JF2698: Best Tips on Housing Forecasts with Kathy Fettke

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Kathy Fettke—Co-CEO of Real Wealth Network, Host of the Real Wealth Show, and author of Retire Rich with Rentals—shares what to really look for when forecasting the real estate market.

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JF2697: How to Live a Balanced Life – The Investor Lifestyle | Actively Passive Investing Show with Travis Watts

Maintaining a good work-life-balance can be difficult to accomplish. In this episode, Travis shares the lessons he’s learned trying to navigate a good balance between work and the other aspects of his life, such as health, relationships, and more.

Want more real estate advice? We think you’ll like this episode: JF2627: 5 Ways to Align Your Investments to Achieve Your Goals | Actively Passive Investing Show 67

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JF2690: How to Network at Conferences – The Best Tips For 2022 | Actively Passive Investing Show with Travis Watts

Attending conferences and events is one of the best ways to expand your network. But how do you make sure you make the most out of your experience? In this episode, Travis shares the critical elements to networking at conferences and how to create your own game plan for your next event.

Looking for your next real estate conference? Join us in Denver, Colorado at the Gaylord Rockies Convention Center from February 24th-26th for the Best Ever Conference! Register here: www.besteverconference.com

Want more real estate advice? We think you’ll like this episode: JF2668: 3 Ways to Grow Your Business at a Networking Event with Ben Lapidus

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JF2683: How to Evaluate Risk in Multifamily Apartments 2022 | Actively Passive Investing Show with Travis Watts

There are a lot of variables to consider when selecting a deal, which means there is a lot that could go wrong with your potential investments. Today, Travis Watts outlines three risk areas investors should investigate before closing on a multifamily deal.

Want more? We think you’ll like this episode: JF1386: How Do You Remove As Much Risk As Possible In Real Estate Investing? With Chad Doty

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TRANSCRIPTION

Travis Watts: Hey everybody and welcome back to The Actively Passive Investing Show. I’m your host, Travis watts, and appreciate you guys’ tuning in. We are back in the studio here today recording this episode on how risky is multifamily in 2022, as we enter the new year. A quick little background on this. Risk should always be top of mind as an investor and I think it’s understated, I think it’s an underserved topic in the industry. Today we’re going to talk about risk as it pertains to multifamily, but I’ve got some really good insights to share with you on some due diligence, so I think you’re going to get a lot of value out of this episode. It’s going to be a bit longer than the last couple. Without further ado, let’s just go ahead and dive right in.

The first thing I want to talk about is the business strategy itself. Just saying “Is multifamily risky?” is kind of like saying, “Is real estate risky?” What exactly are we talking about, commercial, retail, single-family, flips, development? There are all kinds of aspects here. Let’s pinpoint what we talked about all the time on the show, which is value-add real estate in the multifamily sector.

The big difference here when we talk about value-add is to understand one key fundamental, and that’s that the value of multifamily apartments is primarily based around the net operating income. That’s the income the property generates after you pay all your expenses, taxes, debts, and things like this. How do you get net operating income to rise? Well, it has a lot to do with rent and rent growth. What are you buying a property at today? What are the current rents? What do you think you can get the rent to? This is all part of the strategy surrounding value-add. Let’s talk about a cap rate. I’ve described the cap rate in a few different versions in previous episodes,; but I’ll give you a new way to look at cap rate. Hopefully, it’s not too confusing. One, a cap rate is simply just a gauge to see how hot the real estate that we’re talking about is.

If you’ve got a two, three, or four cap, that is suggesting a really hot market or a really hot asset, anything that’s trading in that range. If we’re talking an 8%, 9%, 10% cap rate in 2022, we’re talking about a very soft market, an area that maybe folks aren’t really wanting to move to or buy in for whatever reason. Something to keep in mind. But what cap rate also can be, it’s a multiplier.

Think about buying a multifamily asset at a four capitalization rate. Basically, a four cap is like saying this, if we buy a property — this is just generally speaking, example purposes only. Obviously, it’s not a tried and true exact formula here. If we buy a property at a four cap, it’s a 100-unit or whatever, it produces a million dollars per year in net operating income; the four cap suggests a 25X or 25 times multiplier to purchase price. In other words, someone’s going to say, “Okay, you have a property that generates a million bucks a year. The purchase price will be 25 times that.” Just simply put. So what would that be? $25 million for a purchase price, just generally speaking, just hear me out, that’s how it works from a high level. Not an exact science.

