risk to this asset class, in investment vehicle is the regulatory environment changing. As you know, there are a lot of markets around the country that have already cracked down on short-term rentals. There are ways to mitigate that. One of the things we do is we like to go into markets that are a little bit more short-term rental friendly. These tend to be markets that are a little bit more landlord-friendly conservative states. There are some states out there that took the opposite approach, Arizona is one of them, where the governor actually signed something into a contract that says it is highly discouraged and illegal for cities and municipalities within the state of Arizona to highly regulate short-term rentals.

Their stance is like “Hey, we want to encourage tourism. It helps stimulate our local economy, our local businesses, etc.” You want to start to focus on markets like that or go into vacation towns that have had vacation rentals for decades and decades before Airbnb and Vrbo was ever a thing. Those are other areas that are safe bets. But the ways to mitigate the risk if the regulations were to change, one, you can always fall back to midterm stays. Short-term rentals are defined in most cities around the country as anything less than 30 days. If the regulations do change, you can always fall back to 30-day or greater stays in furnish, which is a growing demand as this whole work from home notion becomes more and more prevalent.

I’ve heard a lot of different numbers out there but we had Neal Bawa on our show not too long ago. He threw out the number 22 million Americans roughly. 22 million Americans are adopting this new way of life to where they are no longer going back to the office, they prefer to work remotely and do the whole digital nomad thing. They’re bouncing around and living in different cities around the world, and they’re not moving their furniture with them. I think there’s a growing demand for that, should the regulations change? Brian Chesky, the CEO of Airbnb, recently in an interview said, “People are no longer staying in short-term rentals, they’re living in short-term rentals.” I feel very bullish on this asset class, I feel like it’s still the first setting of short-term rentals.

Ash Patel: I would also imagine in downtown Phoenix, city centers where you can find cheaper housing, there’s a lot of short-term rentals and they would be the first to regulate. $3 million homes in Scottsdale are probably not going to get regulated.

Rich Somers: Yeah, because you’re not really taking a lot of housing off of the market for a potential renter in that price point. Is that why you’re alluding to that?

Ash Patel: Yeah. How many people are going to crowd million-dollar-plus homes and how many millionaires are going to complain, “Hey, we can’t find a deal because all these short-term rental guys are driving up prices.”

Rich Somers: Right. That’s a good point and that’s another reason why this housing market has been on fire over the last couple of years, that a lot of people don’t even mention, it’s the short-term rental industry.

Ash Patel: Rich is that a negated community, the $3 million property?

Rich Somers: It is not. It’s a community without an HOA so we typically want to stay away from properties that have HOAs.

Ash Patel: Yeah, that’s a challenge. You are going to draw a lot of attention there. Awesome. What’s the biggest lesson you’ve learned or the hardest lesson you’ve learned with short-term rentals?

Rich Somers: I think it was early on when I got into my first few short-term rentals. I didn’t have the same tools my disposable that we use today such as AirDNA. Today we use AirDNA, we have a national subscription so we can pull up any zip code in the world that has short-term rentals and we can see exactly what those properties are making. We can see the seasonality, we can see the occupancy, and we can see a lot of different stuff. But when I first got into it, I was really just guessing and I was taking a risk, I was speculating a little bit. But sometimes without risk, there’s no growth. I think that was the biggest challenge for me early on is not having all the available information to my disposal. Now we do.

Ash Patel: Rich, getting investors on multifamily versus short-term rentals. Can you dive into that a little bit?

Rich Somers: Yeah. I think there are a lot of similarities and then there are some differences. Some of the similarities are networking to meet investors, that’s all really going to be the same. An investor that has the capacity to invest as a limited partner in a syndication typically has the capacity and wherewithal to be able to buy a short-term rental under FortuneCribs, and get a loan and that sort of thing. Some of the differences are, as a limited partner in a syndication, you’re investing in an LLC, typically, that owns a property or maybe owns a few different properties. Now, with this model under FortuneCribs, the investors actually own 100% of the deal, they get 100% of the tax benefits, they get 100% of the loan pay down, they get 100% of the long-term appreciation, and they get 100% of the cash flow after all the expense. That’s really the main difference.

Ash Patel: They get 100% of the cash flow after expenses. How do you guys make money?

Rich Somers: We take a split on the gross monthly revenue. Typically, it’s about 25% of all gross monthly revenue that comes in. The design furnish and all that sort of stuff, we don’t make any money on that. It’s really just on the gross revenue and on the operational side is where we make our money. Essentially, we’re kind of partners with the investor, although they own 100% of the deal so we don’t get the benefit in the long-term upside, just on the monthly cash flow upside.

Ash Patel: I get it, man. I could see how that can be very attractive to investors. What is your best real estate investing advice ever?

Rich Somers: Don’t run out of money with any project that you get into, especially these value-add deals where you’re going to have a dip in occupancy, you never want to run out of money. In our first 32-unit deal, we made a lot of mistakes, we ran very, very low on money. The pandemic drops shortly after that, we had a lot of vacant units, and we had some serious heart-to-heart talks. But just know, if you do run out of money, there are always outs and always solutions that you can arrive at. In that deal, we actually just went full cycle on, we sold it about a month ago and we 3X the value of the property in just 25 months.

Ash Patel: What was your solution when you guys ran out of money?

Rich Somers: That’s a great question. We were able to secure a non-secured private second mortgage on the property which gave us the funds to complete our business plan really.

Ash Patel: This was during the pandemic?

Rich Somers: Right when the pandemic dropped.

Ash Patel: Good for you guys for being resourceful. That’s incredible.

Rich Somers: Absolutely. There’s always a solution for everything. I think success is never a straight line.

Ash Patel: Yeah. Rich, are you ready for the Best Ever lightning round?

Rich Somers: Let’s do it.

Ash Patel: Let’s do it. Rich, what’s the Best Ever book you recently read?

Rich Somers: The E-Myth Revisited by Michael Gerber. I just read it recently. Wow, that book has changed a lot of stuff in my life. For the listeners out there, it talks about working on your business and not being a worker bee in your business, knowing the value of your time.

Ash Patel: Rich, what’s the Best Ever way you’d like to give back?

Rich Somers: One of the things I’d like to do here in San Diego is volunteer with a program called Big Brothers Big Sisters, they have them in big cities across the country. I was matched, a few years ago, with a nine-year-old boy named Isaac. He comes from a little bit rougher background, his father’s not in the picture, and we get to hang out one or two times a month and go do fun stuff. He’s almost 12 now, a good kid.

Ash Patel: Rich, how can the Best Ever listeners reach out to you?

Rich Somers: You can find me on social, Instagram handle is @rich_somers, I’m pretty active on social media. Fun check out our podcast, it’s The Multifamily Takeoff. If you want to learn more about FortuneCribs and buy a short-term rental, it’s fortunecribs.com. If you want to check out our syndication company and our fund that we’ll be launching in a couple of months, you can check us out on pac3capital.com.

Ash Patel: Rich, I got to thank you for sharing your story with us today. Mark Cuban recently said, “You can try a lot of different things, you can move on if you don’t enjoy something because you only have to be right one time.” I’m glad you found your one right time, coming from the immigrant upbringing, selling cars, air traffic controller, and now you’re killing it in real estate, man. Thank you for sharing your story with us.

Rich Somers: Ash thank you so much for the kind words, man. I enjoyed this conversation. It’s been a pleasure.

Ash Patel: Yeah. Best Ever listeners, thank you so much for joining us as well. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2753: How Much Do You Need To Retire? Should You Stop Working? | Actively Passive Investing Show with Travis Watts

In this encore episode, Travis Watts and Theo Hicks provide their insight on reaching early retirement, navigating financial freedom, and setting goals following retirement. 

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Travis Watts: Hello Best Ever listeners and welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. Today we have something a little bit unique, it’s called an Encore Episode. The topic is how much do you need to retire, and should you stop working when you retire?

It’s come to my attention that a lot of our viewers and subscribers here are relatively new to the channel, so there were a lot of episodes we recorded in years past that haven’t been heard. So instead of trying to recreate or repeat myself, we decided to do something a little bit different and we did a bit of a mash-up of a few different episodes that were recorded about two years ago, and I want to extract the answers to these questions from those episodes. I think they were well done. It’s back when I had my co-host, Theo Hicks, with me.

The topic at hand has just been something that is very relevant today. I mean, in the last probably month or two just working in investor relations, I’ve had a lot of calls with baby boomers retiring or looking to retire or recently retired. A lot of people are asking questions like these. I’m never giving financial advice, I’m not a financial planner, so please seek licensed advice, but there are some good key concepts to consider and think about, so we’ve addressed them here in this encore episode.

I’d love to hear from you guys too if this concept is something you like, where we can extract some of the best bits and pieces of previous episodes to address maybe a new question or a topic at hand. So like, subscribe, comment, reach out anytime if I can be a resource. Enjoy today’s episode.

Theo Hicks: How to know when to retire? How much is enough? Now, before I let Travis describe it, I don’t see many people asking this question, I don’t see many blog posts covering this topic. I think Travis did a really good job explaining what we need to do in order to, number one, just be aware of this kind of stuff in general, and then number two, what we should do to figure out when, if ever, we have reached the point of maybe we don’t need to work as much, or continue that grind. I’ll let Travis take it away and then we’re going to have our back and forth.

Travis Watts: In this blog, I use the story of a CEO of a tech startup company. It starts with the tail end of this guy’s career, saying he just took his company public, he’s got stocks that are going to vest over the next five years. Once they do, it will be estimated this guy will have about a $5 million payout. That kind of sounds like the ultimate American dream. But as we dig a little bit deeper, we get a little more into this story and we figure out that the way this journey started was this guy worked at a Fortune 500 company for the first decade of his working career, had a high salary, had some stock options there as well, so in those first 10 years, walked away with approximately $2 million in total investments, a paid-off home, things like this, and then launched his own company afterwards, went into business for himself. He had actually previously sold a company, that was his second venture and out of the second decade of his life. Then here, we’re taking a look at the third. So the question really is, as much as that looks like an amazing success story to a lot of folks potentially, how much is enough? Was it possibly enough when he had a couple of million dollars and a paid-off home? Could he have potentially retired in his 40s, maybe in his 50s? Now he’s 60, looking at a couple of kids in their 30s that he wishes he could have spent a lot more time with in his life. A lot of people get caught up in these success cycles. It’s just one business to the next, to the next, to the next; I made one million, now I need to make two. I made two, now I need four. I made four, I need eight. But where do you stop?

Theo Hicks: I was talking to someone — I can’t remember what his name was, maybe two weeks ago on the podcast. He really had an exit plan right when he started. He knew exactly how much money he wanted to get in real estate before he fully stepped away. Let’s say I know what enough is – then what? What do I do after that?

Travis Watts: Identify first what is important to you, what are the most meaningful things in your life, what does that look like, what brings you the most fulfillment You got to write this stuff down; this can’t be just done in your head one time, this is just setting goals for a lifetime. Then you have to reverse engineer now. How much is that going to take?

I think what a lot of people find, myself included, is when you really nail this stuff down, you might find it’s a lot less expensive than you might think. The problem is, in general, we don’t stop to think about these things. We just think, “I’m working now, I’m going to work till my 60s, whatever.” We don’t give it much thought and we just go on the treadmill. Then one day you’re waking up in your 60s thinking maybe either, “I have a few regrets, maybe I could have actually pulled the plug back in my 40s or my 50s, spent more time with my kids, maybe travel a little more, had less stress, if nothing else.” And the purpose is not to say quit working or retire in the traditional fashion, especially if we’re talking about someone in their 40s; I think it’s about finding what you’re truly passionate about.

Theo Hicks: I know some people’s goals in real estate are to actively invest until they’ve built up a large enough nest egg that they can passively invest with someone else, and then live off of that interest.

Travis Watts: Yeah, that’s exactly it. That’s my big message to the world, too. Obviously, I’m a huge advocate for passive income and passive investing, that’s my story. The point is you and I, Theo, are very fortunate to have jobs and careers that we genuinely enjoy. We like to be creative and expressive, we both write blogs, we both do the podcasting stuff in various outlets, and that’s amazing. But you also have to remember, most people aren’t doing that; most people are caught in the golden handcuffs. Either a nine to five situation, or they’ve climbed this corporate ladder so high that they make a really nice salary, so they’re kind of trapped. So until you start putting some of your income towards investments, whether it is passive investments or not, it’s hard to branch away and have this balance that we’re talking about no matter what your approach is. But I think we all need to get there, we all get there at one point or another. What’s the average American retirement like? 67 is the retirement age; I don’t know, something like this. You’ve got social security, you’ve got possibly a pension or your 401K. This is basically passive income at that point. You’re not having to exchange your hours and your labor in exchange for money. So we’re going to get there somehow, at some point, hopefully. It’s just a matter of if you focus on the stuff earlier in life, you can get there potentially a whole lot faster than perhaps your 60s or 70s.

I was introduced to this video and came across it on YouTube. Unfortunately, this is on the fly right now, I can’t remember what the guy’s name is, but if you type in, I think, “retire at 36” or something like that, “retired at 36”, there’s this guy who had a passion for boats and sailing. That was really his life purpose, it was his hobby. He was a consultant, if I remember right, an IT-type consultant, made really good money, worked full-time, grinded it out up until 36, ended up just buying the sailboat and just living out on the boat and in the Caribbean. He “retired” at 36. He’s the one that introduced me to this concept of “enough.” He said, “That’s the hardest thing to do, is to pinpoint that number, this number would be enough for me,” and then take action when you hit it. Because that’s the scariest part, is taking the leap and saying, “God, I hope this is enough. I hope I’m right.” But it was for him, and this guy is, who knows, in his 50s now or something. But it’s an amazing story. His alternative was just more and more and more and more money, but then that would have kept him longer and longer and longer away from sailing. And what if he had passed away or came with a debilitating disease or something? I mean, you never know, life is short. Something to think about.

Theo Hicks: When you’re sitting there saying, “What’s enough? Well, “I want to have a BMW, and I want to have a million-dollar mansion, and I want this,” which is obviously fine. But that “enough” number is going to be way higher than if you’re just going to graduate from college and you’re in an apartment. Like, “I really just want a three-bedroom house and it’d be nice to have a car and to be able to go out to a restaurant once a week.”

Travis Watts: Yeah, that’s a great point. As far as things like talking about a BMW or a 10-bedroom house or this, that, and the other, you’ve really got to ask yourself why are you doing that? Is it because you genuinely wholeheartedly love BMWs, and you’re passionate, and you’re a car fanatic, that’s your hobby and interest? Or is it because you’re keeping up with the Joneses? Or it’s because you think, “Well, society expects this of me. I’m a dentist, or a doctor, or a realtor. I’ve got to drive this really fancy car. What will people think of me if I don’t?”

You’ve got to really understand, this takes a lot of soul searching and looking deep, but at the end of the day, it’s probably the ladder in most cases for most people. And nothing wrong with those vehicles; I’ve owned nice vehicles like we talked about before. I chose to buy them used, pre-owned, and I have owned luxury vehicles. So there are ways to go about it, but is it you’re doing it for yourself and not trying to impress other people?

Break: [00:12:22][00:14:18]

Travis Watts: Okay, so you’ve gotten to the point of let’s say early retirement or retirement in general – does that have to mean that you don’t work anymore? What happens when you retire early and you’re in your 30s or 40s? Does that mean that it’s time to go move into that retirement community and start playing pickleball?

Theo Hicks: I definitely fell into this early on, for sure. I think I’m slowly getting out of it, and your blog posts definitely solidified some of those things in my mind. So with that being said, let’s go through it.

Travis Watts: The idea here is that we all have a lot of preconceived ideas about what retirement is, what that means. I think that we all want to would be contributing in some form or fashion. Successful individuals that are far beyond what they need financially to retire – why is it that they keep “working?” Well, it’s because they have a mission, they have a purpose. That, to me, is really what financial independence is all about. It’s having the option to work, but not the obligation to work.

Theo Hicks: Well, then maybe rather than just quitting and going into real estate full-time, try to figure out a way to transition into a job now that will help you reach your long-term goals.

Travis Watts: Yeah, and there are usually two types of people. There are those that love their career and they’re passionate about it, and then there are those that really despise what they do. I was in the latter part of that initially, and then the passionate side later. But the point would be this – if nothing else, for either side of that, just get started. Again, to the whole theme of this blog about not having to quit work – it doesn’t have to be so extreme, like “I work a W2 job today, and tomorrow I quit and go full-time real estate.” Just start, just have a rental property, REITs. In the stock market, you can get in with $10.

Most people think of investing in terms of capital gains, in terms of equity, in terms of fix and flip a house, in terms of buy a stock at 10 and hope it goes to 15 and sell. That’s how most people associate investing. But I flipped that into passive income, cash flow. Specifically, living on cash flow and creating multiple income streams early in life, to where you’re actually putting yourself in the situation that statistically 60 and 70-year-olds are in, in retirement. I’m passionate about helping people reach those levels, so that they can do essentially their highest and best work.

Theo Hicks: The other thing you said too that I wanted to also mention about what retirement actually means – is it just doing nothing? It’s continuing to do something that you want to do. Again, you also gave some examples of things that you’re doing now that anyone can really do now to start to figure out the type of life that they should be living once they retire. Do you want to talk about that too?

Travis Watts: Sure. A lot of passive investors, I’ve come to learn, are just simply highly paid professionals doing whatever it is they do, and they’re looking for a place to park capital that’s not going to require their time. Think about being a dentist or a doctor, and then taking two days off a week, Saturday and Sunday, and going and trying to fix and flip houses. You can’t even day trade stocks, it’s the weekend. So a lot of this active stuff just doesn’t make sense for certain types of people.

When a doctor, an attorney, or an engineer reaches financial independence, what they have is an option. An option to – and here’s the three things I point out. An early retired doctor might set up a smaller practice that operates without the pressure of optimizing profits, and without dealing with the hassle of insurance companies, one of the biggest headaches in the industry. An early retired attorney might refuse all cases that are based on questionable ethics. You have an option to say “I’m not going to do this work, I’m not going to take on stuff like that.” Or you can be a lot more picky and choosy with what you do. And the engineer might continue working. For example, they might contract instead of being a W2. They might go part-time instead of full-time, or they might be compelled to create new software. So those are just some things to think about of what we’re talking about. None of these folks in these examples stopped working, but they were able to move on to something that was more fulfilling and brought more into their life.

Theo Hicks: Yeah. Another example, more real estate related too, if you are someone who wants to transition from active, retire from that and become a passive investor… I’ve talked to a few people recently who were full-time active real estate investors and then they hired someone to oversee the company. I’m sure they took some time off, but then once they were ready to get started again, they started some sort of consulting program or mastermind group where they teach other people to replicate what they did. That’s just another example.

The other thing that I really liked about this blog post that you mentioned – the question you want to ask yourself to figure out what you should do once you retire is what you value. You gave the example – and we talked about this in a past episode – if you value stuff too much then you’re going to have a hard time reaching that number. Because you’re going to have this luxurious lifestyle that’s going to cost you a lot of money to maintain, and you’re going to need a higher passive income to cover that. You gave examples in here about things that were high costs, but resulted in low happiness, and then things that were lower in cost that resulted in higher happiness.

You talked about how you could upgrade to a Ferrari or Lamborghini, but would that ultimately make you happier? Maybe once you buy it and then when you’re driving it once a month, or once a week, whatever, but it would bring you further away from your financial goals, your family goals, and your travel goals, because of that reason, “Now I need to make that much more money, invest in that many more deals to cover that Ferrari cost.” So you gave other examples of things that resulted in happiness. I’ll let you talk about what those are.

Travis Watts: When I was a kid, Theo, I remember when I first was learning about money and how much things cost, and I would see a Lamborghini or Ferrari and then ask or research how much those are. I’d think, “Oh, my gosh. That car is $200,000. That’s not even in my world, that’s not in my reality. That’s insane.” As you progress through life and one day, you’ve got a couple of 100 grand and now you’re thinking “I could really buy that car cash.” Then you think, “How dumb would that be? How much happiness would that give me, versus what if I invested it and I got 1,200 bucks a month in cash flow? What could I do with 1,200 bucks for the rest of my life?” For most people, that’s social security benefit right there, 1200 a month; that’s crazy. And maybe less.

A couple of things that have added some tremendous value at a low cost were my wife and I went and backpacked Europe for our honeymoon, and I bought the custom-ordered shoes, like a forever sole, breathable, washable, they collapse down, you can roll them up, you can put them in your pocket… They’re amazing. They were like 100 bucks and I can’t even begin to tell you how much value that added, not only to that trip, but every vacation we take, I’m wearing them. I love them. And they don’t wear down; they’re just phenomenal.

The other thing is my wife’s got scoliosis, so her spine’s like an S-shape. I bought her an inversion table. We’re always trying to experiment with things that make her life easier, and eases the neck tension and the back pain. It’s just a little table, you strap your feet in, turn it upside down, and it decompresses your spine. I don’t know how much they retail for, probably a couple of hundred. And I can’t tell you, man, every time she gets on it, she’s so happy; it’s so fulfilling and physically rewarding.

This whole thing is about finding things that bring value and happiness into your life. What we really value is travel, vacations, spending time with family, and these little things. A nice pair of shoes that are comfortable. Just to wrap it up, that’s the whole point, I think.

Theo Hicks: My dad, for example, he retired as a bus driver. He loves talking to people, and so every morning… Not now, but before COVID. Every morning at [6:00] AM, he’d go to the little bus shop, where the buses are, and other retired bus drivers are there and they’d just talk about whatever for two hours. He really enjoyed doing that. Again, it could be something as simple as “I like talking to people, so I’m going to do a part-time job where I’m doing something as simple as driving a bus, or being a cashier, where I get to hang out with people all the time.”

Travis Watts: You just made me think of it. I know we’re both Tim Ferris fans, so 0 I forget which book, 4-Hour Workweek, or one of them… He’s sharing the story of the New Yorker business guy that goes down to Mexico on a fishing trip. This guy takes him out on the boat for a few hours comes back and he says, “Alright, thanks. That was great. It was amazing. Do you have more customers today?” He said, “No, I only do one trip a day and get some fish for my family and do this.” He says “Well, why don’t you do more? Why don’t you do like five trips a day? You’ve got plenty of time to do it.”

He’s talking about, “Well, I like to come home, take a nap, visit with my wife, play with my kids. In the evenings have some tequila or whatever, and play music with my friends. That’s my life.” And the New Yorker is like  “Well, can you imagine though, what if you did more of these trips, made more money, you could buy two boats, then you could hire employees to run those boats, and then you could have a whole fleet of ships. When that gets successful, you bounce out of the business, then you could headquarter in the States, then you could run this big operation, and then you could franchise…”

The guy keeps asking “And then what? And then what? And then what would I do? And then what would be after that?” He goes, “And then you can retire, come down here, have a quality of life, spend time with your family and your friends.” The guy already had all that, he already had the quality of life. That’s one more example of having enough.

Theo Hicks: That’s a perfect story to end with. Is there anything else you want to mention before we sign off?

Travis Watts: I guess for anyone listening, just think about this question – are our goals and your aspirations more set around the quality of life, or having quantity? Meaning money in numbers. I was guilty of this early on when I would set goals. It was always money goals. One of my first goals is, “I want to be a millionaire. I want to have 10,000 a month passive income.” But when you dig a lot deeper, it’s what do you really want out of life? How do you want to live your life? That’s really what the question is.

Theo Hicks: We’ll end the episode on that note as well. Thanks, Travis, again for joining me for The Actively Passive Investing Show. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2746: 4 Rules For Professional Investors | Actively Passive Investing Show with Travis Watts

Want to enhance your professionalism and authority as an investor? In this episode, Travis Watts shares four ways you can elevate your knowledge, work ethic, and mindset to gain credibility as an investor.

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Travis Watts: Welcome back Best Ever listeners to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. I have another exciting episode for you all today, I titled it Four Rules for Professional Investors. Just because someone is an investor, it doesn’t make them a professional investor. I do think that there are some rules that could “be followed” to help you out, and that’s what we’re talking about in today’s episode. As always, my intent here is to bring you all as much value as I can, in as short of a timeframe as possible.

I’m just going to go ahead and dive right into number one, which is understanding active versus passive income. I’m going to give it to you in my own definition. I know there’s the technical definitions between the two, but just hear me out on this. The simplest way I can put it is active income is when you’re materially participating in the business of making the money. I’ll give you a couple of examples. Flipping a house would involve my time, my effort, my energy. Even if I’m not, say, the contractor that swinging the hammer or putting things together, I am still active in the business of finding that property, running the numbers, trying to work with realtors to list it when I’m done. I am actively participating. In my definition, that is active income. If I’m day trading stocks, for example, and I’m sitting in front of a computer a quarter of the day, half the day, all day, and I’m sitting here and I’m trying to look at trends and markets and graphs and charts and moving averages, and I’m trading in and out of stocks, I am making active income.

Now on the flip side, passive income is rolling in whether or not you actually work or put in any time. It’s something where you make a decision once, you put money somewhere once, and then for the rest of the time, money is coming back to you, whether or not you work. Again, you are not materially participating in the business itself. I’ll give you two quick examples, which would be as I do – I invest as a limited partner in multifamily apartment syndications.

The general partners are the active folks, they are finding deals, underwriting them, managing the business, doing investor relations, sending out distributions… I’m just the guy saying, “Here’s $50,000. I want to invest in that deal.” I sign some paperwork upfront; that’s about as active as that gets, and then the rest of the time is hopefully receiving cash flow distributions, passive income into my bank account.

Another example of being a hands-off or passive investor would be if I bought shares of a dividend-paying stock. We’ll use Coca-Cola as an example, because they have paid a dividend for a very long time, I think it’s a quarterly dividend. Again, I would do a little bit of homework, do a little bit of research, figure out maybe I want to invest in that stock. I make a one-time transaction and buy some shares; the rest of the time, I’m not working for Coca-Cola, I’m not the CEO of Coke, I’m not on their team, I don’t have to actively participate in the business of Coca-Cola in order to receive dividends by holding that stock. So that is passive income.

The big point and the big message I’m trying to make with this is it can be literally life-changing to understand the importance of these two. I’ll just tell you, from speaking with thousands and thousands of accredited investors over the years, the wealthy invest for passive income. I want to make one thing clear with that statement; notice I said, “INVEST for passive income.” Obviously, a lot of wealthy individuals are business owners, entrepreneurs, CEOs, you name it, they are active in earning income in different ways, but they invest passively, for the most part. Obviously, the exceptions to every rule – you have wealthy general partners, we’ll say, who are both active and passive in their investments.

But here’s the deal – you and I only have so much time in a day, so much time in a week, so much time in a year to be active on whatever it is we choose to be active on. Even if we’re the best CEO in the world, you may not want to put more than 80 hours a week in, because you’re going to burn yourself out. So how do you scale your income beyond your salary, let’s say, as being a CEO? You invest passively for passive income, and that way, money starts coming back to you, without you having to be active additionally outside of, we’ll call it, “work.” All that sums up to number one, understanding active versus passive income. Again, not financial advice, not technical definitions, just my take on it, sharing it with you to simplify the message.

Number two, the second rule is get financial education. I think we’re all very aware that our school system doesn’t do a great job at teaching us financial education. They might teach you how to check out a bank balance or balance a checkbook or something kind of crazy like that. I remember, in fact, in high school we did one exercise and one exercise only that even somewhat related to investing, and it was a terrible exercise. But all it was this, they gave us what’s called a paper trading account, which is a fake brokerage account. You just enter how much money you want in there, so we all started with whatever $10,000 or something. We each created a little sign-in. And then it tracked the real stock market day-to-day, but the money we were using was fake. The objective was, we started on a Monday morning, and every day we would do about 30 minutes on this exercise. The goal was by Friday, in this particular class, whoever generated the most money in their fake brokerage account, won. That’s a terrible strategy, because this is how a lot of people try to chase the shiny objects, they try to chase the highest yield, they try to get into the most speculative investments, with the highest risk profiles, without understanding that, which – we’re going to talk about risk here in a minute. Ultimately, it’s a buy low, sell high, and a get-rich-quick kind of mentality. It was the worst exercise ever. I didn’t realize that at the time but in hindsight, looking back, that was just terrible to try to teach people that that’s investing.

So when I say get financial education, most of us weren’t educated even in our own household about true professional investing. Some of us may have been grateful enough to get that kind of message, and we can’t rely on the school system either. So what I mean is listening to podcasts like this one, reading books, attending seminars, finding mentors… You have to be a go-getter, unfortunately. When I say unfortunately, most people aren’t go-getters, let’s be real. So it kind of requires that to be a professional investor. You cannot achieve professional investor status by just turning over your money to some money manager and saying, “Put me in the stock market, or whatever. I don’t care what it’s in, just do what you think is best.” That’s not a professional take on it; you need to do a little more homework, a little more due diligence, and take a little more ownership over your finances if you’re seeking to be a professional investor. Granted, not everybody is, not everybody would care to be, but if you are, and you’re listening to this episode, I’m just sharing what it takes to be a true professional investor.

I named several ways to get financial education; some are paid, some are unpaid, we’re all different. I know people that have paid hundreds of thousands of dollars to attend different conferences and mastermind groups; that’s effective for some of them. And I know people that have really, quite frankly, not spent much money at all – I would gather probably under $1,000 – to get financially educated, because they’re go-getters. They’ll go read 50 books from the library, they’ll go listen to podcasts that are free, and they’ll skim through YouTube to get content for free. So there are a lot of different ways to do it; you have to know a little bit about yourself, and everybody’s different as to which is most effective.

Circling quickly back to that story about me in high school and that exercise about day trading stocks basically is what we were doing… There was nothing taught about cash flow or passive income, which is the way that the true wealthy invest. To that point, that brings us to rule number three, which is invest for cash flow, or passive income, not for capital gains or potential appreciation. And I’ll explain why. The buy low sell high mentality is promoted and marketed worldwide, it’s not just in America. It’s this idea that I’ve talked about on the show many times, that you’re told by either an employer or by Wall Street or by your broker-dealer that, “Hey, just dump some money in your 401K and in your IRA, and then one day, it’s going to be all good down the road.” Well, it’s only going to be all good down the road if the markets just go up and up and up and up and up and up and up forever. And hopefully, when you pull the trigger to retire we don’t have a big market correction or something like that. So my point is, is it possible to flip a house today and make a profit, which is buy low sell high? Is it possible to buy a stock today at $10 a share and then it moves up to $15 in a relatively short timeframe? Absolutely, that’s possible. Absolutely. But you know, one of the biggest factors that help you achieve that goal is the market itself. If the housing market is booming like it is right now, there’s a better chance you’re going to make a profit, and the same thing can be said with stocks. If you’re getting in after the market bottoms and now we’re starting to see a recovery backup, you can virtually just throw darts at a board and make a profit over the next five years.

Break: [00:12:52] to [00:14:48]

Travis Watts: What I encourage you to think about is what about the 401K holders, what about the IRA holders, what about the buy low/sell high strategists when 2008 and 2009 came along? And by the way, we didn’t see a real recovery for many years. It was almost 2011-2012 before the market started making a rebound. So there were years of loss, and then years of settling, and then years of really just kind of flat returns, from ’08, ’09, ’10, and ’11. That’s a long time to sit on the sidelines. I’m not going to beat a dead horse, I’ve talked about the lost decade so many times between 2000 and 2009, where there was almost a 0% return, using a buy low and sell high mentality. So something to think about as an investor, again, being a professional investor, being a long-term investor, looking at the long-term horizon is what is the most stable and consistent and predictable way to grow your wealth? Because it’s great when you’re flipping houses in a booming market as I did in Colorado, along the front range in 2012, ’13, ’14, ’15, and ’16. I did great because the market did great. We are seeing, in some cases, double-digit annualized appreciation. Well, that certainly helps when you’re holding assets in an environment like that. But when the market corrects, as I said earlier, you might be buying at the top and then having to sell low if you can’t hold on to a cash-flowing property.

So we obviously know that a lot of people got crushed in the dot-com era in 2000, when everyone was buying publicly and privately into companies that had a potential to go up, but many ended up crashing and going to zero. That’s all because of the strategy that was being used. But have you ever considered what happened during the year 2000 or 2008-2009 to investors who were holding cashflow positive investments? Whether it be a company that had very little debt and was cashflow-positive, generating great revenue. Whether it was cashflow positive real estate; as your tenant’s paying it down, your occupancy stayed up. That is the key. The cash flow investors did great when the market went up, they do great when the market goes sideways, and not too many lost properties and did terrible when the market went down, as long as they held on to a cashflow-positive asset. That’s the point, you guys – markets can only go up down or sideways. So if the odds are two-thirds to three-thirds of the time, you’re going to be in the profit; that’s my exact point. So you don’t have to sit on the sidelines or take massive losses every decade or so.

Anybody who’s hoping or guessing that the price of something is going to be higher in the future is simply speculating. I know I’m going to take some heat for that comment, but truly consider that. I don’t know the future, you don’t know the future; as we’ve seen over and over on the news, talking heads and CNBC and all these different sources, everybody’s got an opinion every day. Every day, I could pull you an article that says the sky is falling and the market’s about to collapse, and I could pull you an article that says we’re about to start the next phase of the bull cycle, and things are going up from here.

Every single day we have differing opinions; that tells you that people are speculating. It’s the same thing as playing the roulette wheel and asking for people’s opinions. You’re always going to have someone that says, “I know it’s going to be red. I know it’s going to land on red.” Someone’s always going to say, “It’s going to land on black. I know it’s going to land on black.” Let’s accept that that is a form of speculation.

Now, with that being said, I’m not going to bash people who flip houses or trade stocks or do any buy low/sell high investing. I just want you to be aware that it’s really not as professional just to sit on something and ride the ups and downs and the volatility if you’re trying to build steady, consistent income. I’ll say it one other way, which is if you’re a cash flow or income investor, the price may be of secondary importance to the passive income if your focus is the passive income. Back to the Coca-Cola example – I don’t know what the share price of Coca-Cola is today, but just for example purposes, I’m going to say it’s $30 per share. Well, if they’re paying a consistent, steady dividend every quarter for the last 20, 30, 40, 50 years, whatever it’s been, does it matter, is the primary focus that the stock today’s 30 versus 31, versus 29, versus 28, if the dividend keeps getting paid out to you every single quarter, every single year, and you’re using that dividend to live on as part of your income? I would argue the price is secondary. If it happens to fall drastically, maybe you buy some more shares and dollar-cost average. I’m just saying for example purposes.

Same thing with real estate – if you paid 300,000 for a single-family home that you’re renting out for $2,500 a month cash flow, does it matter if the market softens a little and now the estimated value of your real estate is 275,000? If your tenant continues paying $2,500 per month and they’re locked into a long-term lease, I would argue that it’s really not that important, unless you are looking to sell the property, which is back to buy low and sell high strategy, which I don’t use, and a lot of wealthy professional investors do not use either.

Okay, moving on to rule number four. The final rule is to understand risk. Something that is not talked about nearly enough in the industry of investing. But I want to ask you this quick question. Is it more or less risky to rely on one income source or 40 diversified income sources? Well, to me that answer is pretty obvious, but I guess some people have a different take on it. In fact, I want to share one of those stories with you. Several years ago, I was talking to my brother-in-law about investing, just kind of feeling out what kind of investing he does, or if he invests… And it turns out he does not invest; and this was his reason. He told me very specifically that it’s too risky to invest when you have kids. What he was really trying to explain or articulate is that he thought it was risky to take money away from providing for his family to invest, I’m guessing in a speculative sense, because he couldn’t afford to lose that money. Granted, there is some merit to that. Unfortunately, as I said, he’s probably thinking about speculative investing, like in the crypto space or something like that, and not so much in stabilized, cash-flowing real estate. Of course, you never want to invest any money that you can’t afford to lose.

So I did agree with him in many ways, but then I got to thinking about it… But on the flip side of that, he has one income source, and it’s his job, and it’s a high-paying job. I thought, what would your family do or what would he do if he lost his job and his income went to zero? Or what if his company said, “Hey, budget cuts and salary cuts. Sorry, but you’re taking a 30% cut.” Well, this stuff happens, as we all know. He would have no backup income. Hopefully, he would have some savings and some emergency fund, but his income would go from 100% to potentially 0% overnight, and it’s something that’s not necessarily in his control.

So on that topic and to that point, this is why it took me almost six years to realize the real risk in investing in single-family homes the way I was primarily investing in single-family homes, as a buy-and-hold investor. I thought, one, if I had a tenant move out, which I did on the regular, my income didn’t just go from 100% to zero, it went from 100% cashflow-positive to immediate cashflow-negative. In other words, I didn’t just lose my positive cash flow, we’ll call it $300 a month for example purposes on a property, but when someone moved out, whether it was planned or unplanned, I went immediately in the whole negative, because I still had a mortgage payment, property tax, insurance, HOAs in many cases, and I had to pay those bills without having any income roll in to cover it.

So consider this as a quick math example. As you all know, I’m not very good at math, but I’m just going to hit some simple, basic numbers. If I had a single-family property, and it was $300 a month cashflow-positive. That means that the rent comes in, I cover all my expenses, and at the end of the day, I was making $300 per month in positive cashflow. Let’s say one of my renters or the renter on that particular property moved out. And it was all expected, it was that they did a 12-month lease, and at the end, they decided they weren’t going to renew; they were going to go buy their own house or something like that.

Let’s say it took me 30 days or roughly one month to turn the property around. They have to move out, I have to get it cleaned, I have to relist it, I have to interview people, and then the new renters want a one or two-week extension until they can move it. Let’s just say it was one month to get it covered. Some example expenses would be, I might have a $1,500 a month mortgage payment on the property. I might have a $200 a month HOA fee to pay, I might have $250 in property tax. I might have a $100 per month insurance policy that I have to pay, and it might take me $200 to clean the carpets and clean the place up for the next renter.

When you tag all of that together, it’s over $2,000 of an expense. When you look at a property, a single-family home that’s $300 a month cash flow positive, you’ve got to remember that in an event like that, even an expected event that happens every year, could knock out eight months of your cash flow, the better part of a year. And that’s just turning the unit over, not to mention all the maintenance nightmares that I had to deal with, from leaking roofs, to shoddy plumbing, to having to paint properties, to landscaping messed up, to special assessments with HOAs… When you factor in all the risk points of going cashflow-negative, the maintenance, and the unexpected things, it’s awfully hard, in my personal opinion and my personal experience to make good, solid, consistent money with single-family homes. It’s what prompted me to shift after six years of doing all that kind of stuff into investing in stabilized, cash-flowing, multifamily, primarily value-add business plan syndications.

I’m not saying that everybody should do what I did; not saying everyone’s experience was what my experience was. I’m just saying as a fourth point, to understand the risk of what you’re investing in and weigh that out against the potential reward that you’re looking at getting in that particular investment.

I digressed from that story… I hope that you guys found this episode useful. Again, I will recap for you the four “rules” for professional investors. It’s understanding active versus passive income, it’s getting financial education, whether it’s paid or unpaid. You’re on your own to self-educate, unfortunately, in most cases. Number three is investing for cashflow, not capital gains, or hoping that markets always go up, up, up, and away. Number four is understanding risk.

Thank you so much for tuning in to today’s episode on The Actively Passive Investing Show. I’m your host, Travis Watts. Don’t forget to like and subscribe. Always happy to be a resource to anybody, reach out anytime. We will see you in the next episode.

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JF2735: 3 Ways to Systemize Your Investments for Maximum Growth ft. Chris Larsen

What if you could simplify the complex strategies of investing? Chris Larsen, Founder of Next-Level Income, shares how you can create a basic and repeatable method to streamline your business. He also discusses mindset hacks and how to form a clear vision for your future.

Chris Larsen | Real Estate Background 

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Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Chris Larsen. Chris is joining us from Asheville, North Carolina. He was a previous guest on episode 2370. You can google Joe Fairless and Chris Larsen and these episodes will show up. Chris, we’re glad to have you back, thank you, and how are you?

Chris Larsen: I’m doing great, man. And Asheville – I think they half named it after you, right?

Ash Patel: You’re right. Awesome. Today is Sunday, so Best Ever listeners, we are doing a skill set Sunday episode, where we talk about a particular skill that our guest has. Chris is the founder of Next Level Income, which helps people plan for financial independence through education and investment opportunities. He is also a GP on 3,000 doors in an LP on 15 properties. Chris, before we get started into your particular skill set, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Chris Larsen: Yeah, I’d be happy to. I bought my first property at 21. We didn’t scale up to 3,000 overnight here, it’s been a couple of decades in the works. I raced bicycles for a lot of years, and I went to school for engineering. When I was in college, I was learning the engineering process, which has stuck with me through my real estate investing career. But what I realized during my engineering education was that I didn’t want to be sitting around behind a desk my entire life. My best friend passed away between my freshman and sophomore years, and it was really kind of a slap in the face to say how precious life was. During some reflection over the next couple of years, I realized that I needed to make the best out of every day, I need to make the most out of the life that I was given.

Let’s face it, in this world that we have, you have to have the financial independence to live your best life. That’s how, over two decades ago, my investing journey started. I started in single-family, ultimately moved into commercial properties, office, multifamily. Multifamily has been the bulk of what we’ve done for the past six years. Today, we focus on multifamily, self-storage, as well as mobile homes and a couple of other things. Personally, we have some short-term rentals here in Asheville, because it’s such a great place to come visit.

Ash Patel: Chris, the skill set that we’re going to dive into today is systematizing investments. Tell us more about that, please.

Chris Larsen: Yeah. Again, I talk about our process in my book. If you’re listening, you’re welcome to get a copy at nextlevelincome.com, just click on the Book link, input your info, and I’ll send it to you. But I’ve always been a systems guy. I raced bicycles in school, and I was never the smartest guy, I was never the fastest guy on the bike… I had to put everything together, and I want to limit variables. So I’d figure out how to do something, then I would move on to the next thing, and figured out how to do that. I would just try to make what I was doing repeatable and improve upon the process. In engineering, they call this iterating. So you iterate, you go through the process, you improve it, you iterate again, you improve, you improve, you improve. So we moved to Asheville, and a lot of people thought, “Oh, you guys just got lucky.” We were living in DC.

I just wrote a blog post here that’s up on our website… I took a snapshot of a spreadsheet I put together 20 years ago. What I did was stack-ranked cities across the country where we wanted to live. A lot of these studies were based on the quality-of-life metrics; the quality of life, places where growth was occurring, this was in the early 2000s… We determined the places where we wanted to live, and Asheville was number three on the list. Through a confluence of events, we ended up moving here. The reason I bring that up is that through these systems that I built, we use the same things today for multifamily investing. So whether you’re an operator and you’re going out and finding properties, or whether you’re an investor and you’re trying to figure out the next best place to live, you can take data, you can distill it down or work with somebody that does that, and you can really simplify the process of — what I like to say is predicting the future of where you can be successful.

Ash Patel: All those systems, how do they apply to investing?

Chris Larsen: Alright, two different things. We could talk about how to determine the areas of opportunity, and then we can talk about how to basically short circuit human nature and really help you achieve success in your investing. We’ll talk about that here in a minute. So the first thing is, if you’re trying to figure out the best areas for investing in the future, you need to figure out what are the big tides, what are the big shifts taking place, that are going to give you those tailwinds? I’m a demographics guy, and if you’ve been listening to this show, you know that the lifeblood of commercial real estate, specifically multifamily, is people. Are they moving to an area? You want population growth, you want job growth, you want income growth; all those things are going to help give tailwinds to the growth of a multifamily property.

One of the easy things to do is you can go on the United Van Lines annual moving survey and you can see where people are moving. This is going to give you some broad strokes; it confirms a lot of things that you probably already know if you’re listening, which is like people are moving to the southeast, Phoenix, Texas. What do they call Austin? The cheapest city in California? [laughs] But again, if you understand how to take some of these broad-stroke data pieces, and you can apply them, you can really simplify the decision-making process for where you want to invest next, and then ultimately also decide who you want to invest with in the future.

Ash Patel: And you mentioned short-circuiting human nature. What is that?

Chris Larsen: Look, I’m a person, I have genetic tendencies. About six years ago, I started seeing a new doctor, and they do genetic analysis, and I have my genes taken. I raced bicycles for a lot of years, I’m not like a big guy, I’m like a pretty skinny…

Ash Patel: You’re like a Lance Armstrong.

Chris Larsen: Lance is even more muscular than I am. I got to train with Lance before he won the tour, as a matter of fact. Thanks for giving me a chance to name-drop there… He’s way better than I am. But my doctor said, “Chris, you should be fat; you should be obese.” He goes, “But you somehow basically short-circuited your genetics.” Now, my wife jokes because she’s like, “Chris, you don’t have any self-control.” She’s like, “If I bring a pint of ice cream in the house, you’re going to eat it all.” I said, “But I have the self-control to tell you not to bring it in the house.” So that’s an example of me knowing my tendencies, as somebody that loves ice cream, to not put that in front of my face.

So if you’re an investor, and if you’ve chosen your strategy, if you say, “Hey, I’d like to invest in multifamily. I’d like to work with this specific operator, to invest in this specific region”, the question is, how do you put a system in place so you ultimately achieve success? If you want to achieve financial success, you have to say, how much do you have to invest on a regular basis to get to the point of achieving financial freedom? So then the question is, how do you replicate that?

In my book, I talk in chapter three about having an opportunity fund. So you have to be diligent about setting aside money. I call it a savings tax. So if you’re like, “Man, it seems like at the end of every month, I have no money left”, you need to turn it around. Most people hate budgets, no different than people don’t like diets. I don’t like to deprive myself of ice cream, but if it’s not in the house, I don’t feel deprived, because it’s not sitting there in front of me. So my first suggestion, if you’re starting out on your investing and your financial journey – tax yourself first, before the government does. Before you spend all your bills, take your savings out first, put that into an area that you can’t touch. I use cash value life insurance, you can use a money market fund, you can use a savings account in another bank that you’re not going to see; put that money aside first. Second, determine a timeline with which you are going to invest. My coaching clients that I work with – we have a quarterly investing plan.

Ash Patel: I love putting money in a bank that you can’t just get online and say, “Oh, I’ll just transfer X number of dollars from savings to my checking account.”

Chris Larsen: That’s a great point; you want it somewhere different. Before there was Apple Pay and everything on your phone, these financial gurus would say, “Hey, if you can’t stop spending money on your credit card, put it in a freezer, in a block of ice, so you have to thaw it out before you can use it. I’m like, “Who uses their actual credit card anymore?” You pay on your phone, you pay online… It’s so easy to spend money without a credit card, so you have to figure out new ways. Again, you set it up in a different bank, or a different account, so maybe you have to request the money or you have to access it differently. It’s not just sitting there every day in front of you to spend. Then develop an investment timeline. Let’s say you’re training for a marathon; you don’t get up one day and the next day run 26 miles. Some people that are crazy, like David Goggins – he does that. If you haven’t read about David Goggins, that guy’s crazy; but read his story. Maybe you run a mile, then you run two miles the next week, then three miles, 26 weeks later, you’re running 26 miles; you built up to it. But you have a program that goes back from your end goal. So if your goal is to invest $100,000 in a year, figure out how much you need to save, and then figure out when you’re going to make those investments; then you can figure out when and how you’re going to invest in those.

Ash Patel: Are your clients older or younger?

Chris Larsen: That’s a great question.

Ash Patel: I have coaching clients and investors that are in their mid-20s. Coaching clients [00:12:23].04] as old as my investors. I have investors that are well into their retirement years that do that.

Break: [00:12:28][00:14:24]

Ash Patel: I’m going to throw you a crazy phone call that I received yesterday. This guy texts me and makes it seem like I should know who he is. He calls me up, I take his call, he’s like, “Hey, here’s my story. I’ve got a W-2 job, I want to get into real estate, I’m 45 years old, and I have a goal of reaching $50,000 in passive income by the age of 50.” He calls it 50 by 50. I’m like, “Awesome. How are you going to do that? What’s the plan?” “Well, I don’t know.” Then he goes on to say, “But you know what? I think 50,000 a month is actually too small. I’m going to achieve 70,000 or 75,000.” I’m blown away; you have no plan… How do you coach somebody like that? First, I’m like, “How did you find me?” He’s like, “Oh, I saw a YouTube video where you’re analyzing a property. At the end of the video, you said feel free to hit me up, so I hit you up.” I’m like, “Do you know anything about me?” He’s like, “No.” He didn’t get on Facebook, LinkedIn, or google me, or anything. So I guess kudos for taking some initiative, but how do you coach somebody like that? They have no plan. My advice to him – get on Bigger Pockets, educate yourself, network, go to meetups, but immerse yourself into this world, if that’s what you want to do. But man, that was too big of a leap for me to try to give him real advice.

Chris Larsen: Yeah. And he said, 50,000 a month?

Ash Patel: Passive.

Chris Larsen: Passive, a month.

Ash Patel: A month.

Chris Larsen: In five years.

Ash Patel: Yeah.

Chris Larsen: Okay. Well, maybe he’s starting off with a nice stockpile.

Ash Patel: He’s not, I asked him.