The thing with value-add in the thing with stabilized cash flowing projects is as long as you keep the income up and the expenses under control, there’s a lot more predictability in that kind of play. It can be a lot less speculative than doing new development, where you have to say “Construction costs are this today, but it’s actually going to be three years down the road by the time we complete everything. So hopefully, prices are X, Y, and Z in the future, and hopefully, the market does A, B, and C to help us out.” But that’s speculating an awful lot, in a space that, quite frankly, you don’t have much control over, what government policy is, what the Federal Reserve decides to do, and anything else that may pop up in between in terms of inflation, pricing, wages, lack of inventory, etc. This is why I always say that cash flow is king. This is why I’m not such a fan anymore of flipping houses, although I used to do that. It’s also the same reason that I don’t buy stocks as a buy-low-sell-high kind of mentality or strategy. I think it’s very practical and very useful just to accept that market conditions are widely out of our control, good news in the media, bad news in the media.

So instead of buying a stock at $10 a share, then hoping that one day it’s $15 a share, and then hopefully I can sell. It’s an awful lot of hope. But instead, what I would do is I would buy a dividend-producing stock, ideally at a discount as the markets just pulled back 10, 20, 30%, so I have a lesser chance of it going down even further at that point.

But the important component is, it’s not about the price, it’s not about buying it at 10, or 15, or eight, or nine, or seven. What it’s about is the fact that it’s producing positive cash flow, or a dividend in this case, because we’re talking about a stock.

In other words, it’s a lot less speculative if I can take a company that’s been paying a dividend out for 10, 20, 30 years and say, “Well, they’ve never missed a payment. Or at least 90% of the time, they’ve never missed a payment even through the ups and downs and through the recession, so I have a lot more certainty and predictability on whether or not I’m going to actually receive a dividend from this company.” That has a lot more control to it than saying, “I think I’m buying it at $8 or $9 a share and I believe it’s going to go to $13 or $14.” That’s just crystal ball territory that nobody really has. But some people like to think that they do have a crystal ball.

A few episodes ago, I talked about the lost decade. This was from January of the year 2000 to December of the year 2009, that’s just about a decade of time right there. Had you just bought into the stock market, generally speaking, with an S&P 500 index, which is not a cash flow, or a passive income, or dividend kind of play, even though it’s got a small one attached to it – it’s really a buy-low-sell-high mentality. It’s that you’re going to buy the general stock market and then hope that over time it goes up. But the fact is, during the lost decade, you would have bought in January 2000, it would have trickled down with the dot-com bust, and then 9/11 happened, and then we had a recovery, and then we had the great recession where you would have gone down again, and then we had a recovery where you went up again. But the fact is, 10 years go by and you’re left with really nothing. So you kind of got eaten up by inflation, more or less, and you had no cash flow, nothing to put in your pocket month to month. That’s why I’m not such a fan of just buy-low-sell-high and speculating. Not to suggest that you or anybody else shouldn’t do that, I’m just sharing my opinions, my perspective with you, in hopes that it can help you make more informed decisions.

Okay, that is kind of the big-picture philosophy. That’s from a high level that was talking about strategy and business plan. Let’s dive into the three risk areas that I often talk about. On to the market risk. First, I’ll share a quick story with you that I invested in at least two deals –it could have been three at this point– where, quite frankly, the market itself kind of saved the overall business plan and made investors profitable. In other words, I invested in these deals where the operator didn’t do necessarily a good job at all at executing on the business plan doing what they said they were going to do. The deal was just kind of average and so-so, it was basically just a market price deal and nothing too special. But the market itself was booming, and it was a great high growth area. I’ll pinpoint a few things to look for in a market here in a minute. But essentially, we all got out profitably by the market bailing us out, not with the other two components, the operator in the deal itself being a big contributor to our overall success.

Break: [00:08:40][00:10:18]

Travis Watts: There are really three main areas that I look at when I’m vetting out a market from a macro level that I think is really important to consider. One is jobs. That’s how many jobs are there? Who are the employers? Is the market diversified by industry? I’ve spoken a lot about Dallas in the past being that no one industry comprises more than 20% of the job market. I don’t know if that’s still true today, it may be even better stats than that. But the fact is, it’s not a Detroit, Michigan [unintelligible [10:48] recession, where it’s really just one industry lifting the market, and if that one industry goes down, then everybody’s hurt. Then I look at are people moving in or moving out of the market? Not every market, as you know, is created equal. There’s an exit happening in parts of Los Angeles and San Francisco, more people are moving out than moving in, rents are stagnating, and in some cases declining in those areas. How many people are there in general? How many are moving in versus moving out? This is all just public information that you can look up online. You can probably ask the syndicator or the operator for this data if they didn’t provide it to you in the proforma. I also look at what’s the absorption rate in the market. In other words, take a look at average occupancies and things like that. What is the overall absorption rate? You can find this by the way through CBRE, Marcus and Millichap, there’s a lot of, again, public information that you and I have access to that will tell you this data.

Next is wages. What are your tenants actually earning? Obviously, the common thing that we look at is how much are they earning on average at this property. But also look at the three-mile, five-mile, 10-mile radius of jobs, look at average incomes in the area, and just decide if you’re going to be charging 1500 a month in rent. Is that adequate for your tenant who’s going to be living there, or is that a stretch or a push, and at the very, very highest end of the affordability spectrum for that three, five, and 10-mile radius? I also look at the same topic, are the jobs recession resistant? In other words, at the property or in the surrounding area, do you have medical facilities, doctors, nurses, and things like that? Or is it cruise ships? Are you right next to Cape Canaveral in Orlando or Miami right there at the port? You got to look at what that industry is comprised of and who’s actually working what jobs. Trying to decide, are the wages safe especially in volatile times like today, with viruses going around, with different industries having to shut down, and all these crazy regulations that we have. You need to know that your tenants are going to be able to continuously pay the rent and that you have a diversified employment base among residents at the property.

Moving on to the operator risk. As an investor, the primary metric or statistic that I look at from an operator’s perspective as I’m doing my due diligence is what is their track record? Is this business model that they’re showing me what they usually do? Is it the norm for them? Is that their specialty? Or is it something that they’re experimenting around with and have never done before? In other words, if an operator’s done 40 deals just like this one over and over successfully and they can show me that data, even if a couple of the properties underperformed but in the wide majority they’ve outperformed or performed expectations, that really goes a long way. Versus just saying, “Look, we’re new to the business and we really hope this is all going to work out. We’ve never done it before but give us your money and let’s see what happens.” That’s a big red flag, at least to me, something to consider. I’m not going to go through all the different line items of vetting out an operator here on this episode because we’ve covered it so many times in different episodes. So check out some of the 2020 episodes that we did on how to vet an operator, a market, and a sponsor. I will point out a couple more things for you real quick right here, which is get references both from the operator. Say, “Hey, do you have any investors that can speak to having some experience investing with you.” But also try to branch out of that if you can. Try to get on forums, Google, and attend any kind of real estate meetup groups, try to meet people who are already invested with these groups.

Guys, I can tell you, word of mouth referral is powerful. The way I’ve found a lot of operators that I partner with today is just through word-of-mouth references. It’s not always because I requested a word-of-mouth reference, it’s usually because I’m talking to someone and they said, “Hey, you ever invested with so and so?” “Yeah, I’ve done four or five deals with them and just had a really positive experience.” It usually kind of starts with that. A little bit of interest, then I do my due diligence, I interview them, then I’m on their deal list, and then I ended up partnering if it kind of matches my criteria. And then I would do a gut check analysis. I think this is really critical and It’s very simple to do. I’m just talking about googling the operator, I’m talking about going on to YouTube, Facebook, LinkedIn, and social media sources. I love to look at videos, I love to watch interviews, and I’m just trying to get a gut check of who are these operators as people, in philosophy, in competency. Are they widely known? Are they out there in the industry? Or again, are they just getting started? Or is there no public information on them at all? Some of these items could be a red flag for you so definitely watch out. If something doesn’t align or you just think, “There’s something off about this person. I can’t really pinpoint it but I’m not really comfortable with what they’re saying or how they answered that question.”

Last, but not least, get on the phone with the operators. If you can meet them in person, even better, but if not, get on Zoom, get on a phone call, and ask your questions. This can be very revealing. Again, like I often say, I’m not looking for the “right answer”, I’m looking for an answer that just makes logical sense. I’m just looking to know they’ve thought things through, that they’re competent in what they’re talking about, and I’m just trying to get an overall gut check that my money is going to be in good hands and not “Oh, hey, good question. Hadn’t even really thought about a recession happening. I don’t know. I don’t think that’s going to happen.” That might be a red flag.