Chris Larsen: I guess my first step would be to stop posting YouTube videos if I were you. I’m joking, I’m joking… But in my book, I talk about a three-step process: make more money, keep more money, and then grow your money. Again, you have to figure out how much you need to invest at a specific assumption. We actually have a dashboard we’re coming out with to help investors just plug those numbers in. If they say, “Hey, I want 100,000 in passive income in 10 years”, you can see how much you have to invest based upon what your options are for investments. So if you can get a 15% return, you can plug that in; 10%, 20%, whatever your investment returns are, you can plug it in. You have to know where you’re going. This guy, 50,000 a month – okay, let’s say that’s his goal and he wants to achieve $600,000 a year in passive income. The first thing I would do is say, “What are you going to invest in?” Talk him through that. He says, “Hey, I’ve got these investments that are producing 10% a year.” I’d say, “Well, how much do you need to be invested?” It’s what – $6 million, right? That’s where I would start. Now, is that a reasonable assumption for him? I don’t know, but it sounds like it’s not. But let’s say he wanted 60,000 a year, and he could invest $600,000 over the course of the next five years. For a lot of people that are high-income earners, if you’re listening, if you’re a physician… I was a sales rep for a lot of years; I was investing six figures a year for quite a while. It was very realistic. We talk back and make sure that my coaching clients or investors have realistic expectations, because the last thing I want to do is paint an unrealistic picture, and have bad assumptions, and have expectations that can’t be met with a plan. Because nothing squashes confidence than somebody that just isn’t making progress, right?

Ash Patel: Yeah. Chris, I love that approach. You break down and really paint the picture of what it takes to achieve what they want. In my mind, a lot of people just look at retirement as, “Alright, I just have to save a bunch of money.” How many people actually put down numbers, make a budget, and figure out what they need to start saving more of or investing more of?

Chris Larsen: This is what’s wild… My MBA is in portfolio management; I almost did a PhD in finance, so I took a ton of finance classes, I was really interested in becoming a financial advisor. I’m in a little bit of a different role now, but I had the same kind of motivating factors underneath. And if you compare the traditional financial world – financial advisors, let’s say they charge a 1% annual fee; a financial advisor actually earns their clients typically a multiple of that 1% fee. And the reason is, they develop a plan and they hold their clients accountable. So it’s no different than a coach. A coach is going to help you develop a plan, and hold you accountable, whether you’re training for that marathon, or if you’re trying to develop a specific passive investing plan. I think that’s the key. I work with clients that make hundreds of thousands of dollars a year, and very few come to me and say, “Hey, here’s my three-year vision, and here’s a plan.” No, they come to work with me because they say, “Hey, I don’t know where to start and do that.”

If you’re listening and you want to put something together yourself, here’s my advice… Paint a vivid three-year vision of what you want your life to look like; that can include your financial goals in there as well. Personally, I do health, wealth, my social relationships, and my personal, which would be personal enrichment. You could even include things like, maybe you want to buy a new car, or a boat, or something like that. Then you break it down and work backward to what your goals are, and determine based upon, again, the assumptions, based on your returns for a financial goal, what you have to do each step of the way. Again, if you don’t know how to do that, that’s why we’re developing these tools to do that. But then you have to figure out ways, like we were talking about, short-circuiting human nature, which is finding something that you can repeat on a regular basis. Because investing, especially in the things that we talked about, commercial real estate, it’s “get rich slow”, it’s not “get rich fast”. And it’s not really exciting; you make your first investment of $50,000, you get a few $100 a month coming in. You’re like, “Wow, honey, I can take you out for a nice dinner.” You need to do it over time to really grow that snowball of wealth.

Ash Patel: What’s the biggest reason people are non-conforming?

Chris Larsen: I think the first thing is that people don’t stop to visualize what they really want. I’ve found a very high correlation between success with people that paint a clear picture. Here’s what I want you to think about if you’re listening… You get in the car, you have a destination; you take out your phone, you pull up Google Maps, and you put the destination in. Now, if you go to the same place on a regular basis, you know sometimes Google Maps takes you on a different route. If you just started driving and there was a traffic jam, you took a turn and then you didn’t know where you were going, you probably would never end up at your destination. But Google tells you, “Hey, we’re going to take you on this route, because there’s traffic, there’s an accident, the road is closed, whatever it may be.” You must, must, must have a clear vision of what you want in your life to get there. That’s first and foremost, and I think that’s the big thing.

The second thing that’s very correlated with success, is do people show up to do the work? For my coaching clients, if they’re on the weekly calls, if they’re responding to the weekly emails, they’re more successful. Number one, a vision; number two, are they doing the hard work? When I say hard work, this isn’t onerous, but just are you doing the things every day, every week, every month, every quarter, every year, to get you where you want to be? That’s what’s really key to achieving success.

Ash Patel: How do you deal with non-compliant clients?

Chris Larsen: You fire them. First off, if somebody is going to pay me and not show up, I’m going to cash the check. So if anybody’s interested in working with me, you’re welcome. This would be no different than the US Treasury. If you send them a check, they will cash the check; they’ll put it in a treasury. So hey, news for anybody that thinks that you make too much money and you’re not paying enough tax – you can write a check to the Treasury and get that done. But again, I think sharing the success and the tips from people that are achieving success is important, and I think social motivation is good as well. We have group calls on a regular basis, so that way people can hear — because it’s really hard. Let’s say you’re investing and a deal doesn’t go well, or 2020 hits and your distribution checks stop coming in, because people aren’t paying rent and you can’t evict your tenants. It sure is helpful if you know other people in the same boat and then how people are getting through that. So you stick to your plan; no different, again, like I always mention, the financial advisor. The reason a lot of investors underperform the overall stock market is because when the market drops, they sell, and then they take a loss, and then they start all over again. But they have this loss, instead of sticking to their plan when times get tough. No different than when I eat that tub of ice cream that my wife brings in, I’ve just got to get up the next day and say, “Alright, back to the gym” and start all over and put that behind me.

Ash Patel: Chris, I’m going back to that bank example. I’ve got a couple, they’re really good friends of ours and they both just love to spend. I’m thinking, if they have a portion of their check put into a different bank, I’m pretty sure when you open that account, you can set something up where both people have to be present to withdraw money. Because I remember, when you sign that thing…

Chris Larsen: If they have a joint account, they could probably put a restriction on that.

Ash Patel: Yeah, I’m going to recommend that. What would you say to a couple, maybe mid-30s or even into their 40s, they just love to spend, don’t save anything, and don’t really give retirement much thought?

Chris Larsen: Again, this is where you have to flip things around. I’ve found that in life a lot of times when you invert what traditional wisdom would tell you, you get more success. So the first thing you need to do is say, “Okay, are you both in line with what you want out of life?” Then you say, “Alright, we’re not going to have a budget, you love to spend money. Let’s make it enjoyable to spend money.” Again, let’s say that couple brings in $10,000 a month after tax, and their goal is to save $2,000 a month. Well, if you give them $10,000 at the beginning of each month, and on the 30th of each month, say “Okay, where’s your $2,000?” There’s probably a fairly low probability with this couple that they’re going to have it left, because they love to spend money. You take the $2,000 out first and you save it first, you pay your bills second, and then guess what you say? Spend everything that’s left.

Now, what happens is you take people and you say, “Alright, if you make extra money, then you get to spend it on the back end.” You can take this a step further. If you’re like, “Well, I don’t have that problem. I love to save money. I have an investing problem.” Well, let’s say you make $200,000 a year. I would say a really good high bar to set – so this is the opposite end of the spectrum, somebody that’s mastered saving – set a goal of saving 50% of what you make. Because then, every year you work, you can take a year off essentially. But then you can do the same thing, if you save 50%, if you make 100%, more, you get to spend 100% more than you’re making. That was our rule. A lot of people would see, like, “Oh, you bought a new car, you did this, you did that… You’re spending a lot of money.” I was making a lot of money, but our mortgage was $1,300 a month; we’d save a lot of money, and then I would spend what was left. It’s enjoyable.

Part of the problem is once you master saving and investing, you’re ingrained into saving, investing, and a lot of people that are listening to the show, when you become successful as an investor, you then have a hard time learning how to spend money. So you have to learn how to enjoy the money that you’ve saved and enjoy life. What I’ve found is that the 50% rule allows you to achieve higher savings and you also get to learn how to spend some money and enjoy it on the backend as well. But you have to have a lot of discipline on the front end to achieve high savings levels like that.

Ash Patel: I love these mindset hacks. Chris, thank you so much for joining us today, sharing a lot of these tricks, a lot of these mindset changes, and sharing the story with your best friend passing away. It’s a tragedy, but I feel like it’s had a huge impact on how you’ve structured and led your life. We appreciate your time today.

Chris Larsen: Thank you for having me on. If you’re going through a tough time in your life, adversity strengthens you in the long run. It’s a blessing and a curse, but thank you for having me on, Ash, and sharing my story.

Ash Patel: Chris before you leave, how can the Best Ever listeners reach out to you?

Chris Larsen: Real easy, nextlevelincome.com. You can get a free copy of my book there, you can also find all my contact information. Check us out on social media, as well as our podcast.

Ash Patel: Thank you again. Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with anyone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

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JF2654: Industrial CRE: Find Your Competitive Advantage with Neil Wahlgren

The industrial sector can be hard to market to potential investors, but Neil Wahglen has found a way to ensure his company stands out from the rest. From their sale-leaseback strategy, to their unique, storytelling marketing, Neil has been able to not only bring in but maintain long term relationships with high-net-worth investors. In this episode, Neil details how these strategies came together to help him find his competitive advantage in the industrial space.

Neil Wahglen Real Estate Background

  • Works full-time as COO at MAG Capital Partners and is an Industrial Sponsor.
  • He has 8 years of real estate investing experience and is both active and passive.
  • Portfolio: $350M of industrial, single tenant net leased (NNN) commercial.
  • Background: commissioned officer and pilot in the US Air Force and Navy.
  • Based in San Francisco, California
  • You can find him at www.magcp.com | neil@magcp.com

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Neil Wahlgren. How are you doing Neil?

Neil Wahlgren: I’m doing great. Thanks for having me, Joe.

Joe Fairless: I’m glad to hear it. It’s my pleasure. Neil works full-time as COO at Mag Capital Partners, they are focused on industrial products. He has eight years of real estate investing experience, both active and passive. Their portfolio is 350 million dollars’ worth of industrial triple net lease commercial. His background – he’s was commissioned officer and pilot in the US Air Force and Navy. Thank you, sir, for everything you did for our country, you, and your colleagues. I sincerely mean that. Neil is based in San Francisco, California. You can check out their website, magcp.com. It’s also in the show notes. With that being said, Neil, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Neil Wahlgren: Yeah, absolutely. Like you mentioned, a slightly non-standard track to finding commercial real estate. California native, I grew up just outside of San Francisco, I really grew up in the suburbs, a little bored out there… I decided I need some excitement, I went to the Air Force Academy, went on to fly a number of planes, but primarily the C-130, the Hercules. I flew that full-time for the Air Force, and then part-time for the Navy, and the reserves, been to over 100 countries, two combat deployments, to Iraq and Afghanistan. It was just a great, maturing and experiential process in my 20s. That was the right thing at the right moment there. Ultimately, I did that for altogether about 10 years, and kind of hit a transition point where you start looking, hitting that point your life, you’re like, “Alright, can I keep doing what I’m doing now and hit really my goals for all the things I want to do?”

The more I was in a flying world, the more and more I realized my time was stuck two hours in the cockpit, which was stuck to time away from home and not being able to build that family work-life balance that I was hoping for. That was my catalyst for effectively transitioning out of aviation and out of the military side, and somewhat serendipitously ended up running into a family friend, right at that transition point, who had built up kind of an equity-focused, really investor-focused arm of commercial real estate. They had a model where they would effectively partner with developers, operators, and brokers who had a very niche skillset for commercial real estate deals, but didn’t necessarily have that capital component. So we would JV with them on a deal-by-deal basis. That was effectively how I got my feet wet and jumped into commercial real estate about eight or nine years ago.

Joe Fairless: What was your role eight or nine years ago? I know it’s evolved. I assume it’s evolved since. What was it at the beginning?

Neil Wahlgren: At first, it was operations. Kind of bringing that very structured checklist – discipline, multi-component experience of flying, and really piloting and managing a multi-crew aircraft. The founder was skilled at certain parts, but that operational piece, he knew he had a hole to fill. I came in on that side, really just working internally, and then slowly grew and built out a team. Through that process, we ended up growing our holdings and portfolio in about four years by about 10x. So it was a really fast-growth profile, and I learned just firehose effects. We got to see and underwrite through everything, from multifamily, to industrial, to commercial, multi-tenant retail, even some ground-up development stuff… So I really got to see a ton of different types of commercial real estate and a bunch of different partners, and I really got to see and really hone in on what is the type of real estate that I love here, what stands out amongst the rest, and what operating teams do I find exceptional? Ultimately, one of those groups was Mag Capital, who I had the opportunity to join up with full-time about four years ago.

Joe Fairless: And we’ll get to that. Just so I’m clear, you said you first started doing operations, and slowly grew from there. What specifically were you doing when you started out?

Neil Wahlgren: When I first came in, it was a bit of chaos. It was just emails, it was a lot of projects. There was, I would say, ineffective communication going on between investment partners, between operator partners. Really it was just – start from the ground up and every day was “Alright, let’s build this checklist out to have a rhythm, a flow, monthly check in meetings, set up standards and consistencies with both investors and with operator partners, set up expectations, and really start delivering on time or early on what we said we would do.” That was really a major piece that was missing on this firm when I came in, and really setting up that relentless, methodical approach toward day-to-day operations, which slowly grew weekly, monthly, and an annual forecast was ultimately what allowed us to grow.

Joe Fairless: As COO, what are the KPIs that you’re evaluated by?

Neil Wahlgren: Great question. My primary focus is in capital markets. We’re vertically integrated at MAG. We not only broker and source our own deal opportunities, but we also fund with our internal investment partners. So I am graded and effectively judged by how well we can effectively pair those two pieces.

Joe Fairless: What two pieces?

Neil Wahlgren: Both the deal side and the equity side; cash and deals. Effectively, you need to be skilled and efficient at doing both, but more so you need to be balanced and be able to find the right flow to say “Hey, am I looking ahead? What’s my deal flow pipeline look like? Am I preparing adequately on the investor side?” It’s everything from, are we able to get the right deal flow for what our investors are asking for? How many deals per year are we able to fund effectively and quickly? Are we able to do it in a way that commitments turn into true-funded positions? All these granular details of a COO are probably the most important components of the position.

Break: [00:06:50][00:08:23]

Joe Fairless: That’s a lot of responsibility, first off. Assuming that I’m interpreting what you said correctly, does that mean that you’re responsible for finding the deals, and does that also mean you’re responsible for finding the money to fund those deals?

Neil Wahlgren: We have more the latter. So we have two principals, Dax Mitchell and Andrew Gi, who come from a brokerage, a broker background, and also from an effectively commercial real estate appraisal background. They run our acquisitions team, they’re sourcing, they’re using multi-decade relationships to put together and find these industrials, single-tenant, net-leased investments that we do. Then ultimately, as those opportunities come and work through the pipeline to the point where, if it makes it all the way through, they become an offering that we want to effectively bring into our investment group – that transition and that alignment of debt partners, equity partners, and ultimately getting a solid deal under contract, that is where my primary focus really is.

Joe Fairless: So I heard debt, equity, and then you said ultimately getting a solid deal under contract. Are you responsible for any part of the negotiations to get the deal under contract once the other two partners identify it?

Neil Wahlgren: Yeah, most of the negotiations are done on a principal level. Our primary way that we’re sourcing deals is actually somewhat unique, in that it’s through sale-leaseback. It’s a very niche way to create opportunities in that space. Unlike other commercial real estate asset types, these projects probably have more work that’s done upfront, because you’re negotiating not only the purchase price of your asset, but also the brand-new lease that you’re putting in place, and kind of the relationship between those two.

Joe Fairless: Elaborate more on that, will you? You said the primary way you’re sourcing deals is by sale-leaseback. So you’re finding them via leasebacks, or that’s just a mechanism that is used to… I don’t even know. Help me understand.

Neil Wahlgren: Sure. A high level of sale-leaseback is when you have… To use an example, the industrial space. Imagine you have a light manufacturing company that operates and owns its own real estate. So a sale-leaseback is when they sell off the real estate that they own and simultaneously lease it back as a tenant. We come in as a buyer and then we transition to the landlord. They are the seller who transitions to the tenant.

Joe Fairless: Got it. So how you find those deals is by seeking out businesses that currently own the land, reaching out to them, and say, “Hey, do you want to sell to us and just lease it back?”

Neil Wahlgren: Typically, not directly. A lot of it is done through broker relationships. Those types of companies — or what happens, most of the time those companies are recently acquired by private equity backers. Those private equity groups are intensely focused on growing the operational component of their new business, less interested in being real estate owners. They will often be the driving force. They’ll either connect with us directly or through broker relationships, and effectively say, “Hey, we just bought this company, we want to basically move the cash into the operation side to grow EBITDA, grow revenues, profitability, etc. So they will sell the real estate, prefer to be in a tenant position, and then redirect that capital into growth metrics.

Joe Fairless: So you’re responsible for debt and equity?

Neil Wahlgren: Yes. We have specific teams on both sides of it.

Joe Fairless: But you’re the one overseeing it?

Neil Wahlgren: Correct.

Joe Fairless: Okay, so let’s talk about equity. I think most of the listeners are interested in that primarily, but we will talk about that too, because that’s something that gets glossed over, but shouldn’t. Equity – what was the last deal you bought,

Neil Wahlgren: We just closed on a five-building 500,000 square foot industrial portfolio with a single tenant. That tenant was a powdered metal parts manufacture; kind of a neat industry. Imagine 3d printing with layers of plastics, but these guys did the same thing with layers of powdered metal. They effectively forge into these complex parts, sell to automotive, aerospace, heavy equipment, etc. We did a sale-leaseback transaction, buying five different buildings, all tenanted by the same company.

Joe Fairless: How much equity was required for that?

Neil Wahlgren: That one, I believe we raised about 10 or 11 million.

Joe Fairless: Okay, let’s say 11. Where did that 11 come from?

Neil Wahlgren: We effectively have really long-term investment partners. It’s a range of family offices, a range of high-net-worth individuals and retail investors, and we ultimately do multiple deals with the same folks.

Joe Fairless: Okay. So the $11 million came from both family offices and high net worth individuals?

Neil Wahlgren: Correct.

Joe Fairless: What percent do high net worth individuals make up of the 11? Approximately.

Neil Wahlgren: Probably the majority, I don’t have the exact numbers.

Joe Fairless: Okay, the majority. And how are you attracting the new individuals? Not the current ones, but new high net worth individuals.

Neil Wahlgren: Having been in this space a long time, my feeling on it is there are two extreme approaches. You can be more of a marketer, or you can be more of an effectively deep relationship, deal focused type of equity relationship. We’ve chosen to be the latter; so we really do very little outside marketing. Almost all of the growth, all the new investment partners that we’ve made are almost probably 99% referrals. It’s effectively devoting resources, devoting time to folks who invest with us on a repeated basis. They effectively bring friends, family colleagues, and that’s been almost 100% of our growth on that side.

Joe Fairless: How, if at all, do encourage or help facilitate referrals?

Neil Wahlgren: Everyone who invests with us is important. There are some people in our network that we’ve found over time really are just phenomenal partners. Not even necessarily the biggest check writers, but people that really believe in the product, believe in our model, believe in our team, and ultimately bring in what I call outsized referral sources. Those, what we’ve found, is really hyper-focusing on those people. Thank you’s, handwritten notes, gifts, taken out… It doesn’t need to be monetary-based either, but just putting attention back into the people that are really helping make you successful. We really put an emphasis on that as a team, and it’s paid dividends, in my opinion.

Joe Fairless: What system do you use to track that?

Neil Wahlgren: A lot of tags; we use a CRM coupled with our investor portal. We meet three times a week, myself and my equity team, and we outline who needs attention, what is the best way to effectively give back, what’s the best way to receive feedback, or solicit feedback… All those pieces done on a very repeatable consistent process is what we’ve found to be the best approach on that.

Joe Fairless: Which CRM do you use? And which investor portal do you use?

Neil Wahlgren: We use a portal CRM company called simPRO. We recently switched over to that system and I’ve been pretty happy.

Joe Fairless: What did you switch over from?

Neil Wahlgren: Juniper Square.

Joe Fairless: Why did you switch?

Neil Wahlgren: I think Juniper Square, in our opinion – not to get too much in the weeds – perhaps focus more on institutional investor relationships than for the type of relationships that we had. We felt we were able to effectively present opportunities, and manage in a more robust manner in terms of metrics, in terms of graphics, in terms of telling the story of these industrial investment opportunities with the simPRO platform.

Break: [00:16:15][00:19:08]

Joe Fairless: I’m glad you’ve found the right platform. And it’s okay to get into the weeds in this conversation. that’s alright. A lot of investors are looking at different options so this is helpful. As far as the focus, it might have been a little more focused on institutional investors. Can you just give a couple of examples for people who are trying to identify “Okay, here’s the type of portal I’m looking for”? Because most listeners for the show, they’re focused on high-net-worth investors as their investors, so this will resonate.

Neil Wahlgren: With any investment, it comes down to telling a story. Effectively, a system should be just a medium that you’re using that allows you to tell your story in a way that’s effective. If you’re effective, if you’ve told that story well in a clear and concise manner, and you have the right amount of trust and backing with your investors, really the equity will fall into place at that point. Industrial can be tricky. I’ll be honest with you, it’s not that sexy. It’s four walls, oftentimes it’s in secondary markets, it’s not flashy, it’s not on the front end of a new development center… Typically, it tends to be really the value and the beauty of it is the relationship between core dirty often manufacturing operations, paired with the real estate that allows that to happen. So to tell that story, we use drone footage, we use some nice imagery, and we like to pair the story of what operation is happening within these four walls, what type of manufacturing? What are the products? Where does this go? How is this integrated in the American industry? Then really couple this investment real estate around that, and pairing those two, using a lot of graphics. We’ve found that that particular platform allowed us to do it best.

Joe Fairless: What about on the debt side? How do you identify the right debt product for… Let’s use an example, the last deal that you did.

Neil Wahlgren: Sure. Honestly, we’ve found a lot of the industrial products that we’re buying – we find opportunity in the seams. We’re buying secondary markets or kind of what I call commutable secondary. It might be the labor force for this manufacturing is in, say, Des Moines or in Champaign, Illinois, some similar-sized city, and then ultimately the asset might be 10 miles outside of town, but that’s okay. If you have the right strength of tenant and the right credit behind it, that can be the most sleep easy, cash-flowing vehicle you can have. But to your point, those types of markets can be sometimes scary or overlooked by national lenders. So what we found is regional lenders, state-level, or Southwest oriented banks, or Midwest oriented banks who know those areas better, have tighter relationships with companies and individuals in those areas – those really, for our type of model and product, are absolutely the best kind of debt partners. So we do repeat business with typically smaller credit unions and banks.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

Neil Wahlgren: I would say that the best advice that I have is find your competitive advantage. If you don’t have a competitive advantage, find out how you’ll get it. If there’s not a clear path to that, find a partner to invest with who does. I think relying on commodity skills without having some outlying advantage really leaves a lot of risk on the table for an investment. So I would say find someone who has an ultra-tight niche and specialty, does it well, and then either partner with them or emulate what they’re doing.

Joe Fairless: Is your competitive advantage the two principles and their background? Is it just being focused on industrial relative to the rest of the commercial real estate world that isn’t…? What would you say?

Neil Wahlgren: I think we as a team, I believe we put together better investments in single-tenant net-leased industrial acquired through sale-leaseback transactions than anyone else.

Joe Fairless: That’s a mouthful. You make that sentence long enough, of course you will be exactly that. [laughter] That makes sense, though. I’m glad that you talked about that. I’m glad that we touched on each of those aspects of it too, since that’s your competitive advantage. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Neil Wahlgren: Let’s do it.

Joe Fairless: Best Ever way you like to give back to the community.

Neil Wahlgren: I would say what we’ve talked about before – finding those who put in an outsized effect on your personal development and growth, finding those people, and giving back. So I think we find those folks and shower them with time, with attention, with appreciation, and listen. I think by really taking the interaction level to a higher level with a smaller group of people that are directly responsible for your success – I think that’s what we do best.

Joe Fairless: How can the Best Ever listeners learn more about what you are doing?

Neil Wahlgren: We have a lot of resources on our website, www.magcp.com. Or I’d love to hear feedback, comments, questions from folks as well. You can reach me directly at neil@magcp.com.

Joe Fairless: Neil, thanks for being on the show. I enjoy talking about a sector that I do not focus on in the commercial real estate world, because I love being educated on it. So I appreciate that. And hey, even if we’re not focused on this sector, there’s a lot of takeaways that you talked about that can be applied to any aspect of commercial real estate or any aspect of business, quite frankly. So thanks for being on the show. Hope you have a Best Ever day and talk to you again soon.

Neil Wahlgren: Thanks, Joe.

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JF2653: What Their 12 Unit Purchase Taught Them About COVID Asset Management with Jeromie and Anne Marie Sheldon

In March of 2020, Jeromie and Anne Marie Sheldon closed on a 12 unit deal right as COVID-19 was taking the world by storm. The pandemic caused additional problems on top of the regular challenges that come with any property–rowdy tenants, delays, labor shortages–and yet one and a half years later, the Sheldons’ property is thriving. In this episode, the Sheldons discuss their business model and how they navigated being “COVID Closers.”

Jeromie and Anne Marie Sheldon Real Estate Background

  • Jeromie recently retired as an Air Force Pilot after 24 years of service and is now flying 747 overseas for UPS out of Anchorage, Alaska.
  • Anne Marie is a Licensed Physical Therapist.
  • They are both CREI, LPs in syndications, Active apartment owners.
  • Both actively and passively involved in CREI.
  • Portfolio: Started out with a SFR 2015 full cycle. Currently, Passive LP deals = 2000 + doors, Independent GPs on a 12 unit & 5 unit locally in WNY. 
  • Also own a townhouse- LTR (12 beds for pilots called “crashpads”) in Anchorage, AK.
  • Based in Grand Island, NY (close to Niagara Falls & Buffalo, NY)
  • You can say hi to them here:
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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Jeromie and Anne Marie Sheldon. How are you two doing?

Anne Marie Sheldon: Great. Thank you so much for having us on the show, Joe.

Jeromie Sheldon: Yes, Joe. Thank you. It’s an honor and a privilege to be on the show with you.

Joe Fairless: Well, it’s my pleasure. Just behind the scenes Best Ever listeners, I called in eight minutes late to this interview, and they were waiting very patiently for me, so I appreciate both of your patience and I’m looking forward to dive-in in my last interview [unintelligible [01:08]. Jeromie recently retired as an Air Force pilot after 24 years of service. First, officer, thank you for your service. I respect what you did for our country, you, and your colleagues.

Jeromie Sheldon: Thanks, Joe. It’s much appreciated. I’m so honored to have served our great nation, and just a blessing to be part of that team.

Joe Fairless: Anne Marie is a licensed physical therapist. They’re both commercial real estate investors, actively and passively. They focus on apartments. In fact, let’s talk about their portfolio. They started out with a single-family rental that they took full cycle in 2015. They’re currently passive investors in over 2,000 doors, and they’re independent general partners on a 12-unit and a 5-unit locally where they live, in New York. They live in Grand Island, New York which is close to Niagara Falls in Buffalo, New York. With that being said, you two want to give the Best Ever listeners a little bit more about your background and your current focus?

Jeromie Sheldon: Yeah, like I say, you kind of hit it there with our background, with me coming out of the Air Force, Anne Marie is a physical therapist, and she also helps teach our kids at home. We’ve got a busy home, with six blessings. But our big focus really is to grow a portfolio as many of your listeners are doing. We joined a program in 2018 and got into some limited partnerships.

Joe Fairless: Which program?

Jeromie Sheldon: It was the [unintelligible [02:36] program, and then we’ve also had some personal coaching with Anna Kelly, and then we were also part of a mastermind. That’s probably one of our main points is we’ve wanted to just focus on educating ourselves in this space. We’re both professionals and we feel that education is very important and would probably qualify [unintelligible [00:02:54].17] advice. And then, like I say, we’ve limited partners in about five deals across Arizona, Texas, and Florida, just saw one go full cycle and gave us significant returns. We’re very happy.

Joe Fairless: Nice. Congrats.

Jeromie Sheldon: And then we also wanted to get our hands dirty a little bit with working with property management and just getting into the weeds of managing our own properties. So that’s why we got involved with the 12-unit and the 5-unit here in New York, just to make sure we kind of understand the full aspects of commercial real estate; really, before we felt comfortable trying to do a syndication and taking other investors money, we wanted to be able to make sure we understood all aspects of it. The long-term goal is to get into syndications, but we feel it’s a process of moving that forward, and growing our assets to a point where we kind of have a long-term vision of growing that asset. And then being able to start a retreat center. We won’t get into that, but that’s to minister and give back.

Joe Fairless: You were passively investing in deals, and then you decided to do some active deals, the 12-unit and the 5-unit. What did you think of that process?

Anne Marie Sheldon: Well, it was great to see the passive deals first and also to interact with a lot of different investors and learn through that. We could see that we were lacking an understanding of asset management. So with the 12-unit, when we jumped in, the first thing we were doing once you close the deal and the work begins, we started doing our CapEx projects. That was a great learning experience, because our property management company is helping us run that 12-unit. But as far as the large projects, like the parking lot, LED lighting, things like that, we really wanted to oversee that. We wanted to get the bids from the contractors and really be hands-on in that process. So that was a great learning experience there, just to kind of understand what it’s like to work with contractors, what it’s like to get into these bigger projects, what the money is going to be, and how that’s going to improve the NOI and the value of the property. So that was one big learning experience for us in the beginning.

Joe Fairless: What did you learn from working with contractors?

Anne Marie Sheldon: We learned a couple of things. Sometimes it’s straightforward, and other times — one issue we really ran into is it’s a 12-unit. So when you’ve got a contractor, like for a parking lot, maybe they’re a commercial contractor doing parking lots – they’re looking for at the mall parking lot, that large institutional parking lot. You’ve got a good-sized parking lot, much bigger than residential, so you’re not falling in that category, but you’re not exactly falling in the commercial category fully. So it’s not a big enough deal for some, but it’s too large of a deal for others. We found that sometimes a 12-unit was falling in that situation. For example, the stairs going into the building need to be replaced. But in order to do that, that’s concrete work, that’s removing concrete, and that’s building specific molds to go back to replace like-kind with like-kinds, so you don’t have to pull a permit and do a lot of different changes. Well, we find the contractors are wanting to do the regular molds they have for residential; or if they’re commercial, concrete, they want to do the big parking lot. That’s been a big struggle in the labor shortage too, because a lot of times they don’t have the workers that they used to have. So we’re getting backed up as well.

Jeromie Sheldon: So we got through about 10 to 12 concrete folks, and I think we finally have landed on somebody that can do the workforce next spring. But it’s been a struggle, like I say, with COVID, and the labor shortage; there’s not a lot of folks out there that want to do concrete, and the folks that are out there are so busy, a little job like what we’ve got doesn’t work for them.

Joe Fairless: I heard you say that you’ve got a property management company, but you wanted to invest time working on the CapEx. But wouldn’t your property management company have a contact that you could work with?

Anne Marie Sheldon: In fact, they did. They had about two contacts. One of them stood us up. We came to the property, they didn’t show. I got in touch with the owner of the property management company and he goes, “I got stood up as well.” He dropped them from our list. Then we went on to the next person, and they were too busy at the time. So I think that was a situation; we went through so many actually, but I think that was a situation where they couldn’t do those particular molds, because these are very unique stairs with a very narrow driveway, so you can’t use a standard residential step mold; you’re going to have to do something customized. Now we hit a wall with the property management company trying to find someone, so we just continue to go off contacts and off leads from other people.

Joe Fairless: We jumped into the details quickly, which is great… But if we can take a half step back just to get a little perspective on the 12-unit… What do you buy it for and how did you find it?

Jeromie Sheldon: We found it through a local broker here in [unintelligible [00:07:55].11] We acquired it at 60k a door, which is pretty decent for this area. It’s an all-bills-paid unit, so that was also a little bit into our factor. Location is what really drove it. It’s in a suburb of Southern Buffalo, and it’s right on the main street, and essentially, the crime, the schools, the High School is just down the streets, it’s a nine out of 10. It had been on the market for about a year; and the street appeal – the previous owners were pretty much doing everything themselves, so the street appeal was probably not good. We were able to work a pretty good deal; they were asking 750k and we got it for 720k.

Joe Fairless: Okay. How long ago was this?

Jeromie Sheldon: We consider ourselves COVID closers. So as the wave of COVID was coming across the world, we closed in March of 20.

Joe Fairless: Wow. Yeah, right there. Like right on the cusp of Armageddon.

Anne Marie Sheldon: Yeah. Everyone was going, “Do what?” Everybody was looking at us and going “Do you want to still do this deal?” [unintelligible [08:58] in a hurry. They were thinking we were going to back out.

Joe Fairless: Obviously, you got financing. Was that tricky? Maybe not, obviously… Did you pay cash? I guess I didn’t ask that?

Jeromie Sheldon: No. The financing actually was probably one of the easiest things. We used a local bank here in town. I think probably part of it is because we’ve got a W2 and we had the other assets. We had the stuff invested in the syndication, so we were able to show all that. So I think they were comfortable with us.

Then the other piece of it was I think the location; the bank president had actually looked at the property when it was for sale about eight years prior and was considering buying it, so they knew, location-wise, we wouldn’t have any issues with keeping it full. We’ve been blessed, through COVID, we’ve had no non-payers. Everybody has been paying rent, a couple slow, and then we did have one person… We talked about this same [unintelligible [09:48]. We did cash for keys, and we had one person that was causing a lot of issues right after we took over. We gave them some money and said “Hey, we’ll help you go find another place.” They took it and ran. We got to a new tenant in there, we fixed it up, and they’ve been great.

Joe Fairless: How did you determine how much money to give that person to leave?

Anne Marie Sheldon: That was interesting… Our property management company said, “Let’s just write him a check for $500, or something.” I said, “First of all, this guy’s not a check guy. This guy’s a cash guy. So we’re going to handle cash.” Not us, but the property management company. So here’s the situation… His rent was around — we bumped it since then quite a bit– but it was around 750 a month. What he was doing was he wasn’t paying rent, he was subletting it to someone; so he was actually getting rent, we found out through the grapevine, through the other tenants that he had a sublet that was paying him. So $500 a month when he was getting $750 or $800 from someone else wasn’t going to get him out. So we said, “Let’s go with $1,000, because we’re going to bump the rent on this unit to $950.” And this moratorium is just starting, so we’re thinking this is going to go on for a year. You potentially could lose $10,000 or more from this guy. So we felt like $1,000 cash was what was going to dangle the carrot for him.

The property management company said… He said he would think about it for a couple days, and when they said “We’ll give you cash”, then he signed the document to say he would agree to those terms. And then  when they gave him the cash, I guess his comment was “Cash is king, this is great.” [laughter] He was not just not paying and subletting, but he was in fact doing all kinds of things on the property – intimidating tenants, playing music super loud… It’s a really quiet community and village, and there were three other tenants threatening to move out, isn’t it? So we probably also could have lost rent from those other units as well. So $1,000 was kind of a drop in the bucket to get rid of that.

Break: [00:11:48][00:13:20]

Joe Fairless: Knowing what you know, having asset-managed the property, as well as gotten in there on some CapEx stuff for a little over a year or a year and a half, what would you do differently if presented a similar opportunity on your next acquisition? Maybe you didn’t do it wrong, but what would you do a little differently on the next deal if it’s the exact same 12-units, similar block, similar challenges, and now you’ve got another chance at operating it a little differently?

Jeromie Sheldon: I think one thing would be restructuring the deal so we didn’t have to come out of pocket for as much of the CapEx. We probably would have been willing to offer full price, or even a little more if we could have worked some of the CapEx into the loan proceeds. So I think that looking back – we had the capital, but especially going through COVID, the worry, and that type of stuff, it would have been nice to probably hold some of that back. But we felt we needed to do it to improve the place, to tell the tenants that, “Hey, new owners are here and we’re going to make improvements.” But it would have been nice to be able to finance fixing the parking garage and putting new lighting in. So in the future, I think we will definitely look at how we could get more proceeds out of the closing to go ahead and take care of some of the CapEx without having to come up with it straight out of pocket.

Joe Fairless: Anything come to mind for you Anne Marie?

Anne Marie Sheldon: I think another thing that we do differently is when we were looking at property management companies, we only looked at a few. Looking back now — and we’ve learned a ton over the last two years and we still have a lot to learn… But one thing we did learn is we didn’t really vet that the property management company properly. When I say vet, I mean we did ask them certain key questions, but we didn’t really get as transparent with our business plan as we could have. And I think we could have done a better job on the front end, saying “When a unit turns, this is what we picture happening with the unit, this is what we want to do, this is the rents we’re trying to achieve.” We did tell them what rents we’re looking at, but we didn’t really tell them the steps in between that we were looking to do. So I think we kind of caught them off guard on the first few turns, because when you take over a property, a lot of times a couple of turns happen right away, with new ownership. And immediately, the maintenance… It was a busy time, it was the summer when the first turns happened, and COVID happened, and they were short of some staff. But when we went to say “Okay, we want everything, from new flooring, to all the covers painted, to new vanities, new fixtures, new trim” it was more than they were used to. They were used to like the quick turns, just steam clean the carpet, do the small little ramp up, or no ramp up and just kind of keep going. I don’t think they foresaw that we were going to do moderate to heavier turns on some of the units… Because some of these units were neglected. It’s a 1960s building; they were not only neglected, but they were out of date. And to get the ramp-ups we wanted, we’re going to have to do some considerable changes to the unit. So I think just being more transparent and more direct with what we were trying to do instead of muddling through that on the first turn could have been even better,

Joe Fairless: What are the rent increases that you are achieving, and how much per unit are you investing on those turns?

Jeromie Sheldon: Most of the stuff that we’re turning, like for instance, we’re turning one right now that just moved out… They were paying $750, we’re going to bump it to $975. For this unit, we’re doing some of it ourselves. I think it gets back into ensuring that we’re real estate professionals, so we’re trying to show that active involvement. But for this unit, we’re going to put in probably about $3500 to get it… We’ll put in a new flooring, we’re doing the painting, doing some updates in the kitchen, and that type of stuff, the bathroom.

Joe Fairless: And you can get $225 rent increase on that $3500 renovation, not including your time?

Jeromie Sheldon: If we weren’t part of it, it would be more than $3,500.

Joe Fairless: Yeah, I get that. But not including your time, which is a lot of money. But just without including your time, it’s $3500 in order to get a $225 rent increase?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes.

Joe Fairless: That’s a 77% return. That’s a pretty good return. Again, not including your time, but still, those are some favorable numbers as an investor.

Anne Marie Sheldon: Yeah. We didn’t put a lot of time into this one. It depends on what your definition of that is. But the reason we chose to assist on this one is our kids. It’s kind of funny, but a quick side note… They want mountain bikes and want double suspension mount bikes, we have six children… And we were like “We’re not buying everyone just a brand-new double suspension bike.” [laughter] We said when they work at the units with us – which isn’t that often, it’s more in the summer – we pay them; we pay them all different hourly wages depending on their age. One of our sons, we pay him more than he gets in his job, more than minimum wage. So we said, “There’s a short spurt of time, three or four days, we’re going to go paint. If you guys want to get these bikes, if you have the money for the bike, you’ve got to raise the other half. Here’s your opportunity. You want to come paint or just clean up behind us, whatever, you can make half the money and we’ll pay you for it.”

Joe Fairless: I love it.

Anne Marie Sheldon: That’s why we did this unit this way. Typically, in the last few units, like in our 5-unit, we are not involved in the painting or the [unintelligible [18:45]

Joe Fairless: Got it. That’s great. That’s beneficial for many reasons. Is there also benefit there from a tax standpoint, paying your kids? I’m vaguely familiar with something where you can pay your kids and…

Jeromie Sheldon: I think you’re right. We’ve talked to our accountant, but I think we can pay each one of the kids, I think it’s up to $6,000, and that comes off of the business income. And they don’t have to worry about paying federal income tax on that money. So yes, it’s a way for us to pay our children through the company. It’s obviously an expense on the company that our kids get to take advantage of. We’re firm believers in this as a family business and everybody partakes in it.

Break: [00:19:27][00:22:21]

Joe Fairless: Anne Marie, how many hours a week do you work with your licensed physical therapist role?

Anne Marie Sheldon: Currently, I’m not working with the role. I’ve kept my license and my education up. I’m helping people pro bono on the side, friends and family that need help, but I’m currently staying home, homeschooling the kids.

Joe Fairless: Oh, wow, homeschooling. Okay. And you got six kids?

Anne Marie Sheldon: Yes.

Joe Fairless: Okay. Alright. So the question that I was setting up is still relevant. Because Jeromie, you retired, but you’re now flying 747s overseas for UPS, out of Anchorage, Alaska. So how do you two prioritize your time? Because you’ve got six kids… One of you definitely has a full-time job. Jeromie, I don’t know how many hours you’re doing, but I’m assuming it’s more than 10 per week on average. How are you prioritizing?

Anne Marie Sheldon: I think a couple of things… One, we learn to time-block. We knew about time-blocking, but not as detailed as Anna Kelly, our coach. She really taught us more details and models in our personal coaching time with her on how to do that. So I think that has really helped.

Also, with Jeromie being active-duty military, it was a lot busier in some ways than it is now, in that he flies 14 days a month now, but he has 14 days a month completely off. So the last three weeks, he’s been home, he’s been helping, and we’ve been doing more on the real estate side. We’re networking for things to grow our business.

For me, I’m doing homeschooling, from about the hours — that’s nine to three or nine to two. I do drive around for different activities, but my senior is driving now, so that helps. What I’ll do is your nine to midnight, nine to 11 shift, I do a lot of those things. Sometimes we’ll do the networking in the early evening, and I will do the asset management type things in the early to midafternoon. Sometimes you have to do things in the morning, and then the kids, I’ll direct them on what they’re doing independently, or two of them are helping each other. But it’s kind of a rotating juggling act a little bit there. But just kind of trying to find those blocks of time.

Joe Fairless: Taking a step back. What’s your best real estate investing advice ever?

Anne Marie Sheldon: I think for us, there’s a couple of things. We feel like there are some non-negotiables that we have, and it’s taken a little bit of time to develop. When we’re looking at a deal, when we’re looking at a partnership, we have certain foundational things that we agree on that we’re looking for. So I think sticking to those and not getting really excited about a deal, an opportunity, and jumping in too quickly, or a partnership. I feel like a partnership is a marriage with someone else. We want to be aligned and we also want to be transparent with our financial situation and their financial situation, so that you’re not jumping in and then finding out later that there’s a hitch in there and somebody’s finances aren’t going to work for that deal. So we feel like those things are foundational things. And it sounds really simple, and I think it is, but sometimes it’s hard to stick to your guns and stay with that when you’re in the excitement of deals and partnerships.

Jeromie Sheldon: Or there’s pressure to get into a deal. I think we’re fortunate that a lot of our real estate income that we’ve got, we’re not living off of that. That has helped us out as well as we’re able to vet the deals and say, “Does this really make sense for us as a family?” And then, like I say, the non-negotiables, if it doesn’t really meet that, and we’re okay, just passing on that, being patient and waiting for the next opportunity.

Joe Fairless: What deal have you two lost the most amount of money on?

Jeromie Sheldon: We got into a deal, it was a flip of 4-unit in Dallas. This one was – essentially, we were providing the debt fund for it, and we got caught up in COVID, or the team of contractors got caught up in COVID. It was supposed to be in and out in a year; they were going to get everybody in, as soon as the leases were done, move them out, do complete rent-outs, then get them released up, and then have the entire place sold within a year. That didn’t happen, obviously, with COVID, contractors, lockdowns, all that type of stuff. The team finally got the last property sold in June, so it was almost a two-year hold versus a one-year hold, so we ended up losing about 20% on the money we put in to that deal.

Joe Fairless: How much did you put in?

Jeromie Sheldon: We each put in 100k. We lost about 20k each, so about 40k total to that deal, just because, really, the business model didn’t work because it got slowed down by an entire year.

Anne Marie Sheldon: Yeah, the flipping model.

Joe Fairless: If presented a similar opportunity in Dallas, would you do it, because you chalk it up to “Hey, that was COVID”? Or would you not do it because “Okay, it was COVID but also XYZ variables, and I’m not comfortable with that so I wouldn’t do that type of investment.”

Jeromie Sheldon: Yeah, it’s something that we would think twice about in the future. We didn’t do as good a job vetting the group either. We felt – the debt fund, okay, we’re just going to get X amount of return, we’re not into it for the equity. So I think we would really think hard and fast again about a model that is really predicated off of a one-year timespan. So yeah, probably do some more homework.

Joe Fairless: It sounds like you would pass…

Jeromie Sheldon: I think so. Yes.

Anne Marie Sheldon: Yes.

Joe Fairless: [laughs] Fair enough. We’re going to do a lightning round. Are you two ready for the Best Ever lightning round?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes, sir.

Joe Fairless: Alright. Best Ever way you like to give back to the community.

Anne Marie Sheldon: For us, we as a family, for Thanksgiving and Christmas, we join up with the regular Gospel Mission here in town. We go to different apartment complexes, like the lower-income section eight areas and we deliver meals with them. We bring joy to them, have conversations, how are you doing, pray for them. That’s one way we love to get back.

The second way is – our long-term vision, is to use the proceeds from real estate to purchase a wellness ranch healing place where we can continue to give back to veterans with PTSD, and help them get well and get back on their feet again.

Joe Fairless: Keep me posted on that. If there’s anything I can do to help out with that. How can the Best Ever listeners learn more about what you two are up to?

Anne Marie Sheldon: If they want to get in touch with us, we’re on Facebook, LinkedIn, Instagram, all the social media sites. Our email is sparrow@equitymanagement.com. Those are probably the best ways.

Joe Fairless: Jeromie and Anne Marie, thank you for being on the show. Thanks for talking in detail about your experience both as an LP, what’s worked, what hasn’t worked, and as a GP. Those 12 units, contractors, debt, closing, being COVID closers, the business model that you’re employing, and setting expectations with the property management company prior to closing. Thanks for all the insights you shared and your experiences. Hope you two have a Best Ever day and we’ll talk to you again soon.

Anne Marie Sheldon: Thank you so much, Joe. We appreciate it.

Jeromie Sheldon: Appreciate it, Joe. All the best. Thank you

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2652: CEO Reveals Exclusive Look on Managing a Multi-Generational Real Estate Investment Firm with Daniel N. Farber

Who makes the decisions in a family-run business? What metrics are used to evaluate the CEO? What kind of challenges do they face? Daniel N. Farber helps answer all these questions in today’s episode by pulling back the curtain on what being a CEO for this type of investing firm is like. From what his KPIs are to who he reports to, Daniel gives the Best Ever listeners an insider look at how this multi-generational real estate investment firm is run.

Daniel N. Farber Real Estate Background

  • CEO of HLC Equity 
  • HLC Equity is a multi-generational real estate investment firm that has owned and operated real estate in over 25 states throughout the USA, having owned and managed over 7 million gross square feet of commercial, residential, and development land.
  • Prior to real estate, he served in the Israel Defense Forces as a Staff Sergeant in an elite infantry unit.
  • Based in Pittsburgh, PA 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Daniel Farber. How are you doing, Daniel?

Daniel Farber: Very good. How are you, Joe? Thanks for having me.

Joe Fairless: I’m glad to hear that, I’m well, and you’re welcome. I’m grateful that you’re on the show. A little bit about Daniel – he’s the CEO of HLC Equity. HLC Equity is a multi-generational real estate firm. They’ve owned and operated real estate in over 25 states, and they’ve owned and managed over 7 million gross square feet of commercial residential and development land. His company is based in Pittsburgh, Pennsylvania. They invest, as I mentioned, all over the US. With that being said, Daniel, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Daniel Farber: Sure, definitely, 100%. So real quick on the personal side for me… I actually never thought that I was going to go into real estate, and much less a family business. I kind of started out in my career through journalism and then going kind of the diplomatic route, eventually becoming a strategic consultant to high-tech companies and some political organizations. Through that, I kind of touched upon business and several different factors that got me much more interested in going that route. That’s kind of where one thing led to another, and I got eventually involved in real estate first and then eventually into the family business, which is where I am today.

As you said, HLC equity is a multi-generational real estate investment company. We are a company that has gone through various iterations, having been around for decades. Basically, founded by Herman Lipsitz, who was my grandfather. He was just an ambitious entrepreneur, a child of the depression, just an all-around great, hardworking guy. He had a distribution business in the morning, a law practice in the afternoon, and with the proceeds, he would buy real estate in the evening. It was at a time when it was a little bit different of a market than it is today, so I guess you could do that, even though I often think about how did he do that when a fax machine was considered innovative. But he did it.

So basically, throughout the period of time, there was everything from land and development and residential shopping centers. Eventually, as he got older, really the strong focus became more neighborhood shopping centers, and eventually, just net leased assets was really a bulk of the kind of company holding.

That went for some period of time, until eventually, as I got into the business, and some other folks got into the business, we really wanted to make a shift and we said “How are we going to grow this thing? How are we going to take what we have and to grow it?” So what we’ve done is really shifted into the multifamily space, done a lot more in the multifamily space over the last, call it, seven to eight years… And then also, while our company used to be primarily just kind of deal by deal with partners, Pari Passu, or else just on our own, we built out the infrastructure and the wherewithal to be able to be stewards of investor capital and bring in investors of all shapes and sizes. That leads us to kind of where we are today.

Joe Fairless: It’s a multi-generational real estate firm, as you mentioned, and you are the CEO. I’m curious about the structure. Who do you report to as the CEO?

Daniel Farber: You have a very good question. Part of our growth was bringing in obviously really great people. We have a committee that’s kind of our executive committee, so that’s the management, and then we have the family, and we separate the two. At the end of the day, decisions are made by the family, but with heavy weight by the executive committee.