Alright, moving on to the last of the three risk points, in my perspective, in my opinion, and that is the deal itself. Again, just my own opinion, that the deal is 25% of your risk, the market is 25% of your risk, the operator is 50% of your risk. The bottom line is that if you have a good operator, someone who’s experienced and who has a track record, they probably know what they’re doing first of all. They’re probably going to find a good deal and a good market, they’re going to know how to vet a good market and how to vet a good deal. They don’t want to spoil their track record, obviously, plus, they’re co-investing in the deal and everything else. You still must do your due diligence. This is kind of one of those trust but verify thing, so let’s dive into that.

When an operator is doing a deal, I don’t care what operator we are talking about, they want to show you the highlights of the deal and they want to highlight all the best features. They want to show you all the pros, they want to talk about how great everything is, but they’re probably unlikely to show you any negativity or any stats that really don’t justify their business plan. As I’m looking at proformas, I’m tuning into webinars, and I’m thinking about maybe investing in this deal, I’m kind of making notes of what wasn’t covered. I kind of start off as they’re talking, I wonder what’s the cap rate here? What’s the reversion cap rate? How conservative are they underwriting the T12? Are they giving me a sensitivity analysis? These questions, and as I go through, I read, and I listen, I’m marking off my list the answers. What I’m left with, I’m kind of circling, then I’m going to set up a call, I’m going to ask those “difficult questions.” I encourage everybody listening to ask difficult questions as part of critical due diligence. The last thing you want to do is to invest $100,000 and then find out three months later, something wasn’t disclosed or that you didn’t understand something fully, and now you’re locked in for five to seven years.

I’ll share with you guys a really quick story, this was a few years back. There was a deal that I’m listening to the webinar, I’m browsing through the proforma, and everything looks good. The numbers look good, it seems very conservative, the deal seems solid, just seems like an overall great opportunity so I’m really leaning towards investing. After the presentation’s done, I hop on Google Maps, and I just take a little drive-by of this property. What I find is that directly to the left of this property is a really old, rundown mobile home park. Now, nothing wrong with mobile home parks, in fact, I used to live in a mobile home park growing up and I invest in mobile home parks today. But this particular mobile home park was really, really rundown. I mean, it was in terrible shape. The only thing that divided this park from this apartment community was a six to seven-foot concrete brick wall between the parking areas. I thought “Oh my gosh. That wasn’t even talked about in the webinar. That wasn’t even shown on the pictures.” Here they are, showing all the interiors and what they’re going to do for unit renovations, and not even talking about the elephant in the room, so to speak, which is right to the left of the property. Long story short, I decided not to invest in that deal. But this is the kind of due diligence that I’m talking about.

Break: [00:19:23][00:22:19]

Travis Watts: …marketing, it can really hurt your drive-by traffic. You can do all the curb appeal enhancements as you want, new plants, new signage, new lighting, but people aren’t going to miss that as they drive out every single day, in and out of that property, what’s just to the left. Look at school ratings, absolutely. That’s often not talked about on a lot of webinars that I see, it’s that trust but verify. If they make a generalization like “Yeah, great schools, lots of families here.” Just go do your homework, get on Zillow, it’s really easy to go look that kind of stuff up. Look up crime stats, public information, do the drive-by as I mentioned on Google Maps. If you can, the best way is to visit properties in person. I always learned so much about it, and it’s just the common-sense factors, the gut check. When you’re pulling in, what’s the feel, and what’s the appeal? As you talk with the property management company, what’s your general feedback? How does the clubhouse look? Just stuff like that. Are people being responsive on the property? Is there graffiti all over the sign? Are there broken lights all over the place? It really tells you a lot about the area that you’re not really going to see in a proforma.

The goal and doing your due diligence, again, is trust but verify. You’re trying to seek out what’s not being talked about in the webinar or the presentation. Again, just jot down your questions. “Hey, what about that neighboring property XYZ? Is that going to be an issue or do you foresee any problems with that? What gives this particular property that competitive edge compared to the one that’s right next door that seems to be doing great? Is there anything that this property has to offer that they don’t?” Maybe two or three swimming pools instead of one, maybe a better gym, or maybe it’s some of the value-add plans that they’re going to be implementing that’s going to far exceed what neighboring properties have to offer. All that stuff is really great info to have. If you find a bad review on a school, “Hey, I noticed that the school next door is rated at three out of 10. Do you know anything about that? Or is that kind of a red flag for you guys in any way? How do you think that plays into the resale of this property or the value that it has today?”