Joe Fairless: Interesting. Okay. How many people are on the executive committee?

Daniel Farber: Five.

Joe Fairless: Five people are on the executive committee. And how many people have votes in the family?

Daniel Farber: There’s three, at the end of the day, but they’re weighted in different ways. The actual ownership is somewhat proprietary, just because it’s family, but it’s weighted in different ways. But there are really three votes all at all.

Joe Fairless: Okay. What are the responsibilities of the executive committee, those five people who are not family members?

Daniel Farber: It’s really team members that we brought in, from CFO, head of operations, head of asset management, and head of investor relations.

Joe Fairless: Okay, I’m with you. So they’re not board members, they’re active employees in the business who make up a committee. And since they are on the ground and know the business, that’s why the family takes their opinion into account.

Daniel Farber: Yeah. Not just take into account, but very seriously. I’ll give you an example. Let’s say we have some sort of building structural issue in a property in Dallas, which is typical for some properties in Dallas, as you know. Our head of operations and our head of asset management – they’re going to know much better what the situation is, and their opinions, for us, matter much more, because they’re on the ground, as you said. Much more than like if it was just important executives with fancy titles. That’s why their opinions count more when it comes to just daily operating this stuff.

Joe Fairless: What are the metrics by which you’re evaluated as CEO?

Daniel Farber: We actually use a system from the Scaling Up Program, if you’re familiar with it. Every quarter we have KPIs, and everybody on the team has KPIs, down to — everybody. Based off of it, for hitting those KPIs, that is definitely what I’m judged on. There are other factors obviously also, but that’s kind of how we really, from a numbers standpoint, keep track of it.

Break: [00:06:09][00:07:42]

Joe Fairless: Just to get an idea of your responsibilities, what are your KPIs for this quarter?

Daniel Farber: Annually, there’s a certain amount of acquisitions that we want to hit and there’s a certain amount of investor acquisitions that we want to create new relationships. Just as an example, one would be, per quarter, we want to do our kind of sweet spot acquisition, which is anywhere between 20 to 70 million dollar purchase price. That’s an example of, if we hit that. But then it goes to marketing and how much content we’re putting out, hence podcasts… There’s how many investors come into our portal operationally, are we hitting all of our KPIs? So on and so forth. It really touches every division.

Joe Fairless: What are your new investor goals per quarter?

Daniel Farber: Right now, we’re shooting for 40 new signups per quarter. We pretty much have hit that.

Joe Fairless: Nice, congrats. Well, no need to do any more marketing. You’re good for this quarter.

Daniel Farber: No.

Joe Fairless: [laughs] I’m kidding.

Daniel Farber: That’s the point.

Joe Fairless: I know.

Daniel Farber: I don’t know if we’re shooting too low, or the folks that are in charge of that are just doing an amazing job… But I’m happy that we hit it.

Joe Fairless: Is a sign-up someone who signs up for your portal and shows interest? Or is that someone who actually puts money in a deal of yours?

Daniel Farber: Great question. No, the 40 is that we build a relationship with them by them signing up.

Joe Fairless: So 40 new people who fund, invest money with you per quarter?

Daniel Farber: Yeah. You’re asking a really good question, because there’s a huge difference between somebody who signs up and somebody who invests. And I don’t mean it in the sense that there are so many people who can sign up and very few invest. I mean it in the sense that it’s touchpoints. So I’ve had conversations with folks, and it has led to nothing for three to four years, but then in year five, it has led to something significant, whether it’s a large investment, a large partnership, or whatever it may be. So it’s very hard to quantify that stuff. I think it’s actually maybe a little bit too transactional to say like, “Okay, you got them in. Did they invest?” Obviously, you have to have forward momentum. We talked about this a lot, because it comes down to networking also. At the end of the day, we just want to build meaningful relationships with great people that we can work with over the long term. So if they invest that quarter, or two quarters, or in five years, or not at all, that’s just a matter of [unintelligible [10:03] if you get what I’m saying.

Joe Fairless: Mm-hmm. What have you seen is your conversion rate from people who sign up to learn more to people who actually fund?

Daniel Farber: I don’t have an exact number for you, honestly. I would need to kind of dig deeper, because we actually just completed a transaction in which we saw, thankfully, a lot of traction, and that literally just closed this week.

Joe Fairless: Congrats.

Daniel Farber: Thank you very much. I think that in order to get a real solid number, I would need to get back to you on that. I don’t have the exact rate as of the last kind of quarter.

Joe Fairless: Taking a look at the people who did fund the new leads, what are the top three lead sources for those individuals?

Daniel Farber: I would say the top lead sources…

Joe Fairless:  Where did they come from?

Daniel Farber: No, I got you. I’m just trying to think. So we fund these deals in different ways. We have relationships with wealth management groups that bring their clients into our deals, and those are significant checks usually. We have our own friends and family-accredited investors who bring in anywhere between 100 to 500,000. Then we have our own HLC Direct which is our direct to investor platform. Those are really our three routes. We do work with some private equity groups when it gets to the larger deals as well.

Joe Fairless: Got it. Okay, fair enough. So going back to the goal of 40 new people who are funding…

Daniel Farber: Our social media platform is not as robust as many others and it’s probably an area we should put more focus on. We definitely get a lot of traction to our newsletter. So we get people to sign up to our newsletter, a lot of times that does come from social media, but it also comes through other venues which I can discuss. Through that newsletter, frequently, we get a lot of signups onto our investor portal. We run a Global Real Estate and Technology Summit, and I can get into what that’s all about. But interestingly, the most amount of kind of signups to our newsletter comes from that.

Joe Fairless: Okay. How many people on your newsletter?

Daniel Farber: I believe we have roughly 3500.

Joe Fairless: Wow, that’s a good chunk of people. Let’s talk about this. The reason why I asked these questions is most of the listeners are active investors, and they’re looking to do similar things or are currently doing similar things.

Daniel Farber: I think it’s great questions. I don’t have all the answers because it’s stuff that we’re constantly switching. Because I don’t think that there is the magic formula. I think different groups kind of like to attract in different ways, but I’m definitely happy to discuss it.

Joe Fairless: Just for my own clarification, a couple of things. HLC Direct, you said that’s direct to investor platform. What’s the difference between that and just working directly with friends and family?

Daniel Farber: This allows us to expand. Our whole thing is we want to expand our relationships and we want it to be direct with us. The more direct we can be, I just feel, the stronger the relationship. Forget about the broker fees, or if you work with other platforms there are fees, that’s not really what I’m interested in. What I’m interested in is having direct relationships with investors. So it’s allowed us to grow that because people are either receiving our newsletter or seeing stuff on social media. They frequently like what they see and so they sign up for our platform for HLC Direct. Through that we’re able to build more relationships.

Joe Fairless: I get that. But what I’m trying to understand is you mentioned the three groups, wealth management groups, friends and family, and HLC Direct. So what’s the difference between friends and family and HLC Direct?

Daniel Farber: Friends and family are people that I would say that we have relationships with, and we’ve had relationships with for some time. The traditional friends and family route. HLC Direct is exactly what I said of the lead source. This goes back to your question, the lead source being either a newsletter, or social media, or some other form of third-party ways of getting to them. Again, we have our summit, which is helpful as well.

Joe Fairless: Got it. Okay. The Summit, Global Real Estate and Technology Summit, when’s the last time you did it and how many people attended?

Daniel Farber: First of all, it’s global because we actually don’t do it in the US. Even though we’re fully US-based, we actually host this in Israel. The last time we did it was in 2019. We were obviously in the planning stages of 2020, and then we were unable to do it. We hope to do it this coming spring or summer. The last event that we had, we keep it an international but pretty high-level event. The focus is on quality over quantity. We have 350 people, I think, the last time, we have several sponsors, we have everybody there from the family offices, VCs that are interested in investing in technology, technology companies, real estate owners, and operators. It’s really in order to build an ecosystem around this phenomenon that is now mainstream. But when we started it, it was less so of the convergence of real estate and technology.

Joe Fairless: Are you hosting it this year?

Daniel Farber: I very much hope that we will be able to. Hopefully in the beginning of June. Are you coming?

Joe Fairless: How can I and others learn more where do we go?

Daniel Farber: 100%. On hlcequity.com, under Our Brands, one of the brands is Proptech 360, that is the event. Or you can just Google Proptech 360 Israel and it’ll come up.

Joe Fairless: Nice. As CEO, you said you’ve got the acquisitions, focus, new investor focus, among other things also, what’s been the most recent challenge that you’ve had?

Daniel Farber: I think that the challenge is by far the acquisitions environment, the competition, and just finding deals. I guess we got spoiled buying deals in Denver and Dallas for seven or eight cap. The readjustment in mentality, that’s hard, and also just getting comfortable in making sure that you’re buying right because real estate is all about the buy. That’s very challenging to be confident in today.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

Daniel Farber: I think I just said it, the buy really matters. Because from there, you have so much room if you can buy right. I really do think that that is great. The next one is just buy stuff that you can hold for a long time. Because I’ve seen, over the decades, if you’re able to buy right, and then you’re able to hold, you can do well. It appreciates, you can depreciate, you can refinance, you can do lots of great stuff, and it really is powerful.

Joe Fairless: Let’s pretend tomorrow, you’ve got a closing, would you rather be buying a 300 unit or selling it tomorrow?

Daniel Farber: I would rather be buying it.

Joe Fairless: Why?

Daniel Farber: Because I’m sure, similar to you, every single day I have people knocking on our door saying we have this great off-market offer, we’re going to offer you a premium, and so on and so forth. Then the question is, right away, what are we going to buy? I think that in my opinion, again, we just bought a brand new 330-unit deal and we have other deals under contract. Obviously, it’s a great seller’s market but at the same time, if you’re thinking long term, which is what we always try to do, at the end of the day, holding hard assets right now, I think, is going to be beneficial.

Joe Fairless: What deal have you made the most amount of money on?

Daniel Farber: You know, it’s funny. The deals that we make the most amount of money on are deals that we do on our own, and there are what I call quirky deals. We don’t do them with investors because it’s more risk than we’re willing to take on responsibility for investor capital unless they’re highly sophisticated and are willing to basically lose it all. We do the best on deals where we don’t care about the cap rate. But we know there’s some sort of intrinsic short-term value that distorts what the cap rate is. We’ve done deals in Brooklyn, New York where we bought smaller multifamily buildings for, call it a going in of one and a half to two cap. But we were able to add value in specific ways on that deal, we kind of knew it going in, and we went around and sold it for great returns a year or a year and a half after that.

Joe Fairless: What was the value-add play there?

Daniel Farber: With that specific deal, we knew that we could buy certain stabilized tenants, we knew that there were renovations that we could make. This was going back in 2012, we could see that the market there was just becoming super hot. So a mixture of our tenant buyouts that we were able to do our renovations, and then the market taking off was helpful in that. But again, like going in, it’s not a sure thing. It’s very nerve-racking buying in a low cap like that. We did something very similar, and this wasn’t multifamily. But we did something very similar right around April, as COVID is hitting. We’re contacted by a broker to buy an occupied Veterans Association Clinic. Here on the deal was there was one year left, the upside was it was a development deal, and assuming that the VA left, there was development rights to build 80 to 90 units. We looked at the deal and we said, “Okay. The VA, they’re paying way less than they should. If we want to, we can develop it even though we’re not developers. We could partner with a developer and build a bunch of multifamily units in this prime neighborhood.” But going in, again, we were paying a two cap. In the end, we ended up being able to work out a deal with the VA, which was my preferred route because it was safer. We got a brand new 10-year lease with the government, around three times higher than what our original rent was. We were able to over double our money within a year, and then not sell, and finance it, and just enjoy. Those types of deals are the deals that we do the best on financially, but that’s not where our focus is in terms of growing our business.

Joe Fairless: On the flip side, how much have you lost as far as the most money you’ve lost on one deal?

Daniel Farber: For me personally, since I’ve been heavily involved in the business, on our new acquisitions, there have not been any. I don’t say that because I think they were amazing, just that we’re lucky because it can happen. Definitely, with the firm, especially in the shopping center business which is a whole other animal, there have been occasions where let’s say a major tenant leaves and that causes a huge financial hit. The exact largest one I can’t point to, but it definitely has happened. Frankly, if it’s a group that’s been around for a long time, then they should have some sort of losses, or else they haven’t been doing enough real estate.

Joe Fairless: We’re doing a lightning round. Are you ready for the Best Ever lightning round?

Daniel Farber: I hope so.

Joe Fairless: I know you are. Alright, first a quick word for our Best Ever partners.

Break: [00:20:34][00:23:22]

Joe Fairless: What is the Best Ever way you like to give back to the community?

Daniel Farber: Because I’m so involved in real estate in a built environment, I’m involved with an organization that’s very similar to Habitat for Humanity. I just really think that that’s something that speaks to me because we’re able to provide decent housing to people who really need it.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Daniel Farber: I think the best way is either to connect with me on social media, which I’m always happy to connect with new people. Or to sign up for our newsletter and you’ll be able to see all of the activities that we’re doing. We don’t necessarily publish everything out on social media but we do put a lot more in our newsletter. You can do that by going to hlcequity.com, and just to connect, and you can see how to subscribe to our newsletter.

Joe Fairless: Your website will also be in the show notes for everyone. Daniel, thank you so much for being on the show and sharing…

Daniel Farber: I really appreciate it. This was great. Thanks for everything you do for the industry.

Joe Fairless: Yeah. Interviews like this are helpful for everybody involved. You gave some insightful information about your business and I sincerely appreciate that. I hope you have a Best Ever day and we’ll talk to you again soon.

Daniel Farber: Great, thanks a lot.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2651: Three Things All Syndicators Should Do to Protect Themselves When Making Deals with Rick Martin

Rick Martin caught the investing bug when he rented out his first house in 1998, helping to pay for film school. Rick continued to make deals while maintaining a full-time job, and just recently switched to syndicating full-time. From making good deals to choosing good partners, Rick reveals the most important lessons he’s learned over his 20+ years of CREI, including three things you can do to weather any storm as a syndicator. 

Rick Martin Real Estate Background

  • Been involved in real estate since 1998 and recently made the transition to a full-time career as a syndicator.
  • Founder of Fortress Federation Investments, which provides multifamily investment opportunities to its investors, helping them build wealth and multiple income streams.
  • Does both active and passive investing.
  • Portfolio: Throughout his career, he has bought and sold single-family and small multifamily. He still owns a fourplex, but otherwise, he is now invested both actively and passively in 1,992 multifamily units.
  • Based in Redondo Beach, CA.
  • You can find him at www.fortressfederation.com
  • Best Ever Book: Who Not How: The Formula to Achieve Bigger Goals Through Accelerating Teamwork by Dan Sullivan

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Rick Martin. Rick is joining us from Redondo Beach, California. He has been involved in real estate since 1998 and has recently transitioned into a full-time syndicator. Rick is both an active and a passive investor and has almost 2000 units. Rick, thank you for joining us. How are you today?

Rick Martin: I’m great, Ash. Thanks for having me.

Ash Patel: It’s our pleasure. Rick, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Rick Martin: Way back in the day, around 1998 or so, I bought my first house. I was with a girlfriend, we were going to buy it together, she backed out, I moved forward. A year later, my career, my life took a change, so rather than selling it, I hung on to that thing and rented it. That was up in Seattle, Washington, and I’d gone off to film school up in Vancouver, BC. I was basically a broke student, but I was getting these rent checks, so that’s how the light bulb went off and I discovered passive investing. Really, it wasn’t that passive, because I hired a best friend to manage it and that led to all kinds of problems. But lesson learned.

Ash Patel: How did you progress in real estate from that one house? Did you just buy another house?

Rick Martin: My plan at that time was “I’m going to try to do this once a year.” But coming out of school, having debt from school, and whatnot, that didn’t quite work out. But I did continue to invest as I made my way down the coast. As I said, I was in Vancouver, and I ended up buying a place in Las Vegas, which at the time seemed like a home run, but that was 2004. Four years later, it didn’t look so good, but I held on to that baby.

Then I actually doubled down during the valleys of that recession. I bought some more in Vegas, and I bought some more in the Desert Hot Springs, because at that time I was living in Los Angeles and that was the place where we could go out. I partnered with a friend. It was really hard to get a loan, basically. We were working, we had good jobs, but it was really hard. The capital markets had sort of dried up so we were coming out of pocket, but paying very little for places. Then we put a little bit of money back into them and basically do the BRRRR before I learned about BRRRRing.

Ash Patel: This was all a side gig, right? You had a full-time job?

Rick Martin: Absolutely. It wasn’t like we were doing 20 homes a year. It was looked at that time like “Okay, this is going to be a part of my nest egg.” But then as I began to sell these things, they were really far exceeding my returns in the stock market, and I just really wanted to become more focused on real estate in general. Then toward 2016 or 2017, I continued doing the out-of-state thing. I picked a market, I was sort of trying to decide between Kansas City, Indianapolis and Birmingham, and I settled on Indianapolis and did some BRRRRs and some flips there. Again, I was still working full-time. I wasn’t really considering a career, just as one day this is going to help me retire earlier. Then I got involved in an online program about multifamily. I can’t remember, maybe it was the Best Ever podcast, but I learned about multifamily and thought this is the way to go.

I joined an online course that had a network, a Slack community, got to know several people within that community, then learned about syndication, and actually went passive for my first five. I’m happy to say those have done well, they’re doing well. I knew that I wanted to get involved more actively, so I became a general partner.

The areas I was most interested in at that time was the West, because I knew it the best. But I really wanted to get more involved in the Sout-Eeast, because I could see what was happening down there, as well as Texas. So South-East Texas is sort of where I set my sights. I was also looking in Tucson, Arizona, but logistically it was very difficult to hop on a plane, even Tucson which isn’t that far from Los Angeles. I was also involved in Columbus, so I was flying back to the Midwest trying to meet brokers that way. I thought something needed to change, at least for me, my lifestyle. I’m married, I got a couple of young kids, I couldn’t be hopping on a plane all the time. So I focused on partnerships and made some great relationships in the South-East and in Texas, and I co-sponsored alongside of those guys.

Ash Patel: Rick, early in your investing career, when you were doing these single-family houses, did your friends know what you were doing with investing in real estate?

Rick Martin: They were always just sort of impressed. I went to the University of Washington School of Business, but I had this scratch that I needed to itch. I tried pursuing music, because I was a musician from an early age. All the while I kind of kept my right brain going in investing; this is before I made that career change I spoke of earlier. They were always impressed, like “Wow, how are you doing this Mr. starving artist? You’re buying these houses; you’ve got a nice nest egg going.” I kind of tell them how I did it. But sometimes people have a hard time wrapping their heads around real estate.

Ash Patel: The reason I asked that question is had you taken on some of these friends as investors, you would have scaled sooner…

Rick Martin: Yeah, absolutely. I didn’t think in those terms. The whole using other people’s money thing had come to me much later in life. There are many things I would do differently or I would tell my younger self to do. But yeah, I was basically saving, and then when I partnered, we did bring in a third silent partner. But for the most part, it was our own money.

Ash Patel: And Rick, you mentioned Birmingham, Indianapolis, and what was the other market?

Rick Martin: Kansas City.

Ash Patel: Why did you pick those three, and then how did you settle on Indi?

Rick Martin: I wish I could say that I was studying underlying market fundamentals… But back at that time, I just sort of went with where the buzz was. I shot first and asked questions later. For me, personally, I thought Birmingham was a little flat in growth. There are some markets that were extremely hot, but I thought the barriers to entry were too difficult… And it came down to Kansas City and Indianapolis. And I did like the mix of appreciation and cash flow in Indianapolis. That’s where I started and that’s how I chose it. And then you can go back and you can check the fundamentals. It wasn’t until later that I really started researching underlying market fundamentals.

Break: [00:06:54][00:08:27]

Ash Patel: What year are we talking about that you did Indianapolis and Columbus? This is recently?

Rick Martin: 2016.

Ash Patel: Okay. And right now you’re focused on the South-East?

Rick Martin: South-East and Texas. So we have properties in Augusta, Georgia, we have three now in Sarasota Bradenton, Florida, one in Lubbock, Texas, and another in Webster, Texas which is like a Greater Houston suburb.

Ash Patel: Do you still shoot from the hip, or is there some analytics behind these now?

Rick Martin: No, there’s a lot of analytics. I’ll usually start by assessing what the downside risk is, definitely compare absorption rate based against vacancy and occupancy, see what’s going on there in terms of what’s driving the population. Take our Florida market, for instance – the average occupancy right there is 98% right now, which is pretty crazy. The last two years have had dramatic rent growth. We’re talking 27% year over year rent growth. So we don’t depend upon that. We’ll underwrite it with more of a 2%, 3%, 4%, and kind of consider that extra spike that we’re getting right now as gravy, the cherry on top.

Ash Patel: Rick, I see a lot of syndicators chasing deals with very low cap rates. What happens if interest rates rise,  what are your thoughts on that?

Rick Martin: Yeah, it can happen, and that’s sort of the downside risk I mentioned. I think everybody’s in fear of that. We keep waiting for the Fed to raise interest rates and see if cap rates are finally going to rise along with them. I don’t think you could stand on the sideline, but I do think you have to be very careful. Make sure — whether it’s a deal that you’re actively involved in or passively involved in, make sure that it’s very well-capitalized, make sure it has flexible financing, and make sure it has active cash flow. I think if you have those three things, you can weather any storm, and you can hold out for a better day to sell. I’ve hung on to certain deals for a long time…

Ash Patel: Just like your house in Vegas.

Rick Martin: Yeah, exactly. It’s a perfect example. I held out, I actually sold that thing for a profit, when it looked pretty sorry there for a while. So yeah, the flexible financing I think is a big one. You don’t want to be pushed out of a loan any sooner than you want to be.

Ash Patel: What does that mean, flexible financing?

Rick Martin: It’s tricky, because if you get into fixed long-term debt, that might not match your business plan. Let’s say your business plan, if it’s a value-add and you want to go in, you want to renovate units, maybe turn tenants over in a matter of 18 to 24 months, then you’re going to increase the value, you’re going to go back to the bank and possibly refinance, and pull investor capital out… You’re gonna be stuck in that loan because there are some pretty steep penalties that you’re going to have to pay on it. So you might want to get a floating rate. To some, that sounds risky. But there are things that you can build in to protect yourself. You can purchase a cap, so that the interest rate doesn’t rise any farther than, say, 5%. There are also forward-looking curves. There’s data that predicts what future interest rates are going to do. So you build that into your underwriting, and it accounts for rises in interest rates; therefore, you’re not left holding the bag when you — say you’re coming in at 2.8%, which is like some of the rates we’re getting today. And it’s floating — it might float on up to as high as 5% in a couple of years, you want to make sure that you have all that built into your underwriting.

Ash Patel: Got it? Rick, you’ve got almost 2,000 units. What does your team look like today?

Rick Martin: Actually over 2,200 now as of this call. We’re just closing on another deal. I have two sets of boots on the ground, because like I said, I do like the southeast and I do like Texas. In each one of those, we have an acquisitions person, and we have an asset management specialist in each one of those markets. In terms of marketing and due diligence, we all sort of team up on that, and then I oversee investor relations. I do quite a bit of content development, just to educate the investors, which I enjoy. Then we have some pretty sizable property management teams in place. We have a property management company in Florida, they have over 10,000 units. They know what they’re doing, they’ve been doing it for a while.

Ash Patel: Financials and legal?

Rick Martin: Financials and legal – we have pretty much the same attorney on each deal. So the PPM looks pretty similar, one over the other. We have accountants, we have bookkeeping; it’s quite a staff, from A through Z.

Ash Patel: What were some of the growing pains that you encountered as you’re coming up to 2,200 units?

Rick Martin: I think the toughest thing for me was breaking in to syndication. I didn’t realize it was going to be such a challenge. I was just kind of trying to find my way and see how I could fit in, where I could deliver the most value to people. Quite honestly, that’s what kind of led me into passively investing, which I do out of my solo 401k. I’d come close on a couple of LOIs, but I just wasn’t sealing the deal. And not only did I want to learn, but I wanted to start growing my wealth. So I started meeting with a few operators that I met through various conferences, and got to know them, got to like the way they worked. I also got a peek behind the curtain, kind of see how they communicate with their investors. Everybody does it differently. There’s a lot of content coming in every week, others are pretty quiet, and then a deal comes around. So everybody does it differently, and I can sort of learn from that, and I did, and I still do.

Ash Patel: What’s an example of a challenge that you had with an investor?

Rick Martin: That’s an excellent question. One person specifically comes to mind. He just didn’t want to be a part of an audience. And when your investor base grows, you have to look toward some way of managing that. So you look at a CRM. What’s that? Customer…

Ash Patel: Relations management.

Rick Martin: Relation management, thank you. Well, when I would send out maybe a blog article or some market information, maybe a video that I did, he didn’t like that. He unsubscribed; and he had just subscribed, and he seemed very interested. We’d had a conversation. So I said, “Hey, what’s wrong? What did I do?” He just told me, flat out, that he didn’t want to be a part of an audience. It’s challenging, because I always have to remember that guy. When I’m sending out important information, like a deal, for instance, I have to go “Oh yeah, I’ve got to contact that guy separately.” That’s okay, I’ll do it if that’s what he likes. But it’s just a matter of always remembering. Okay, I have to remember him. Then if other people do that, then it’s kind of hard to track.

Ash Patel: He’s got to have the cleanest inbox ever.

Rick Martin: He must. He’s very particular.

Ash Patel: Yeah. Interesting. What about a challenge that you’ve had with co-GPs or partners?

Rick Martin: I think the biggest thing is, initially, people have reached out to me and asked, would I like to participate in their deal, and I’m always flattered, but if the deal is happening within the next several months, I just can’t do it. I think the biggest thing is you just have to allow enough time to really get to know these people, and meet with them in person, and just make sure that your interests align, that you really do complement each other’s skillsets, and there are no quirks that might rub each other the wrong way. I’ve seen a lot of partnerships go South pretty quickly. I have a little bit of fear of getting into a permanent partnership, because I know that can happen… But I’ve been very fortunate with the level of communication, and I try to reciprocate, and I try to pass that on to my investors as well. So I’ve been lucky, they’ve been very transparent, and I try to do the same for them.

Break: [00:16:14][00:19:07]

Ash Patel: Rick, does that mean you don’t have any permanent partners in your company?

Rick Martin: I’ve come close a couple of times. And for whatever reason, it wasn’t going to work out. Right now, in a sense, I’m sort of a one-man-band. But I’m always on the hunt, I have a lot of great conversations, and I’m always open to that. But right now, Fortress Federation is working pretty well alongside the other partners. They’re pretty semi-permanent; we partner on every deal.

Ash Patel: But the doors open for anyone to do their own venture.

Rick Martin: How do you mean?

Ash Patel: I’m confused about what a permanent partner is, versus the partners that you have now.

Rick Martin: There are lead sponsors and there are co-sponsors. I consider my boots on the ground the lead sponsors, because they’re the ones that are actually operating the deal. So they would look at me as a co-sponsor. Now, I’m talking with someone and we’re talking about doing a deal together where we would be the leads, in Georgia. That person would become a part of Fortress Federation permanently. Like I say, I’ve had those conversations, but I’m very careful, and I think I’m leaning toward that, but at this time, I’m maintaining my co-sponsorship role.

Ash Patel: Historically, you’ve had partners on deals but not so much a partner in your entity, your Fortress company?

Rick Martin: Exactly.

Ash Patel: Got it. Okay. Interesting. Proceed with caution.

Rick Martin: Well, when I do partnerships with people, then everything is legally written out. There’s always an LLC that we enter together. So when I do vet a partner, it’s not as if it happens overnight. These are people that I consider, basically, friends. We hop on the phone and have conversations about things other than real estate as well.

Ash Patel: Rick, if you can go back and give your 20-year-old-self advice, what would it be?

Rick Martin: I think to scale faster. I think, for me, I didn’t really learn about the power of real estate until I listened to my first Bigger Pockets podcast. Bigger Pockets have been out for a long time. I wish I had opened myself up to greater resources. I wish I read more real estate books. I think podcasts were something pretty new. I think it would have been nice having the technology that we have today, but I think there were resources back then. Syndication has been around a long time. I would have started digging into other resources sooner.

Ash Patel: Rick, what is your best real estate investing advice ever?

Rick Martin: Don’t ever be afraid to walk away from a deal, no matter how much time and effort you put into it. It could be heartbreaking; you spent months and months underwriting, you’re flying to the market, you’re speaking with property managers, someone’s accepted your LOI… But you find something; if it’s a red flag, pay attention, and you’ll get another deal. It may take a lot of time, effort, blood, sweat, and tears again, but better to not lose your shirt than to do a bad deal.

Ash Patel: Have you been burned by following through on a deal that you shouldn’t have?

Rick Martin: I have really not. I’ve never lost investor money. But I did make sort of a dream investment where I bought a piece of land in Costa Rica. It was going to be my dream home. Again, I had a partner on that deal, and he sort of switched philosophies midway. We paid a lot of cash for that, and there really was no income coming in. We did this back in 2006. And when it became apparent that we weren’t going to get water, like we thought we were going to get water and electricity, it was just kind of burning a hole in our pocket. We had to sell it at a bit of a loss and walk away.

Ash Patel: I think that is important advice. Even if you’ve paid thousands for an appraisal, you have lender fees, title fees, if it’s not the right deal, you’ve got to walk away.

Rick Martin: You do, and it hurts. Sometimes people have money that’s gone hard and you can’t get that back either. But you really have to pay attention to the red flags.

Ash Patel: Don’t let your ego force you to continue.

Rick Martin: No. Or maybe you want it so bad… You’ve been wanting to get into this business for the longest time, or you really want to do a deal… Don’t let that overtake the facts.

Ash Patel: Yeah. Thank you for that. Rick, are you ready for the Best Ever lightning round?

Rick Martin: Heck, yeah.

Ash Patel: Let’s do it. Rick, what’s the Best Ever book you recently read?

Rick Martin: Recently, I would have to say Who, Not How, but I will plug the Best Ever book on syndication. I do think it’s a comprehensive resource.

Ash Patel: Awesome. Who, Not How – what impact did that have on you?

Rick Martin: Just not to try to do everything yourself. How refers to how I’m going to do this? What are the tactics I’m going to use, when you really should be leveraging other people who can maybe do it better, and free up your time to focus on big picture items that you should be focused on.

Ash Patel: Rick, what’s the Best Ever way you like to give back?

Rick Martin: I have a soft spot in my heart for kids without parents. I have a few places that I’d like to donate. I give out a lot of free content. One of my mantras is just add value no matter what, deliver good content, and don’t expect anything in return.

Ash Patel: I love it. Rick, how can the Best Ever listeners reach out to you?

Rick Martin: The best way is to go to www. fortressfederation.com. There’s a free resource that’s a quick start guide to investing in syndications.

Ash Patel: Awesome. Rick, thank you for sharing your story with us today. From being on the West Coast, buying a house you were supposed to buy with your girlfriend, that didn’t work out, but that kind of got you the real estate bug, and you’ve achieved a tremendous amount of success. Thank you for sharing your story with us.

Rick Martin: Thanks so much, Ash. It was a pleasure.

Ash Patel: Yeah, pleasure is ours. Best Ever listeners, thank you for joining us have a Best Ever day.

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JF2650: How One College Grad Grew His Portfolio to 359 Units in 1.5 Years with Braeden Windham

During his senior year of college, Braeden Windham wasn’t sure what he wanted to do with his career. It wasn’t until he met his future partner at an event that he found direction. Handed a pile of books and a list of podcasts about CREI by his partner, Braeden spent the rest of the semester studying real estate investing and syndication. Fast forward a year and a half, and now Braeden is the Founding Partner of multifamily investment firm Well Capital. In this episode, Braeden talks about how clarity and transparency guided his success over the past year, along with a few lessons learned along the way.

Braeden Windham Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Braeden Windham. Braeden is joining us from Dallas, Texas. He’s the founding partner of Well Capital which is a multifamily investment firm. He has one and a half years of real estate investing experience. Braeden has 359 units across three apartment complexes. Braeden, thank you for joining us and how are you today?

Braeden Windham: Thank you for having me. I’m doing well. How are you?

Ash Patel: I’m doing very well. It’s our pleasure. Braeden, before we get started, can you give the best of listeners a little bit more about your background and what you’re focused on now?

Braeden Windham: Absolutely. First off, thank you for having me. I’m excited about the conversation today. How I got into real estate… First work experience – I was a ranch hand at 16 or 17 years old. I really learned what it looked like to work really hard for my money, and I never really wanted to do that again. Fast-forward to college, I had an internship with a company that bought other healthcare companies. That was kind of my first, I guess, exposure to purchasing assets and what that could do for you. I guess I didn’t know how it really applied until my senior year of college. I really didn’t have a clue what I wanted to do professionally. I figured I didn’t really want a boss, but I thought maybe being a real estate agent was the closest thing I could get to that. I met my business partner actually at a church event, and he dumped five or six books in my lap and a bunch of podcasts. He was like “You need to go learn about real estate investing and syndication.” I had no idea what that was, but I just went all in, because I didn’t have much else to do. I think I had like two or three classes in my last semester. That’s kind of how I got started.

Since then, he hired me on out in Florida to actually do construction management work, where we were basically taking government grant money and managing on the construction of 500 or so projects. We really learned where our strengths and weaknesses were in our partnership. Since March of this year, I left that to just be syndicating full-time and investing in real estate. That’s a little bit about my background. Now we’re just focused on acquiring and repositioning assets in the southeast and the Midwest. Really anything over 100 units at this point.

Ash Patel: What a story. What the hell were you going to college for?

Braeden Windham: I was actually in finance, with a real estate background. I went into it and I had no idea what I wanted to do. I actually went to my real estate teacher to ask him about syndications, and he had no idea what it was. So I filled my ears with a bunch of podcasts at that time, just to self-motivate and learn about the industry.

Ash Patel: You should go back and teach a class on syndication.

Braeden Windham: They actually do have a syndicator that’s teaching the class now. If I could just go back three or four years, that’d be great.

Break: [00:03:20][00:04:53]

Ash Patel: Alright, so let’s back up a little bit. This person that you met, who was then your partner later on, you guys partnered together immediately and started working on these projects?

Braeden Windham: Yes. He had had a few Airbnb experiences, he had invested in some Airbnb properties, and then also had been exposed to development from a really young age, and his family had been involved in real estate. So he was a little bit ahead of me in that sense, and really knew more about the syndication space. I guess when I jumped in, I was gung-ho about it, and I was like, “Let’s go to the next event, if possible.” Because I was listening to actually Rod Khleif’s podcast, and he was having an event in LA. We flew out within three months of me learning about this stuff and I just invited them out. That was the first time we had ever hung out together, been in the same room together, was at that event. Just since then, we’ve been able to work together for probably close to a year just outside of real estate so we’ve really gotten to learn. He likes to say that he’s the gas and I’m the brakes, and I think that’s a really good metaphor for our partnership.

Ash Patel: Is he still a partner in your syndications?

Braeden Windham: Yeah, we founded Well Capital together. The origin of Well Capital is we were both giving to the same charity just on a personal level, and we woke up one day and we’re like, “Why don’t we make this a company-wide thing?” Because we gave to charity water and, basically, they take funds overseas to give people clean water who have never had it before. So we were just like “Why don’t we rebrand our company as Well Capital and just make it more about that than syndicating apartments?” I think that’s an easier conversation to have with whoever, passive investors or anyone you’re going to talk to. It’s an easy way to make the intro and make it more than about yourself, it’s more about other people.

Ash Patel: Braeden, what was your first syndication?

Braeden Windham: That was a 47-unit in South Texas. It was in Rockport, actually.

Ash Patel: What were the numbers on that deal?

Braeden Windham: We bought that for 2.3, we put about 1.2 million into it, and then right now, we’re going through a refi. A lot of lessons were learned on that first deal. We as a GP probably aren’t going to make much, but it’s a huge learning lesson. I think the appraised value was around 4.4 or 4.6, and that was 18 months ago, which is insane. So it just taught me a lot about what I should be doing, and what I can move forward and do better. I’m super thankful for the first deal.

Ash Patel: Why are you not going to make money? I see over a million dollars…

Braeden Windham: That’s a good question. That’s a loaded one. I think it really just comes down to — for me, it’s a lot of angst. First off, we just had a lot of, I would say inexperience, and we partnered for that inexperience, which is what a lot of people tell you to do. I completely agree. But you have to ask very tough questions up front, if I had any advice on that. So we got into it and just the rehab budget expanded, almost doubled. So we really shot ourselves in the foot when it comes to what we were going to make on that deal. And just not having the people in place to actually know what that rehab was going to cost… So we definitely learned from it.

Ash Patel: What were the hard lessons that you were talking about on this deal?

Braeden Windham: I repeat it all the time, it’s making sure that everything is in an email, everything is agreed upon, that there aren’t any “Oh, I thought you said this, or you were going to do this.” No, everything is in an email, everything’s clear and written out. And just having professionals walk with you on the front end is very important, in my opinion. Because me walking a unit at 21 or 22 years old, and a general contractor that’s done this for 50 plus years, walking in on the front end and telling me there are things behind these walls, or there are structural issues, or there are termites, those are things that I wouldn’t have unknown otherwise. I think just having professionals walk with you and asking the tough questions of those professionals… Whether that be co-GP, whether that be contractors, whether that be whoever that you’re going to have walk with you on a property, just making sure that they know what they’re doing and that their track record speaks for itself.

Ash Patel: With putting things in writing – is that more directed towards investors, contractors, lenders?

Braeden Windham: From my perspective, and where we have gotten I would say misled sometimes is definitely with co-GPS, and just making sure that whatever roles and responsibilities are spelled out, and if you’re going to be boots on the ground, you’re going to be boots on the ground. If you’re going to be doing all the asset management, then that’s going to be in writing. If you’ve got something in writing, then you can basically stick to it. Of course, just having the right documents in place for passive investors and any type of agreement with brokers or that type of thing, of course. But mostly that’s co-GP opportunities.

Ash Patel: In your deals, do GPs put investment capital in as well?

Braeden Windham: Yes. Every deal that we do, we aim to put in 10% of the capital, just to show that we have some type of skin in the game. I think that’s important, just to align interests more than anything.

Ash Patel: And what specific examples have you had with co-GPs when things weren’t in writing?

Braeden Windham: I think capital raise is a big one. I guess, on the front end, knowing who’s bringing what or who has the bandwidth to bring what to the deal, I think that’s important.

Ash Patel: Did you guys just kind of assume, “Hey, we’ve got a great team of GPs. We’ll get this done.”

Braeden Windham: Yeah. You’ll have somebody come in and tell you that they’ve done X amount of properties or X amount of units, and that they can raise the full thing, and take more of the equity for it, but that’s not always the case. So having something in writing definitely, looking back, would have helped to say, “No, no, no, this is what you said on the front end, and you’ve got to stick to it.” That’s definitely the biggest area.

And then just minor roles and responsibilities. Like, on our properties, we always believe that you should have somebody that’s in the area or boots on the ground. So just having what that actually means in a contract, just for that person… If that means going to the property once a week to take pictures of progress, then that’s what that means. And you put it in writing. Or if it’s just quarterly pictures, which for me, I would prefer weekly, especially if it’s a deeper position.

Ash Patel: Weekly pictures of the units?

Braeden Windham: Yeah. If we’re doing a major rehab, I would want to see from boots on the ground, that they’re actually in the area, that they can actually drive there within 10 to 15 minutes and take pictures with progress. If we’re doing construction on 10 units, we want to see updates, because you can’t always trust if a contractor is going to tell you that it’s complete or halfway complete. Their complete and your complete is not the same thing. Rent ready and complete is not the same thing. In my book, at least.

Ash Patel: Braeden, dealing with investors, what are some of the lessons you’ve learned with that?

Braeden Windham: I think the most important thing that I’ve learned is just being completely transparent with them. A lot of people will tell you that there’s a line that you should and shouldn’t say certain things. But I think if you have a good relationship with your investors and you let them know on the front end that “Hey, I’m going to give you the good, the bad, and the ugly”, then I think being transparent is the most important thing, at least for passive investors.

Break: [00:12:18][00:15:11]

Ash Patel: Have you had any issues with investors and you guys not being on the same page?

Braeden Windham: No. I think within Well Capital, our goal, moving forward at least, is to come out with a monthly update for investors, which I think is even better than quarterly, because a lot can happen in a quarter, especially when you’ve first taken over a project. But I think we’ve been pretty clear, I would just like to give them more updates than less. So that’s why we’re kind of going into a monthly more than a quarterly.

Ash Patel: One of the things you could do is — Joe Fairless does this. He gives us a one-pager for each investment, and then there’s a link for people that want to deep-dive into financials. Click on that and there’s a whole bunch of more information behind there. But for people that just want the high level, don’t waste my time, just give me “Are we good? Are we bad?” I like that approach a lot.

Braeden Windham: Is that a monthly or is that…

Ash Patel: He does it monthly.

Braeden Windham: I like that.

Ash Patel: He tells us what the occupancy is, how many units have been renovated, any notable highlights, good or bad, about the property… Then there’s a hyperlink at the bottom, and then there’s a portal where you could get as much information as you want.

Braeden Windham: I think that’s a great idea.

Ash Patel: Not everybody wants to read two-pagers.

Braeden Windham: No. I know some investors that don’t want to know the bad side. So maybe they just… There is a bad side on every property; whether or not you know it, there is. There are things that come up that you didn’t know are going to come up?

Ash Patel: Do you guys have a portal? Or is this just handwritten emails?

Braeden Windham: No, we have a portal now. When we started, we didn’t. But now we use InvestNext for our investor portal. That’s kind of where all of the information goes into.

Ash Patel: What bottlenecks were you experiencing that led you to use a portal?

Braeden Windham: I think it’s just efficiencies of having — for one, I guess every quarter, I’d have to sit down and make a handmade whether it be Canva or PowerPoint, handmade newsletter to go out. It was just kind of inefficient for the time I wanted to spend on it, and having something all on a portal where emails go out and distributions go out – it’s a pretty streamlined process. I think just the time it would take to get it all together, figure out what we wanted to say, and have the right type of documents in there… Just having everything in one place is awesome.

Ash Patel: What is your best real estate investing advice ever?

Braeden Windham: That’s a good one. I think I already said it, but putting it in an email is one of the Best Ever real estate advice that I have. Either put it in an email, or just make sure you’re asking tough questions on the front end of every transaction you do. Because I’d rather have tough questions upfront, than tough lessons on the back end.

Ash Patel: Yeah, and that’s a great example. I’ve got a broker that I’ve been dealing with on a deal. This guy literally doesn’t email at all. Everything’s on the phone. And then they’ll ask the same questions over and over again. It’s like, “Wait a minute. I know I told you, we’re good, move forward.” “No. You never said that.” “Oh my God. Please just use email.”

Braeden Windham: Sometimes it’s not even about not trusting somebody, it’s just a good thing to go back and look at. If roles and responsibilities were carved out in an email, then you can always go back and look at it. That would be the best advice I have for the audience.

Ash Patel: Braeden, are you ready for the Best Ever lightning round?

Braeden Windham: I am. I’m ready.

Ash Patel: Braeden, what’s the Best Ever book you’ve recently read?

Braeden Windham: Free to focus, by Michael Hyatt.

Ash Patel: What was your big takeaway?

Braeden Windham: For me, it was a weekly review, and just time-blocking, and making sure that you are very intentional with the time you’re spending… Because you can just get wrapped up in a ton of calls or something that you didn’t even mean to start working on, and then your day is gone, then your week is gone… Then you’re like, “Whoa, what do I do?” So just kind of keeping control of your time is the biggest takeaway from me.

Ash Patel: Braeden, what’s the Best Ever way you like to give back?

Braeden Windham: The best way I like to give back is through our co-sponsor charity. We give 10% of our gross income to Charity Water, where they take it overseas and give people clean water who’ve never had it before.

Ash Patel: Braeden, how can the Best Ever listeners reach out to you?

Braeden Windham: Two ways. Our website, which is wellcapitalinvest.com, and then we are also hosts on the Wealth and Water podcast; that’s on our LinkedIn. You can tune into that every Thursday.

Ash Patel: Awesome. Braeden, thank you so much for joining us today. From being a senior in college and not really having any direction other than not wanting to work for somebody, being a ranch hand learning how to work hard, to being a very successful real estate investor in a very short amount of time. Thank you for sharing your story.

Braeden Windham: Absolutely. Thank you for having me on. It was definitely a great conversation.

Ash Patel: Best Ever listeners, thank you for joining us and have a Best Ever day.

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JF2649: The 4 Best Ways to Manage Your CRE Investments with Your Full-Time Job with Jaideep Balekar

It can be a struggle trying to break into commercial real estate investing when you have a full-time job that occupies most of your schedule. How do you even find the time to dive in, let alone keep up with your investments? Jaideep Balekar was in a similar situation when he started actively investing while working full-time as a cybersecurity consultant. In this episode, he shares his advice on how to navigate and persevere through these challenges.

Jaideep Balekar Real Estate Background

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Jai Balekar. Jai is joining us from Cincinnati, Ohio. He works as a full-time cybersecurity consultant and is primarily an active real estate investor, but also has one syndication as well. Jai’s portfolio currently consists of 30 doors, and he’ll soon be adding 95 additional doors by the end of this year as a JV partner. Jai, thank you so much for joining us and how are you today?

Jaideep Balekar: Thank you so much for having me Ash. I’m doing fantastic. How are you?

Ash Patel: Wonderful, man. It’s our pleasure to have you here. Jai, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Jaideep Balekar: Absolutely. Basically, the way I got started in real estate was I was always fascinated by real estate. I did a lot of reading, Bigger Pockets, books like that, a lot of books that a lot of people have read. Rich Dad Poor Dad is the first one that got me started. But I had a travel job, I’ve always had an IT job, and it kept me away from taking that leap of faith if you will. Then COVID happened and I started working remotely. Right before that, I had invested in my first investment property, which also happened to be a very heavy lift down to the studs renovation. So it kind of worked out. I know COVID had a big impact on many people’s lives, but it was a blessing for me because I was able to take some time away, not have to travel, and focus on real estate investments. That’s kind of how I got started. After that first project turned out well, that confidence was definitely bolstered, and I was just able to keep going deal after deal.

Ash Patel: You tell me about that first project. What was that?

Jaideep Balekar: Absolutely. So the first project was essentially two fourplexes or two quads, right next to each other, in Cincinnati. One thing that I was very confident about was where they were located. They’re very close to a neighborhood called Oakley in Cincinnati, which is more of a Class A location, with a lot of good restaurants, and a lot of millennials like to live in this area as well. It’s also right off of an interstate, so very close to downtown. Because I was kind of confident about the location, I’ve always heard from all the books and mentors, one thing that you cannot go wrong about is location. That’s one thing you cannot fix. You cannot force-appreciate an entire neighborhood and location. So I was like, “Okay.” These two houses were extremely scary. These were on MLS, by the way, and when I went to see these two quads, I saw a lot of people turning away. They were like, “Oh my god, this is just way too much knob and tube wiring, and stuff like that.”

But I took a chance I was like, “Okay, anything can be fixed.” The inspection came to be relatively okay in terms of the structural aspect of it. I was like, “Okay, the building is structurally okay. Everything else we’ll manage to fix.” Of course, one of the lessons learned is always to have a huge contingency on the rehab costs. That was my first major rehab and I had no idea how to estimate rehab costs. What I had estimated versus what it ended up really costing was three times as much. But all in all, it was a fantastic learning experience. I think I had, fortunately, enough buffer to actually cover those additional expenses in terms of rehab. Then I also ended up self-managing the property, and I still do, and that was another next layer of learning, if you will… That once you have actually stabilized the property, how do you run it more efficiently, as efficiently as possible to keep those cash flows up? So it’s been a great ride. That first deal was definitely one of my best ones.

Ash Patel: And you did this all on your own? You didn’t have partners on this deal?

Jaideep Balekar: That is correct. Yes.

Ash Patel: Can we dive into the numbers?

Jaideep Balekar: This was purchased in the late 2019 or late 2020 timeframe. We paid 400K for eight units, so 50k a door, then we paid about 200K in renovations, and about 20k to 25K in holding costs. All in, we were at about 625k for eight units. These properties were rented at 400 a door before the rehab, because they were severely distressed, so it was significantly below market rents. Once we fixed it all up, which was essentially all-new exterior, roofing, soffits, fascia, decking, new framing, asphalt, retaining walls, and an all-new interior. So that was new plumbing, new electric, new floors, you name it; new everything, basically. We were able to get the rents from 400 to $1,000 on average. So 2.5x rent increase. Initially of course, when I did that, I had a good idea that I will be able to push the rents, but I didn’t know I would be able to push the rents so much. It was a blessing in the end that I was able to actually exceed my projections.

Ash Patel: That’s great. What are these two properties worth now?

Jaideep Balekar: These are worth close to 800k.

Ash Patel: Okay. The joint venture that you’re working on now – can you tell us about that?

Jaideep Balekar: Sure. There’s a 32 unit that I’m working on with a partner I know through the real estate community and have been in touch with, an out-of-state investor. So my value proposition is to be boots on the ground, again, a deep value-add project. So I’ll be involved in overseeing the value-add component of it. It’s 32 units, mostly two bedrooms. Again, what we love about this deal is the location; it’s in College Hill. Just a few years ago, College Hill was a bit of a dicey neighborhood, but things are really looking good. A lot of new construction is appearing in all different areas of College Hill. So location and ability to push the rents post-renovation, and then ending up with a nice renovated building that won’t have a whole lot of problems in the next five to seven years. That’s really our business plan.