I know I kind of alluded to this earlier, but a stress test or a sensitivity analysis is basically something that the underwriting team generally does. They say, “Well, if interest rates go up, this is kind of the effect to the investors.” Or “If occupancy falls down from 95 to 85, this is the effect that would have on the cash flow to our LP investors.” That’s just something you probably are going to have to ask for separately. It’s usually not included in your standard webinar presentation or something like that. Certainly not in a PPM, private placement memorandum. So make sure that you’re asking for stuff like this if the numbers are really critical to you, or if you feel like maybe they’re not being so conservative with the underwriting. This will tell you a lot about a property. A lot of times, I’ll see really great looking proformas but then I won’t see things like them disclosing, “Hey, we’re buying this at a four cap,” and that’s all they say about it. They don’t tell you about stabilization upon the cap rate, they don’t tell you about their projected exit cap rate. We’ve talked about this a lot, but for buying a property at a four cap, I like to see a five cap in the future projected.

Now, I don’t actually want to see that happen. That means the softening of the market, which means a lesser purchase price generally speaking, but it’s a way to be conservative when you’re underwriting and something to look for. If they do a presentation and just say, “Hey, we’re buying it at a four cap, end of the story,” I’ll always ask the question, “What about the exit cap? What do you think that might be in the future?” If they say, “Four and a half, five, five and a half, six,” that’s being conservative. If they say, “Oh, the same. Four or lower. Three, two, one,” red flag for me. It’s just showing that they’re being very aggressive. It’s kind of like predicting interest rates. Do you want someone to predict the interest rates are going to keep going down, down, down forever until we go negative interest rates? Is that being conservative or is it more conservative to say, “Well, interest rates might be going up at some point in the future. Hopefully, they don’t. But if they do, we’ve already factored that into this business plan.”

The last thing I want to point out here about the deal itself is, again, under the philosophy of “trust but verify,” go to places like apartments.com and actually look for yourself at the comps. I know they usually will show you comps and the overview, but they’re handpicking the comps that they want to show you, the operator, so it’s better to do your own due diligence. If the business model is, “Hey, we’re buying this property. It’s got a lot of two bed two baths, they’re currently rented at $1,100 a month, they’re not renovated units, and the comps are 1400 per month in the area.” If that’s what said, if that’s what the business plan is, hop on apartments.com, go look at actual comps in the area, in the three, five, 10-mile radius, look at two bedroom two baths, and see if they’re actually renting at 1400 or greater for a very comparable property. It is not a comp to suggest “Hey, we’re buying a 1975 property and we’re going to raise rents to 1400 when a brand-new built A-class luxury apartment community is renting at 1400 a month two bed two baths.” That’s not a comp even though it’s the same square footage, two bed two baths, I tell you.

Obviously, a prospective renter is not going to go rent the 1975 unit if they can go rent a 2022 built unit for the same price. You really got to read between the lines there and think how conservative is this. Maybe the other older properties are renting at 1400 or 1500 or 1600, in which case, that’s a very conservative assumption. But maybe they’re only running at 1200 and maybe they’ve already been renovated. That’s a big red flag. If you’ve got renovated units running at 1200 and this business plan is to raise rents to 1400, you may not get it. That means you may not get the overall projections and that means all the numbers kind of go out the wayside. Do your own homework. That’s what I wanted to cover in this episode is some of the risk points going into 2022. We have to be more diligent than ever, as investors we need to be doing our own homework.

You can always reach out to me if you have further questions, travis@ashcroftcapital.com, joefairless.com, social media, I’m always happy to help with any questions you have. I appreciate you guys so much as always for reaching out. Well, let’s connect on LinkedIn, let’s connect on Bigger Pockets. Let’s connect on Facebook, on Instagram, @passiveinvestortips. I’m always here to be a resource for you guys. Thanks so much and we will see you next week in another episode of The Actively Passive Show. I’m Travis Watts. Have a Best Ever week.

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JF2678: The Key to Funding Your Retirement Through Multifamily Syndication with Elijah Vo

Elijah Vo went from working full-time in the Air Force to becoming a full-time active investor. In this episode, he shares how he got into multifamily syndication and how he finds deals that will fund his retirement income.