Ash Patel: You’re a GP on that 32-unit deal?

Jaideep Balekar: Yes.

Ash Patel: Are you investing capital as well?

Jaideep Balekar: I am investing very little capital. So a portion of the equity that I’m getting is in exchange for the sweat equity that I’m putting in, and a small portion is based on the cash that I’m putting in.

Ash Patel: Are you also bringing investors to this deal?

Jaideep Balekar: We only have two more investors, and they’re primarily putting in all the capital.

Ash Patel: Got it. And numbers on that deal? What’s the purchase price?

Jaideep Balekar: We are at 1.6 purchase, so 50k a door. We are roughly at about 10k a door for rehab, interior/exterior combined. This is more of a cosmetic rehab than a true gut job renovation. There’s no new plumbing or electrical required. But we are hoping to complete that project in 18 to 24 months, all of the rehab, and then push the current rents, which are about 600 a door, to 850 to 900 a door, which is what we are actually getting. So me and my partner, we both have other properties in College Hill, and we are getting those rents, so at least we know that we can meet those comps.

Ash Patel: Seems like a great deal, Jai. How did you guys find this?

Jaideep Balekar: This was off-market. It came through a broker but I think this individual who got we got the deal from, his main business is a construction company, he does some brokering on the side and he has his network of investors he sends deals out to. So we got that deal from him. I live very close to College Hill, immediately within the hour; I went and did swing by, took some pictures, and I’m like, “Let’s put an offer.” Because time is everything. I’m sure if we didn’t get back to him in a few hours, he would have sent it to somebody else and somebody else would have locked it up.

Ash Patel: How long was your due diligence on this project?

Jaideep Balekar: Due diligence took a little longer than anticipated. I think we had asked for 21 days, but it took longer because it was a mom-and-pop seller. So the records were not all in order. We had a lot of missing leases, so we had to get an Estoppel agreement signed. All of that took a little bit longer, it almost took 45 days. But we are glad that the due diligence period is behind us now, and we are set to close in about 10 days’ time.

Ash Patel: Did your earnest money go hard immediately?

Jaideep Balekar: No, it went hard after the DD period was done. But in some markets, you have to do hard EMD on day one. At least in Cincinnati, it’s not that crazy yet, for the most part.

Ash Patel: So this is a typical GP-LP structure with investors?

Jaideep Balekar: Yes, it is a GP-LP structure. But being the JV, there is no preferred returns or hurdles, if you will. It’s just a Class A, Class B equity, and simple line split.

Break: [00:09:17][00:10:50]

Ash Patel: You work a full-time job. Are you back to traveling?

Jaideep Balekar: I think I will be back to traveling very soon here.

Ash Patel: How do you manage gut rehabs with working a full-time IT job?

Jaideep Balekar: It’s definitely difficult and very stressful. I’m not going to lie about that. Although the last couple of years of my investing journey has been the best couple of years of my life, at the same time, they’ve also been the most stressful years of my life. But if you’re truly enjoying it, then it’s fine. I’m okay with the stress. Initially, in the first few projects where we were doing smaller properties, I built my own teams of plumbers, electricians, HVAC, GCs. I was coordinating all the dependencies between them, I was hauling material myself and making sure materials are on site when they need it, stuff like that. But that was taking up way too much of my time.

At that point, it made sense, because I got to learn a lot, I got to learn how much the material truly costs. So if tomorrow somebody tells me that plywood is $100 a sheet, I would know that they’re BS-ing. Those aspects were a few aspects that I wanted to get a hang of. But going forward, to manage 30 to 65 or even bigger deals, I’m partnering up with… As a matter of fact, just last evening, I had a meeting with a GC [unintelligible [00:12:10].29] they have all trades in house. We are willing to pay them 5% to 10% in construction management fees for better efficiency, being able to source the materials at wholesale pricing, and things like that. That way, I can focus on investor relationships and finding deals or acquisitions.

Ash Patel: Okay, so you’re the boots on the ground for this 32-unit acquisition. What’s your role going to be? What does boots on the ground entail?

Jaideep Balekar: Right. Now, given that I’m not the project manager on the rehab, I’m more of an oversight person, my role is going to be, if things are not going well, swing by every day, and make sure they are going well in terms of the rehab. If things are going fairly well, swing by at least twice every week to still provide that oversight. That way, folks on the ground know that there is somebody, an owner, who is actually here keeping an eye on all the work. That keeps everybody honest and on schedule, essentially. So that’s my main role. But my role is not to get all the materials and literally be there for day-to-day management. That’s my role on the 32-unit.

Ash Patel: Got it. Jai, a lot of people that work full-time jobs contemplate whether they should get started in real estate. Deep down, they may be making excuses, “I’ll wait for the next downturn, the next recession”, or “Maybe I’ll do this when I retire.” What’s your advice to that person who’s on the fence, works a full-time job, and is thinking about investing in real estate?

Jaideep Balekar: That’s a great question, Ash. I think there are multiple ways of investing in real estate. You could invest passively as a limited partner in a syndication, and that’s almost as easy as investing in stocks or bonds. It’s a very passive investment. I would say, if you’re really worried about how much time it’s going to take and if you’re a very busy professional, then that’s a good way to start. But for me, because real estate always fascinated me, the operations, and the ins and outs of it fascinated me more than just cash flows or the money, I wanted to be an active investor. If you want to be an active investor, if you’re just waiting to take that plunge, I think it’s really taking the chance on yourself too, understanding how big of a motivation you have. What are you really investing in real estate for?

For me again, like I said, it was not just the money in cash flows, but it was really freedom of time, having control over my schedule, rather than being stuck in Zoom calls every day, and even if my wife brings me lunch, I can’t eat it, because I’m on a Zoom call. I didn’t want to live that life for the next 30 years. So that was my motivation, having freedom of location, and really trying to build a life that you don’t need a vacation from. That was the end goal. If that means having to compromise and downsize for a couple of years, that was a choice that me and my wife made collectively and I’m so glad we did it. I think it’s really truly understanding what your motivation is.

Ash Patel: Can you talk more about the compromises? Because a lot of this sounds very appealing. Freedom of time, freedom of location… But at what price? This is what often doesn’t get discussed. We see all of these successful people, the cars, the boats, the lifestyle that they live, but there’s a price that a lot of us pay early on. And you’re paying that now; I mean, you’re working full time, you’ve got your plate full with real estate. So give people a little bit of that struggle, just so it’s a true depiction of what it’s like starting out in real estate.

Jaideep Balekar: Absolutely. I think the struggle is on two fronts. Sometimes, of course, if you are flushed with cash, then on the financial side, you might not struggle. But most people are starting out just as I am, and you don’t have unlimited capital behind you. The other aspect is time, and that’s probably the bigger struggle. Time management becomes crucial when you’re trying to juggle multiple different things, and especially if you already have family and kids, it becomes even more crucial. So I think the biggest challenge has been time management, being able to time block, and block time evenings and weekends, so that all of these things, like reviewing operating agreements, leases, doing your due diligence – all of that is done correctly and properly. When you’re starting out, you don’t really have a team, it’s all on you.

If you miss one thing, you might get penalized for it pretty heavily. You miss something on that deal.

So I think one aspect is time and being able to compromise on your free time, on your Netflix time, and dedicating that time to real estate. That willingness has to be there. And number two, I think if you’re willing to compromise a little bit in terms of how you’re spending your money or your lifestyle, that can help propel your real estate journey as well. Because we used to live in a single-family home in a suburb, and we definitely had way more room than we needed. It was a very comfortable lifestyle, but we made a choice that we will sell this house, get all the capital out, and invest in investment real estate. We are now house hacking in a four-family.

Now, going from a relatively big single-family home with a yard to sharing walls with people, there is a compromise. I won’t lie about that. But again, it’s really about what your end goal is, and are you willing to do really anything to get there. Truly, it’s not even like I’m not living on the streets; it’s still a pretty comfortable lifestyle. But you have to be willing to give away some of the creature comforts of your life. Maybe sell that BMW you have and get a Corolla hybrid, save money on gas and stuff like that; cut down your liability, get rid of the expensive watches that you bought when you immediately got a job and started getting those paychecks. That has happened to me, I was just always looking for stuff to buy. But now we just passed Black Friday. I didn’t even open a deal site or anything. Because I know that I don’t want to buy any more materialistic stuff and I want to focus my investments truly on building liabilities.

So I think it’s really the personal choices that you make every day. Eating at home instead of eating out every day, as an example – that has a huge impact by the end of the year. You’ll be surprised how much you end up saving, which now can be used to buy passive income-generating assets.

Ash Patel: Amazing insight. Thank you for sharing that with me and the Best Ever listeners. Make no mistake about it, Jai has a very successful career in cybersecurity consulting. He should be enjoying a lot of the fruits of the years that he’s put in, and he’s making all these sacrifices. So I love hearing that mindset. Thanks again for sharing that. Jai, you’ve got a syndication investment as well. Was that before you actively invested or after?

Jaideep Balekar: That was actually already after I had started to invest actively. The rationale for that investment was, one, I’ve always heard; investing in a syndication is where you get paid to learn. I do want to throw in a caveat there though. When you invest in a syndication, the learning is fairly limited. Because as an LP, you get these quarterly distributions and quarterly reports, but you’re not really involved in the day-to-day operations. But that was my initial, I would say, reason for investing in that syndication as an LP. Two, I also wanted to see that how does a big deal go down? How does the due diligence happen, agency lending, and so on? This property also happens to be local, in Cincinnati MSA. So at least when the rehabs are going on and stabilization is going on, I can always swing by. It’s not like in Phoenix or somewhere else where I haven’t even seen the property. But those were some of the aspects.

The person that I’ve invested with is a great guy, John Kasmin. I still have faith in John, and I wanted to invest in a deal with John. Given an option, I could have always invested that money in my own deal, in an active investment, but I wanted to invest in John’s deal. That was another motivation that I had.

Ash Patel: I appreciate that as well, because when you give your money to somebody else to hold, grow, invest, you understand the mindset of your own investors. They’re putting a lot of faith into you, with their hard-earned money. I think it’s very important to grasp the mindset of the investors. I think a lot of syndicators should also invest passively in other people’s deals as well, for that reason.

Jaideep Balekar: Absolutely.

Ash Patel: What’s the hardest lesson you’ve learned in all of this investment?

Jaideep Balekar: I think the hardest lesson, I would say, is just the importance of having reserves. Right now, we are in a great market, but the importance of having good reserves is going to be highlighted whenever a market correction does happen. We all know it will happen, nobody knows when. But when that does happen, people who are over-leveraged and have less reserves, they’re going to have a hard time. I’ve talked to a lot of lenders who have commercial lending experience of 25 plus years, and one question that I always ask is “What was your lesson learned from 2008?” Some of the lessons learned that they share – they’re experienced people, they have seen how the financial industry suffered and the real estate industry suffered… And I take that and implement that with the way I operate.

On all of my properties, at least six months of BT reserves, CapEx reserves, and repairs reserves on top of that. I keep a lot of reserves for all of my properties. Sure, I could invest that somewhere else and start doubling that money. But for me, peace of mind and a good night’s sleep is way more important than doubling every dollar that I have in my pocket. I think reserves are, I would say–

Ash Patel: How do you get financed? Is it just traditional lending?

Jaideep Balekar: Depending on the location and the condition of the asset. We are now looking at a 13-unit that is extremely heavily distressed. There’s really nothing, not even studs in the property, just load-bearing walls at this point. So for a property like that, I’m looking at private lenders like Lima One Capital. If it’s a stabilized property that meets certain debt service coverage ratios, DSCR ratios, then I’m working with a lot of the local banks, if it’s under a million-dollar loan balance, if it doesn’t qualify for an agency. Then we’re also looking at agency options, where the loan balance is big enough for agency loans, post-stabilization.

Break: [00:22:56][00:25:49]

Ash Patel: When you present yourself and your deal to a lender, do you bring your portfolio with you? Do you have a binder or folder that showcases the deals that you’ve done?

Jaideep Balekar: Yes.

Ash Patel: Do you emphasize that you’ve got six months of reserves for each property?

Jaideep Balekar: I do. Adn when then the lenders hear that, they just love it. I’ll share a story. I’m currently working with a local lender on the 63-unit. Most of my investors or capital partners are all Bay Area folks. Initially, I could just sense that right off the bat, he just wanted to turn our deal down. You guys come in and you buy property here in Cincinnati, but you have no idea how to operate the property. Lenders have gotten burned by out-of-state investors overpaying for properties here in Cincinnati. So that was the initial response. But then we were like, “Okay, let’s schedule a coffee meeting and meet up.”

When we met, we talked about how we run our properties, how we run the rehabs, how much we have in the reserves, and I talked about my portfolio, how I had stabilized, and what were the pre and post rents. When he heard that entire story, that was it, that sold the deal, and we just got approved on the loan. The terms were beautiful, better than we expected. When it comes to local banks and local lenders, it’s really about that relationship. If you can actually provide them with the confidence that you can successfully take this deal down and operate it well.

Ash Patel: I learned that much later than I should have. But having that narrative or that story is so important. For years, I would just send my lender, “Hey, here’s the next deal. Here’s the contract. When can we close?” I had enough of a relationship with them that they would always follow through. But when I started writing a narrative, it was so much easier and faster to get that approved. The board would hear this — it’s not just “Here’s another deal Ash is doing.” It’s like, “Oh, what a cool story. Okay, yeah, awesome. Let’s go.” It also makes you more memorable to both the lender and the decision-makers. So yeah, kudos for doing that, man. Jai, what is your best real estate investing advice ever?

Jaideep Balekar: I think really — again, this is something that probably everyone has heard a million times… But the biggest hurdle is getting started. A lot of people get stuck in analysis paralysis, they do a lot of reading and research, but they never get started. I think even if it’s a JV deal where you’re doing a very small portion and you’re getting equity just for bringing in the capital, or even if it’s an LP as a syndication like I just said, just jump in. I think that once you jump in, it becomes a lot easier. My first deal was the hardest; I learned the most in that deal. But after that, everything became almost like an assembly line. I already had my team set up, I knew where to source the materials from, and I had some lessons learned that I was able to implement in deal number two. But once you do that first deal and jump in, it becomes a lot smoother then onwards. I think jumping in is the biggest hurdle. So just get over it and start investing in real estate.

Ash Patel: Jai, your first two four-unit buildings – you did all by yourself. You’ve subsequently had partners on deals. Would you recommend people on their first deal work with a partner, or do it alone?

Jaideep Balekar: I would say it never hurts to work with partners. You also want to be careful about who you’re partnering with. But if you know you have the right partner, a friend you grew up with, someone you trust, you always learn way more when you work in a partnership, and now you don’t have to do it all. You can play to your strengths and your partner can play to his or her strengths. I’m personally –you know that well, Ash– I’m not a detail-oriented person. I’m more of a high-level big picture. But for these deals, I had to dive into the numbers, I just had to. Because if I missed something, it would cost me a lot of money. But I didn’t enjoy it. So when you work in a partnership, the stuff that you don’t enjoy, you can have your partner do it who has perhaps complementary skill sets. So I always recommend working with partners. In my mind, that’s the only way to scale.

Ash Patel: I agree as well. Jai, are you ready for the Best Ever lightning round?

Jaideep Balekar: Absolutely. Let’s do it.

Ash Patel: Jai, what’s the Best Ever book you’ve recently read?

Jaideep Balekar: Recently, I would say Who, Not How. That’s been my recent read. I’m reading Rocket Fuel now, and they’ve both been phenomenal books. Both of these books have had a tremendous impact on my mindset in terms of how I think about teams, delegation, and playing to each other’s’ skillsets.

Ash Patel: Disclosure, Best Ever listeners, Jai and I are friends. We both live in Cincinnati and those are two books that changed my investing. I recommended those to Jai. What’s the biggest takeaway you had from those books?

Jaideep Balekar: I think the biggest takeaway from those books is recognizing the fact that a lot of times realistic investors have that mindset starting out, especially the do-it-all ones. That you can do something in the best possible way and nobody else can do it better than you. I think when I started working with people, I realized that there are many aspects of this business that others can do it way better than me. Then why am I spending time focusing on those things especially on top of which when I don’t even enjoy doing those things? I think that was the biggest aha moment for me from both of these books. And really finding your who is not just about delegation because people talk a lot about delegation.

It’s not just giving work away, but you are helping them and they are helping you. It’s more of a mutual. Because for them, you are their who, and for me, they are my who. Because they are not probably good at visioning and I come in and play that role. But they are probably really good with details and execution, and that way they are my who. It’s very much a partnership mutually beneficial relationship. I think that’s how you got to see business partnerships. That was the big aha.

Ash Patel: Great. Jai, what’s the Best Ever way you like to give back?

Jaideep Balekar: Best Ever way I like to give back is in two terms really. I think giving back time is more valuable than just giving away donations. So I also donate 10% of all our profits to a charity in India that focuses on the education of kids in poverty-ridden areas. I also really try my best to have as many calls as possible with people who are starting out in real estate, and share whatever I’ve learned to help them get started. I truly enjoy doing that. I love having those conversations. I’m hoping that the time I dedicate to these folks will help them tomorrow to become good mature real estate investors.

Ash Patel: Jai, how can the Best Ever listeners reach out to you?

Jaideep Balekar: The easiest way to get hold of me is via Facebook or by email. On Facebook, my first name, my real name is Jaideep, and my last name Balekar. I’m very active on Facebook and also email which is info@compoundingcapitalgroup.com.

Jai, thank you again for sharing your story with us today. The struggles of having a full-time job and growing a very successful real estate company. Thank you again for sharing that.

Jaideep Balekar: Thank you so much for having me, Ash. It’s always a pleasure speaking with you. I really appreciate the opportunity.

Ash Patel: Best Ever listeners, thank you for joining us, and have a Best Ever day.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2641: Don’t Make These 4 Mistakes as a New Passive Investor | Actively Passive Investing Show with Travis Watts

“What mistakes did you make in your career that I should be on the lookout for as a new passive investor?”  Travis Watts answers this listener question by sharing four mistakes he made starting out as a passive investor that you can learn from:

  1. Location, location, location: You cannot overcome a bad area with good management.
  2. Understand that management is key.
  3. Make sure you understand the underwriting.
  4. Don’t do a deal just for tax reasons or because you see a lucrative fee split structure.

Want a more in-depth look at how to vet a team, a market, or a deal? Then check out our three-part miniseries starting with episode JF2396: Passive Investing Strategies | Actively Passive Investing Show With Theo Hicks & Travis Watts.

 

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TRANSCRIPTION

Travis Watts: Hello, everybody, and welcome. It’s Travis Watts with another exciting episode of The Actively Passive Show. This week, the topic came from actually a conversation I was having with an investor, and this investor asked me, being that I’m a full-time passive investor, he asked “What mistakes have you made, and what should I look out for?” He just basically, was looking to avoid some newbie mistakes, and I thought that’s an excellent question and I want to do it justice, I wanted to better articulate my point, so I made an episode out of it.

I want to share this information because it’s important you guys to balance the risk conversation with the reward conversation. Of course, everybody’s always out there talking about whatever it is they do, whatever their investment is, how awesome it is, and how great it is, and that’s fine. It’s also important to have the conversation about what risk you’re taking on or what mistakes could easily be made. So with that, I’m just going to walk you through four things I made mistakes on early on and mid-career so to speak, in regard to being a full-time passive investor. So we were talking about multifamily, private placements, syndications, being a limited partner.

So without further ado, let’s dive right into number one. Location, location, location. We all know the saying, we all know the phrase, it is a classic real estate line, but here’s the deal. I made a few investments early on. I say a few—well, yeah, it was a few. It was probably three, total. These were C-class properties, first of all. So the class of property, meaning, A class is new development, new construction, or not that old, very high end, luxury, very high creditworthy tenants, stuff like that. So we’ve moved down two spots on the spectrum down to C. This particular place that’s coming to mind right now  didn’t even have a pool, didn’t have a gym. This was just kind of living in the unit and paying the bare minimum rents in an area that we all found out wasn’t such a great area. And I will point out why that is so important.

You cannot overcome a bad area with good management. So at first, this operator was pointing the finger at the property management company. They had hired a third-party property manager, and then things weren’t going well, there was lots of problems, stuff wasn’t getting addressed at the property level. So they fired him, and then the whole quarterly update was how excited they were to bring in this new property management company. Well, guess what? The new property management company couldn’t really do any better. The same problems existed, and when I say these problems, what I’m talking about is there was a shooting on the property. Fortunately, nobody was even injured, but still there was a shooting, so obviously, people don’t want to live in an area like that. There was a stabbing, there was vandalism… They had put up a gate to make it a gated community, and someone ripped the gate apart and broke it. So it wasn’t even functional. There were squatters on the property in the vacant units that hadn’t been leased up. There was just so much stuff, and it all came back to the fact that we had bought a property in a bad area. Just straight up. It was probably a C-minus, D-plus kind of sub-market, and the property itself was probably a C property. So it wasn’t the worst. I think it was built in the ’70s.

But anyway, my point is that of all the deals I’ve done A, B, C – I have never done anything under C – the C properties just notoriously have a lot of problems. That’s just my experience. I’m not saying you’ll have the same experience with a C property; it depends on a lot of factors… But I’m just letting you know.

B class is my sweet spot. I like the 1980s, 1990s, early 2000s built, good markets, good areas, surrounded by good neighborhoods with a high price of single-family homes, high wages in the area, all that kind of stuff, and we’re just taking an older property and we’re improving it. We’re bringing it back to the market standards in the business model.

A class, very rarely have any problems. However, less cash flow associated. So I’ll leave it at that. The mistake I made was investing in bad area. So whether you’re active or passive and you’re looking at a real estate deal, single-family, multifamily, syndication, GP, LP, whatever it is, pay attention to location. Look at school ratings, look at the surrounding neighborhood metrics, look at the jobs in the market, read the stats, look at the crime stats.

Number two is understand that management is key. Now, I just alluded to that you can’t overcome a bad location or area with good management, but in a general sense, the profitability will come from the key management; their ability to advertise and screen for quality tenants, and take care of issues on the property. A lot of deals that are being purchased – not always, but a lot – in the syndication space, and this is probably true with anybody buying, often the management hasn’t done a good job, therefore, they’re not leased up properly, or the rents are well below the market, or maybe it is a mom-and-pop operator and they just refused to ever raise the rents wedge… It’s usually management-related. Or you get on Google, you type in the property and you look at reviews and you just see zero stars and one stars, “Management’s not doing this,” “Management that,” management, management, management.

Back when, even before this – I was talking about single family real quick – I had a property and, come on, guys, quite frankly, I was a bad property manager; and when I say that, I mean, I didn’t know what I was doing. So I was making mistakes. It wasn’t like I was mean to people or doing things that were illegal. I’m just saying, I wasn’t effective. I would rent to a tenant, and let’s say they worked at my company. So, they were more of like an acquaintance or a co-worker, and they were going to rent my property. Sometimes I would just forego the screening process. “Ah, I know you. You work where I work. It’s all good.” Well, huge mistakes came from that.

I had a couple tenants that would always pay their rent right at the deadline, if not a day or two late. I wouldn’t be an enforcer of the late fee. It’s like, “Ah, it’s the 6th or 7th; at least you paid it, we’re all good,” and then notoriously, they would do that then every month thereafter, knowing they’re not going to get penalized. So why not pay it on the 8th instead of the first, because there’s no repercussion. Bad idea!

There was one property I had that was so bad, I hired a property management company to take it over, I was fully transparent about the issues and the tenants and what was happening to this point and why I had hired them in the first place, we signed the contract, we moved forward, about 2.5, 3 months later the property manager quit. They quit on me, because the tenants were so bad; and I take full responsibility for me putting them in there in the first place. But I’m just telling you, if you don’t have good management, you will not have a good performing asset.

So when you’re looking at these pro formas, and these overviews, I rarely hear a lot said about the management. It’s all about the deal, the deal, the deal, the deal, this structure, and it’s made of brick, and it’s in this neighborhood, and it was this many units. Talk to me about the management; ask questions about the management.

If you’re going to invest with a firm that’s what we call vertically integrated, meaning that they manage their own properties, just take a look at their track record or their current performance on the existing properties that they’ve acquired – totally cool to be vertically integrated. Lots of great reasons to do that. But if it’s a brand new group, and they’ve never managed properties, and they’re like, “Oh yeah, we’re vertically integrated. We’re just going to wing it and try to manage our own stuff,” probably a bad idea. You probably would want to start with a more experienced group to come into the picture, help you out, learn from them, and then possibly go vertically integrated later.

Again, not telling anyone to do that specifically, but be aware as an investor of who the property manager is, whether it’s third-party or in-house, and what their experience is in managing that kind of asset.

Break: [08:31] to [10:04]

Travis Watts: Number three mistake that I made is not understanding the underwriting. And here’s the thing – not all of us are underwriters, not everyone wants to go stare at Excel sheets and find the misnomers… And one word of caution upfront, don’t get caught in analysis by paralysis. So many people do this. I’ve done this… Where you’re just digging and digging and digging and thinking and thinking and thinking, to the point where you miss out on the deal altogether, right? It fully subscribes or you don’t have a chance to even participate.

So, here’s my philosophy. You and I, and anyone listening – we’re never going to know 100% of everything to make a decision to move forward. So if I can know, maybe 60%, 70%, ideally more like 70% of the details and the data and the underwriting, at that point, I’m comfortable myself moving forward with a deal. I’ll learn the rest along the way, and I’ll never get to 100 anyway.

But here’s the mistake I see most commonly made is – look, you and I and anyone else can make underwriting look good on paper; just the difference in saying, “Well, we were going to take a 70% loan-to-value mortgage on the property, but let’s move it up to 80%.” Well, now the numbers look a lot better, don’t they? But now we’re possibly overleveraging the property.

Another thing I’ve seen is a group’s going to come in and buy something at say a 5 cap, and then they’re going to underwrite to sell it at a 4 cap. So they’re going to go very aggressive with the exit strategy, when in reality, that’s in none of our hands, okay? The way cap rates are fluctuating and interest rates – that’s not going to be in our control. So I like to see the opposite – you’re buying at a five cap, you’re going to exit at potentially a six. You don’t actually want that to happen. A higher cap rate means a lower purchase price. So that’s not a good thing. That means the market has softened up. There’s many ways and reasons that could happen. But what I’m telling you is when you’re looking at the pro forma, ask the question, if it’s not already preemptively stated in the overview, what cap rate are you buying at? And what cap rate do you anticipate selling at? In my opinion, as an investor, I’m always looking for a higher exit cap rate, not a lower one, for underwriting purposes, so that I know this is conservatively underwritten.

Another thing when it comes to underwriting that I see is aggressive rent pushes. And yes, we’re seeing it now and over the last maybe 6-12 months we’ve seen a big uptick in rent; some markets are 12%, 13% 14% year over year rent increases, which is incredible… But guess what? It’s also not the norm. So, if I see that — just making this up, for example, purposes, but let’s say Tampa, Florida. That’s one of the really hot markets right now. Let’s say, it’s got a 10% year-over-year rent growth, at least for the last 12 months. Well, what you don’t want to see in the underwriting is a new deal being purchased in Tampa, and they say, “Yeah, we’re going to get 10% year over year rent increases for the next 5-7 years.” No.

When you see big spikes, like we see right now, there’s usually a leveling off, sometimes even a slight sinking; I’m not saying that will happen. I’m just saying that can happen; you’re not likely to see 10% a year or year after year for the next decade.

So what I’m looking for is either very little rent growth in year number one as they do renovations, or maybe just a conservative 2% or 3% a year rent growth in the projections. Again, you don’t really want that to happen. You want a higher number than that, and hopefully, you get it, but you’ve got to be conservative too, because if you’re basing your overall return, which is most people are investing based on the overall return projections, you want to know these are conservatively underwritten, or else that’s not going to happen.

And the last thing I’ll say about underwriting is take a look at the capital expenditures budget. If you can, try to get a line by line, and ask questions about it. Why is the landscaping $300,000 per year? Why is it $8,000 per unit? And then look at the breakdown – how much of that is flooring, countertops, cabinetry, appliances. If you feel like they’re being a bit skimpy, like given the inflation right now and the supply chain issues, maybe those appliances are going to be on backorder, or they’re going to cost 30% more than they did last year. Just take that into consideration.

‘Same with property tax and insurance. I’ve seen huge volatile swings in these prices, where it’s underwritten as a 5% a year increase to the insurance or the property tax, but it ends up being 25%. These things can throw off the overall numbers to the investors.

And if the operator has it, I always ask for a sensitivity analysis or what some people call a stress test, and that just shows that they’ve put this projected pro forma through hypothetical stress testing. So in other words, what if interest rates are 4% today, but they go to 6% over the next few years? What if our occupancy today is 95%, but it falls down to 80%? Then what, and what it shows you often is what happens to the overall investor returns should these things occur… So that can be very informative to help you decide how conservative they’re being on these numbers.

Break: [15:20] to [18:13]

Travis Watts: Alright, number four. A lot of people are out there talking about tax advantages of real estate, multifamily, and a lot of people are out there promoting their fee structures, saying “Oh, we have super low fees versus our competitors or whatever.” Number four is don’t do a deal just for the tax reasons or just because you see a lucrative fee split structure. Here’s the way I look at it – yes, tax advantages are excellent in my experience in real estate in general, and having a nice fee structure can be nice as well. But if the deal you’re investing in is aggressively underwritten, or the operator can’t actually execute the business plan anyway, what use are the tax advantages or the low fee split structure if you end up with 4% or 5% return in the end, when you hope to get more like a 15 or 20? It’s definitely a secondary consideration.

I see some people getting caught up in those and saying, “I would never invest with this group over here, because of their fee structure”, and that’s fine to have that opinion… But you guys – I think I mentioned this on a previous episode… I’m in a deal – this is not a multifamily deal, this is a different private placement – and the operator is getting about 66% of the profits and the limited partners are getting about 33% of the profits. Just rough numbers there; but for years, I’ve still been getting overall a double-digit return, on an annualized basis. So, I’m okay with the quote unquote “unfavorable fee structure” because to me in the end, that deal’s still helping me accomplish my goals. So that’s the way that I frame it. That’s the way I look at it.

So the difference between the 80/20 split, or 70/30, or 50/50 and I’m looking more at the office operator, their track record, their ability to actually execute the deal… And generally speaking, if you’re going to invest with a group that has a longer track record and more experience, they probably aren’t going to have as low of a fee split structure compared to maybe a brand new group that’s just getting started, who’s trying to be competitive and gain investors.

So with all of that in mind – I told you this would be a shorter episode, I just want to conclude by saying that Theo Hicks and I recorded last year, it’s about a year ago, you can check it out on YouTube or joefairless.com, how a passive investor vets a team, a market, and a deal. So we did a three-part mini-series. I think each episode is roughly 30 minutes long, so it’s an hour and a half of content, where we go in much more detail about how to actually vet the team, the market and the deal.

I highly recommend that you guys check out that three-part mini-series if you haven’t already, because I could talk all day long, about risk and reward and experience and all this kind of stuff, but every week, I’ve got to pull it back, I’ve got to tone it down, I’ve got to just give you some key elements and hopefully inspire you to do some more research on your own so that you can conduct proper due diligence before you invest.

Thank you guys so much, as always, for being here. I truly appreciate you. I truly appreciate you tuning in to these informative little rants that I that I do. My passion is to help other people like yourselves understand the risks, the rewards, the pros, the cons to real estate investing. It’s made such a profound impact in my life that I want to share that and I want to help other people. So reach out anytime, joefairless.com, travis@ashcroftcapital.com. If I can ever be a resource for you guys, I’m all over LinkedIn, social media, Facebook, whatever, happy to do so.

Have a best ever week, we’ll see you next time on the Actively Passive Show.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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JF2431: Cashflow or Equity Gains, Which Strategy is Best? | Actively Passive Show with Theo Hicks & Travis Watts

Today Theo and Travis will be sharing about investing in cash flow vs. equity gain. Theo and Travis discuss the pros and cons, as well as compare the two. 80% of people in the United States are probably in the mindset of investing for equity gains: the “buy low, sell high” mentality. The bigger picture is when your passive income streams exceed your lifestyle expenses, you have financial independence, time freedom. At the end of the day, you have flexibility.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.

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TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Actively Passive Investing Show. As always, I’m your co-host, Theo Hicks, with Travis Watts. Travis, how are you doing today?

Travis Watts: Theo, doing great, man. Let’s rock and roll.

Theo Hicks: Today we are going to be talking about the differences, the pros and cons, the benefits of cash flow versus equity gains. Which is the best passive investing strategy? Should you invest for cash flow or should you invest for equity gains? As always, before we dive into those pros and cons and kind of compare the two, Travis is going to let us know why we are talking about this topic today.

Travis Watts: Sure, Theo. I think we’ve covered this in a multitude of ways, but never directly, and never in depth. I thought we’re a good match to discuss this topic. I’m a full-time passive investor and we’ve both done a lot of equity stuff, so I just kind of want to get two different opinions on it and share other people’s opinions as well… Like Robert Kiyosaki’s opinion on this, things like that; things that initially changed my mindset in the direction that I ended up going. I would say – this is not an official statistic by any means, it’s just my opinion… I would say roughly 80% of people in general, at least in the United States, are probably in the mindset of investing for equity, for gains; the buy low sell high mentality. I’ll get into why that is. But what changed my mindset so many years ago is Robert Kiyosaki pointing out that the wealthy invest for cash flow. That’s why he invented the cash flow board game. That’s why he’s written all the books he’s written, they’re all cash flow themes, and all his advisors are advocates of cash flow. It makes a lot of sense, so I want to dig into why that is. But more importantly, to the point of the topic of this episode, is one better than the other? What are the pros and cons? Which is right for you? We’re not financial advisors, please seek licensed advice there. But we’re going to share some opinions and some education topics with you. So let’s find out. Before I roll into it, do you have anything else to add Theo?

Theo Hicks: No, jump into it. Let’s talk about cash flow investing.

Travis Watts: I’m going to start talking about cash flow, and then I’ll turn it over to you, I guess, for equity. We’ll kind of compare and contrast that way. Being that I’m a full-time cash flow investor myself, I felt like this would be the segment that I would cover.

When you invest for cash flow, what are you really doing? You’re buying income streams, that’s how I look at it. It’s less about the buy low, sell high, it’s more about “If I put this much money here, how much do I get every month in return from that?” The bigger picture here is when your passive income streams exceed your lifestyle expenses, you have financial independence, or financial freedom, or retirement, or time freedom; there’s all these different terms that you could use. But at the end of the day, you have flexibility, let’s call it that; you have more options.

My goal and mission is just to help educate people in this sector. It’s been absolutely revolutionary in my life, for my wife and I, and our family. These are things I just want to put out there to the world and help others with that mission. Here’s the number example. Let’s say that your goal is $100,000 per year in passive income that rolls in without you having to do labor, or physical activity, or whatever; go to a nine-to-five job, etc. How much do you need to invest? Well, if you had a million dollars invested at –just using a simple example purpose numbers– 10% a year return, then that’s $100,000 per year in cash flow. But again, what if your real estate only cash flows 8%? Well just do the math, 1.25 million invested at 8% is 100,000 per year.

So you kind of get to choose your own yield, what makes sense to you with your own portfolio and your own risk tolerance, and that’s kind of how you run the numbers. But at the end of the day, why does Robert Kiyosaki say the wealthy invest for cash flow? Well, it’s simply because the wealthy have capital, they have money. So at the point where you have a million dollars plus to go invest, then wouldn’t $100,000 a year be pretty life-changing? Or if you had 2 million, wouldn’t 200,000 a year, or 300, or 400, etc, you get the point. It’s kind of the lifeblood of big business, true wealth, legacy wealth, generational wealth, and all these kinds of things.

So why is it then that 80% of people, in my personal opinion, are investing for equity? Well, I want to get into the pros and the cons of that first, and then I’ll answer that question here in a bit. So I’ll turn it over to you, Theo.

Theo Hicks: Exactly. The equity gain is the opposite of cash flow. As opposed to investing your capital and then making a return on that capital, you’re making an ongoing return on that capital; you’re investing the money into something, and then it kind of just sits there, and the hope is that the value of that increases over time, and then at some point, a year later, five years later, when you cash out, you pull out a larger amount of money than you put in.

Examples of this in real estate would be flipping a house; you buy the house, you invest capital into it, and then the goal is that what you make when you sell is more than the amount of money it costs to buy the house and fix the house up. Stocks are an example of this, like trading stocks; you buy a stock at $1 and want to sell it at $1.10, or whatever. Cryptocurrency is kind of like stocks, the same thing. It’s this the buy low, sell high, either by doing nothing and just waiting or by doing something and forcing that value up.

Overall, the focus here is on growing the capital and your nest egg. And since it’s more focused on growing the value, and you’re kind of waiting for it to happen, and it’s not necessarily fully in your control, there’s a lot more risk associated with this strategy. But like most investments, the more risk involved, then the higher potential reward, but also a downside as well.

Sometimes, when you’re investing in equity gains, there’s more risk, so hopefully, the return you get is going to be significantly higher than what you would get if you were investing at a lower-risk cash flow type of investment. Here’s an example – and I’ll follow with an example of a rental property or a real estate example. If you buy a home for $100,000, and you put down 20%, so you’ve got $20,000 invested into the deal so far. Keep in mind, they’re going to be very simple numbers, because there are more expenses involved, so this is the best-case scenario. So you’re putting down $20,000, and then let’s say you plan to improve the property. You end up improving it and you sell the property for $175,000.

After calculating all the repair costs, all of the closing costs associated with selling the deal, then you profit at the end at $20,000. So you invested 20 grand, you profit 20 grand; that’s a 100% return on your money. Let’s say you do this in one year, and one day to pay capital gains tax, you’ll pay a really high tax on it. It’s not 100%, but still, a high double-digit return on your money, which sounds amazing. People will do fix and flips, these type of strategies. But there’s a lot of risks involved in this strategy. A little bit less risk, since it’s a rental home in this scenario, because since it’s a rental home, you could rent it out and get that cash flow at the same time… But if it was a fix and flip and there was no opportunity to rent it, say this is not an area where people rent and your only chance is to sell it to someone to own, a lot can happen in a year. The most common horror story you hear from 2008 is people who were fix and flipping homes, things are going great until all those homes they had that they were in the process of flipping, maybe they were three to six months into that strategy, and then the market collapsed. They were stuck holding all of these properties and they couldn’t sell them for the price that they needed to.

So when you’re investing for equity, as I mentioned before, higher risk, higher reward, also higher downside. If you aren’t able to sell it for that higher number, then you’re going to lose money, and you’re going to make less money than you would have made when you are investing for cash flow.

Going back to what Travis said, and he might go into it a little bit more, but what happens if you don’t have a million dollars to passively invest? That could be your end goal. So you could have an active business and then you can use that to grow your equity, hopefully also having some cash flow as well by doing rental properties or some sort. Growing your equity until you have enough properties where you have either enough properties that you can sell them all and have a million dollars, or even better, having enough properties that through refinances and cash flow you have that million dollars or so, and then do both at the same time depending on what your goals are.

Maybe I’m getting ahead of myself, but overall, that’s an example of what it means to invest for equity. You’re investing capital into something, and then you’re either waiting and doing nothing, or you’re waiting and doing a little something, with the hope of that equity growing so that when you cash out, you get your nest egg back a little bit bigger than the last time.

Break: [00:09:58][00:12:00]

Travis Watts: I was just recently on YouTube, I was listening to Warren Buffett and Charlie Munger talk at the Berkshire Hathaway meeting. I don’t know how many years ago it was or if it was the most recent, I can’t remember. Warren obviously got started very young, very early; I think it was like in the 30s or something, and he was talking about what he was doing through the 40s and 50s in the stock market, and he was saying to the point of he was doing these kinds of crazy returns back then not because the market was booming, but there’s a lot of possibilities with little amounts of capital. For example, could I 5x my money overnight with $1? Probably. I could go to a garage sale and buy a coffee mug and then go sell it on eBay for five bucks. So I 5x my capital, that’s amazing. But that’s because I was only using $1, or $5, or $10. The point he was making is he was making these 20, 30, 40% annualized returns back then, but it’s because he was working with, in most cases, under $1 million of capital. So he had a lot of possibilities and strategies he could implement.

Now as he sits on billions and billions of dollars, you can’t just 5x your money overnight. There’s a drastic drop off in the curve of possibilities with that amount of capital. That’s why I think a lot of these wealthy individuals eventually turn to cash flow, as he has done. If anyone’s familiar with how he bought Coca-Cola stock on Black Monday in the 80’s as it fell apart – that’s a dividend-paying blue-chip stock – he’s never sold it. So his cash flow today off his basis of when he bought is 40 or 50% cash flow; it’s incredible. So he turned into a cash flow guy, but he wasn’t always that way. Neither was Charlie Munger, his partner. He used to do real estate stuff as well. Anyway, I digress, that was just a thought I had.

The second thought I had – I rarely share this kind of stuff, but I was raised by two very frugal parents that taught me a lot about shopping in the clearance section, using coupons, buying the off-brand, etc. And I’m thinking about myself back when… If you don’t have a lot of capital to get started, sometimes your lifestyle choices make the biggest impact on your portfolio. What I mean is if you can trim off – and we’ve done an episode on this before on frugality among the wealthy, or building wealth through frugality, I forget what the topic was… But let’s say I could shave off $300 a month out of my budget by not going to as many restaurants, or spending frivolously on Starbucks and coffee, and things like this. Well, $300 a month is $3,600 by the end of the year. But on the flip side, let’s talk about passive investing and cash flow. Let’s say I invested –I don’t know, I’m making up a number– $5,000 at a 10% return; I’m only going to get $500, and probably a lot of that’s going to be taxed on top of that.

So sometimes, early on, if you’re young or you just absolutely don’t have capital, it’s going to be frugality, it’s going to be your budget, it’s going to be your choices of how you spend money that’s going to have the greatest impact.  As you start making a lot of wealth, all that stuff kind of goes out the window. Why have to use coupons and shop clearance racks when you’re a multimillionaire? You certainly don’t have to anyway. You might choose to, I think even Warren Buffett does still. He’s been known to use some coupons at McDonald’s, or something like that. I thought that was kind of funny.

But anyway, so the last thought before I get into the next section, I’m going to answer the question I alluded to earlier, why so many people are into equity investing versus cash flow. The Federal Reserve conducts a survey, it’s called the survey of consumer finances. If you look at that data, you’ll see that the median –not the average, but the median, that’s a more realistic number–  household net worth in the United States is around $121,000. That’s among all age groups. If you bump to the highest end of that, meaning the oldest age, which notoriously those are folks that have the most wealth, so say 75 years of age, it only bounces up to $255,000 as far as the household net worth.

Again, that’s not going to bring a substantial amount of passive income into your life. Therefore, that’s my opinion of why so many people are focused instead on buy low and sell high; it’s a quicker way to turn over capital and smaller amounts. And if the median household net worth was millions and millions of dollars, more people would be into cash flow, because it would give you more flexibility over lifestyle, things like that. Just a few thoughts there on Buffett, frugality, and why folks mostly are into the equity play.

But something you said earlier, Theo, stood out to me – when I talked to investors, whether they’re active or passive, most of them are doing something right now in life actively in hopes of generating enough wealth to then become passive. That’s usually the story that I hear. Whether that’s a doctor, a dentist, or an attorney that’s working their practice, “Yeah, one day when I retire and sell my practice, then I’ll have enough equity to where I’ll just become an investor, basically, and live off the passive income.” That’s the path that most people in my experience are striving for.

With that, here’s the Holy Grail. The thing I really wanted to share on this episode is it doesn’t have to be so black and white. It doesn’t have to be “Are you a cash flow guy? Are you an equity guy/gal?” Could you have both? Yes, you can have both. That’s the beautiful thing. It’s the holy grail of investing, at least to me. What makes me so passionate is I invest in deals that have both cash flow and equity components to them.

You take real estate, for example – I’m investing in something that’s stabilized and occupied where I’m getting monthly income off of that as we go along. Hopefully, I’m –not me personally, but the general partnership, let’s say– is improving the property, the units, the clubhouse, the branding, and the marketing to where the rents are going up, so we’re forcing some appreciation there. On top of that, hopefully, the market is lifting it up and inflation is lifting it up. So if we buy a property at –whatever, I’m making up numbers– 50 million bucks, hopefully, we later sell it at 60 or 70 million in the future. So there’s your equity, there’s your buy low, sell high, but then also, I’ve got cash flow the whole time.

That’s how I like to invest. If you’re not into real estate or that’s not where you’re at right now, think about the stock market in terms of when it corrects. About a year ago, we had a nasty correction in the markets, that it on average sold off about 30%. Some of these real estate investment trusts that pay monthly dividends – they fell 40 or 50%, so I was scooping that stuff up a year ago. Not enough, but I was putting in what I could at the time. So you’re buying at a depressed price point, and then they’re still paying out dividends, even if they had to cut their dividends a little bit and less than them. Well mow most of those, if not all of them in my portfolio, have not only recovered from pre-pandemic levels, but they’re exceeding those levels and they’re bringing their distributions back. So I got a nice equity boost there and cash flow throughout the whole period. That’s how I invest.

Something I want to share is awesome, by John Bogle. This just blows my mind to think about. I’ll maybe say this a couple of times… Over the past 81 years, reinvested dividend income, accounted for approximately 95% of the compound long-term return earned by companies in the S&P 500. We used to not have the S&P 500 by the way, it used to be called something else, with fewer stocks in it, but more or less the index as a whole. In other words, reinvestment of dividends accounted for almost all of the stock’s long-term gains. This is about cash flow; this is totally about reinvesting, as we’ve talked about over and over on the show. Re-invest your cash flow; that’s how compounding works, that’s the wonder of the world, whoever coined that, Einstein or whatnot. That’s why Warren Buffett does this kind of stuff.

Again, over the past 81 years – I have to say this again, it’s just crazy – reinvested dividend income accounted for approximately 95% of the compound long-term return earned by companies in the S&P 500. That’s just crazy to me. So it’s just my opinion that cash flow is king. This is really the focus that we should all be at least striving for one day. If you’re not there today because of things we talked about earlier, that’s fine. But the goal should be, hopefully, do a little buy low, sell high stuff and work your highest and best, and save, save, save, and then get to a point where you can start generating cash flow. That’s all I got. That was my little passion point. I’ll get off my stool.

Break: [00:21:03][00:21:45]

Theo Hicks: I feel like, for a lot of these episodes, we have these questions, which strategy is the best? The answer at the end is always “Well, it depends,” or “Both are great.” But it’s true. Something when we first started talking, you led off with the fact that a lot of the people you speak with are currently working some sort of full-time job that’s not related to investing or real estate at all, and their goal is to eventually create enough wealth or save enough money through that so that they could eventually exit that and then become a passive investor. The whole idea here is that if you want to be a passive investor, you can either pick it from the point of “I’m going to be active in something and then I’ll become a passive investor eventually, once I’m done…” You can do it while you’re a doctor and passive-invest your gains…

There’s really a lot of different strategies when it comes to being a passive investor, active investor, investing for cash flow, investing for gains. It really depends on what your goals are. For someone who’s just starting out and has no money, you’re going to have a hard time being a cash flow passive investor. But like that Charlie Munger example you gave, when you do have a little amount of money, like a couple $1,000, you can multiply that money a lot easier than you can when you’ve got millions of dollars. The best example of this –we talked about in the show before– is the house hack. We talked about frugality, saving 30 bucks a month by just not spending money on certain things; at the end of the year you’ll have $3,600. That’s almost enough to get the ball rolling on a house hack by just cutting back your spending for a year.

Again, the equity is really good for when you’re first starting out and want to get that nest egg rolling. But I think the strategy here is to eventually transition to cash flow, maybe at the same time, and then transition fully to the cash flow. Those are my final thoughts on this topic. Travis, anything else you would want to mention before we sign off?

Travis Watts: Yeah. Just always keep in mind like I pointed out earlier, a million bucks invested at 10% a year is 100k. You can run your own math, you can disagree with the 10% figure and say, “How about 5%? 2 million bucks at 5%?” Whatever, but just realize that once you get to these capital levels is when passive investing can really kick off and take a journey of its own. It’s not too enticing — I’m asked all the time “If you were to start over from scratch day one again with no money or whatever, would you be a full-time passive investor?” Probably not. Because that means that the first money I put out there, to the point of that $5,000 example, I’m going to be getting 500 bucks a year or whatever that breaks down to; 83 bucks a month or something. That’s not very exciting. Just to be able to cover your cell phone bill isn’t life-changing per se. So no, I would probably go back to equity plays and I would be trying to hit doubles and stuff like that as quick as I could. And then again, frugality and whatnot.

There’s no right or wrong, good or bad. It’s what’s right for you given your unique circumstances, your goals, your risk tolerance, your self-discipline, your frugality, things like that. So it does depend, but that was the approach I took in full transparency – worked a high-paying job that was in the oil field, did a lot of buy low sell high, did fix and flips, had some vacation rental single-family stuff, side businesses that I would try to run, and all of this… And I was very frugal to where I built up a nest egg. I sold everything, I took that nest egg and I put it passively to work, but it’s because of frugality that I was able to pull that off at an early age. If I had had lush lifestyle preferences or if I wanted to spend a million bucks a year, I couldn’t have pulled that off. Everybody is different, but hopefully, some of that was helpful and encouraging to listeners on their journey… And I’ll quit talking.

Theo Hicks: Perfect. Travis, thank you again for joining us today. I always love hearing about your experiences. You’ve got a lot to bring to the table here. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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