Elijah Vo | Real Estate Background

  • Partner at Atlas Multifamily Group, who help investors build generational wealth as a passive investor in multifamily real estate syndication.
  • Portfolio: Operates 700 doors
  • Used to work full-time in the Air Force, but after retirement, he began to do CRE full-time as of October 2021.
  • Based in: DFW, Texas
  • Say hi to him at: https://www.investwithamg.com/
  • Best Ever Book: The Laws of Human Nature by Robert Greene

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Elijah Vo with us. How are you doing Eli?

Elijah Vo: I’m doing great. Hey, if I sound kind of strange, I’m coming off a head cold. I feel fine, but I’m just a little bit [unintelligible [00:01:25].11] up. But otherwise, I’m great and happy to be here.

Slocomb Reed: Great. I know the feeling. I just got the COVID booster shot a few days ago and it put me in bed for a while. Eli is a partner at Atlas Multifamily Group. They help investors build generational wealth passively in multifamily real estate syndications. In the current portfolio, they operate 700 doors. Eli used to work full-time in the Air Force, but after retirement, he began to do commercial real estate full-time, and that’s as of October 21. Eli’s based in the Dallas-Fort Worth area. Eli, tell us about yourself. You were in the Air Force; what got you into real estate?

Elijah Vo: Sure. I’ve been in the military for over 20 years so it was always kind of my mentality to work for the government for 20 to 30 years, and then one day I’ll retire happily on a beach somewhere.

Slocomb Reed: Sure.

Elijah Vo: So I think about halfway through my career, that mentality wouldn’t sit right with me, because I really want to [unintelligible [02:26] our government. I was always interested in real estate so, at that time, my wife and I started buying up small family rentals, went through a couple of them, did pretty good with them… But at that point, I looked back at our goals and was like, “Okay, well by time I go to retire, this income won’t replace my current income.” So we had to find a way to scale more efficiently a lot quicker.

I remember driving around town one day over here in Fort Worth and I saw an apartment complex. I was like “Man, who owns those things? Who buys these?” Because it would probably be way more efficient to own one of those rather than 20, 30, 40 houses spread across town. So I started out working, getting educated on how this whole space works. Around 2018, I ended up joining a mentorship group, and that following year, we ended up…

Slocomb Reed: Which group did you join?

Elijah Vo: It was Think Multifamily.

Slocomb Reed: Think Multifamily.

Elijah Vo: There’s a bunch all over, a lot here in DFW. We’ve got Think, and a bunch of other ones.

Slocomb Reed: Nice. So you joined the mastermind, and what’s next?

Elijah Vo: We started hunting around for deals. That first year, we picked up two deals, about 360 units; those were in Atlanta. Then, about two years ago, our two current partners, we opened our firm, Atlas Multifamily Group. Now we own 700, and we actually have another 115 under contract that will close next month.

Slocomb Reed: That’s exciting. So you jumped in in 2018, it sounds, into multifamily syndication.

Elijah Vo: Yeah. Around 2017 or 2018. I started also doing passive investments first. So we did a couple of passives and then I joined Think mastermind in 2018.

Slocomb Reed: Awesome. So you were picking up some rentals on the side of working in the Air Force and then started investing passively, wanting to get in on the GP side of things. Thinking that you were replacing your military income with real estate, what made syndicating the right fit for you?

Elijah Vo: It was interesting, for sure. I enjoy the fact that on the GP side, I like being the front-runner in these things; because you’re not really buying real estate, you’re buying a business. I find it fascinating and very interesting that we’re able to come in and quarterback these deals, and you have a whole team that you build around you. It’s an entire process of all kinds of different people and partners. I think that’s probably what spoke to me the most, aside from the fact that you can invest in something that can return something like that back to you. You build communities too, you’re giving back and you’re building communities for other families, because you’re coming in and in rehabbing these places, like the exteriors and interiors. You’re making everything better. I enjoy the fact that I’m kind of like the main quarterback here, and we’re also at the same time giving back at the same time.

Slocomb Reed: Financially speaking, understanding that there are other routes that you can take to be in real estate investing full time, you did some passive investing… That’s a very popular way to replace an income going into retirement, because it allows you to act retired. Financially speaking, what is it that compelled you to get into syndication as opposed to some other active model of investing? Is it specific to the numbers? What was it about syndicating?

Elijah Vo: I don’t think I really had the income to invest enough to be a full passive investor. If I have $100 million or more than I could put in and get an 8% 10% return annually, that’d be fine. But on an Air Force income, we really didn’t have that. So I had to find more after ways to make income. I think that was part of it. And then the fact that — I do enjoy the mailbox money, that’s great. But I wanted more control, I wanted more involvement in the deal. I want to be able to go out there and find my own deals, build my own empire, build my own income, and then eventually I’ll get to a place where… [unintelligible [00:06:21].10] I’m sure, maybe. I enjoy it now but over time, I’ll get another I can passively invest. But I love it now.

Break: [00:06:29][00:08:08]

Slocomb Reed: I saw that you have a goal of helping investors build generational wealth while investing passively. Are you underwriting for the five-year hold? Are you planning to hold the properties that you syndicate long-term, longer than five years?

Elijah Vo: I would love to do a long-term, like a 20-year hold, that would be awesome. I think right now, the industry, they’re so focused on those five or six-year holds. It’s hard to find investors who want to do a 20 to 30-year hold, plus that you’d be holding on to, I guess — you’d be partnered with people for 20 years. But I would love having generational wealth, I wouldn’t mind it. We are playing with a new, almost a new model. But we’re doing a three-year hold, where we’re returning 70% to 80% return over three years, rather than do 100% return over six years. Our investors can hit about 74% return in three, and then pick up money and do another one, and get it again in another three years. We are kind of going into a shorter model, given that our investors do enjoy a faster turnaround. They want the amount for sure, but they also want a faster velocity return.

Slocomb Reed: Gotcha. So that 174% return, you’re talking about the gross profit on their initial capital after three or five years, correct?

Elijah Vo: Yeah, like their total return. After all their cash flow, then we cash out and pay back their initial, and a little kicker on top of that, equal like that, say it’s like 80% or whatever it is.

Slocomb Reed: Gotcha. So you’re going for the three-year hold. My experience is the shorter your projected hold period, the more aggressive you have to be with your value-add. What kinds of properties are you targeting? What condition are they in when you buy them?

Elijah Vo: This is our first one. Actually, the one that we have under contract right now that we’re going to do, it’s actually a Class A in Wichita. It’s a little bit different in the fact that it was an old historical building, built back in the 1800s. The current owners had bought it, and they used a combination of federal and state funds to totally rehab it. But they really aren’t operators. Their goal is just to own these old buildings all over the United States, then fixing them up and selling them to guys like us.

Slocomb Reed: How big is it?

Elijah Vo: It’s 115 units.

Slocomb Reed: Wow. 115 units, 130 or 140-year-old building.

Elijah Vo: Yeah. But they totally revamped it though. They put 19 million dollars into changing the entire structure, the bones, they reinforced it with steel if they had to, they changed out all the mechanicals, the plumbing… They did a really good job going in and refurbishing it. The only thing that they didn’t do was push it to its market capacity. So they really aren’t operators. They come in and fix them up, but they don’t really have the want or need to really push it up to the market potential. That’s why we’re–

Slocomb Reed: So what’s left to do specifically? Do you need to turn over a bunch of tenants? Are you just raising rents, or what?

Elijah Vo: So there’s enough of the organic income that we can just bump some rents, but we’re going to definitely turn some tenants over and infuse more capital in there. Probably about 1.9 million in there, to do the interiors to push them to class A. It’s a Class B right now. It should be a Class A, because in downtown Wichita; but we’re going to pushh it to a class A.

Slocomb Reed: Nice, that’s awesome. This is a projected three-year hold. What kind of return are you projecting?

Elijah Vo: It’s a three-year hold, we project a 72% return on the money.

Slocomb Reed: Nice. How did you find this deal? Through a broker?

Elijah Vo: Yeah, through a broker. Actually, when we looked at this property, we were looking at another one in Wichita. Then he calls me and he’s like, “Hey, while you’re in town, go ahead and look at this one that’s in the downtown square.” I’m like, “Well, it’s not really our criteria, but sure.” So we walked down there and we’re like, “Oh, this is a really cool project.” We just kind of dug into it and fell in love with it.

Slocomb Reed: What attracted you to Wichita, Kansas?

Elijah Vo: I like the market. It’s a slow, steady cash-flowing market. It has a lot of diversity in, it has tons of business. I would say that it has a lot of good value-adds still, where a lot of properties here in DFW, they’ve been turned over a couple of times. A lot of stuff that we buy in Arkansas, Oklahoma, and Kansas, they didn’t turnover as much, or not at all. So they’ve had owners for 20 years or plus, so they’re true value-adds, to me at least.

Slocomb Reed: Gotcha. So you’re taking down your first deal as a syndicator now. What is it you said? You took down a couple after you joined the Think mastermind in 2018. What deals were those?

Elijah Vo: Everything I’ve done since I’ve been in Think… I’m not in Think now, but when I first joined Think, the first one I did [unintelligible [00:12:40].18] I sponsored those two, so I was a syndicator in those. Then I did 700 in Arkansas, Oklahoma City, with my two current partners at Atlas. And then we’re doing another 115 as well.

Slocomb Reed: Gotcha. Nice. And are all of those on the three-year hold?

Elijah Vo: No. The ones in Arkansas, Oklahoma City are on a five or six-year hold, and then a one in Kansas is on a three-year hold.

Break: [00:13:06][00:16:02]

Slocomb Reed: What is your Best Ever advice?

Elijah Vo: Best Ever advice… I would say even if you’re not the most capitalized, most intelligent, I would say what it takes to make it in this industry is having persistence and grit. Take action now and keep going. I know there are days where you get burned out and things drag on and you get frustrated. But the ones who do the best here are the ones who just keep going day by day, inch by inch. I think the people who come in with stars in their eyes or whatever, they can have tons of money and tons of ambition, but if they don’t have the grit and the wherewithal to keep powering through, they won’t make it. So you don’t need to have everything, but you need to have a couple of key skills for sure.

Slocomb Reed: Great. Eli, are you ready for our Best Ever lightning round?

Elijah Vo: Yeah, sure thing.

Slocomb Reed: Awesome. What is your Best Ever way to give back to the community?

Elijah Vo: I don’t think I give back enough… This has actually been a topic of discussion amongst Atlas. We’ve been looking at different ways to start giving back. I think the guys want to donate some funds, they want to do certain things…

I would like to do one where I can give more of my time. I used to read a lot at my kid’s schools, we’d read books or whatever. But something like that, where I can give a little bit of my time in my week to maybe go build some houses for Habitat for Humanity, read books to kids at schools, or I’d like to do something where I could go visit senior citizens homes, and give my time to them.

Slocomb Reed: Nice. What’s the Best Ever book you’ve recently read?

Elijah Vo: It’s not real estate, but recently I read Robert Greene’s Laws of Human Nature. That’s a fantastic book. It’s a big, thick book and it encompasses a lot of psychology, behavioral theory, psychiatry, and philosophy. I love it. It really deals with how we think and how we interact with other humans.

Slocomb Reed: That seems right up my alley. I’m going to have to look into that one.

Elijah Vo: Yeah. It’s a great book.

Slocomb Reed: What’s the most money you’ve ever lost one deal?

Elijah Vo: I was passively invested in a deal in Atlanta. It was a pretty big one, it was like 300 plus units. A partner ended up stealing money from the company, and then he had passed away. There were in [unintelligible [00:18:12].20] for several months. So we ended up losing most of our investment in that one. It wasn’t a good time. There’s a silver lining though, it did teach me a lot about how syndicators can communicate when there’s a big issue like that… And how to respond to it, how do we communicate the problem and the issue, how many webinars should we be holding, how many calls and emails go out, and all that. It wasn’t my favorite deal, but I did learn a lot about the GP and LP communication gap there.

Slocomb Reed: Hopefully you didn’t have to pay too much for that education. What’s the most money you made on a deal?

Elijah Vo: Probably our biggest deal so far was the one in Oklahoma City. That was a pretty good deal. It was 288 units. We had a good team, we came in and we closed that one at the end of October. That was probably our biggest deal. It’s a Class C that we’re going to push to a B. We did pretty good on that one.

Slocomb Reed: You bought it in October, or you sold it in October?

Elijah Vo: We closed on it in October. I’ll tell you what, probably the deal that we made our most on was the first Atlanta deal. That was the one that we just sold this year in January. It was 110 units that we bought for 42k a door, and we sold it for 90k a door almost.

Slocomb Reed: That’s awesome. How much did you have to put into it?

Elijah Vo: We put in around six or $700,000 into it, with all the rehab and everything. So under a million dollars. But we had rehabbed it, we held it for about two and a half years, and we ended up selling it, returning about 129% return to our investors. That was a whole…

Slocomb Reed: Over what time period, that 129%?

Elijah Vo: Two and a half years.

Slocomb Reed: Wow. That is good. What accounts for that? Is that what you projected, or did it outperform?

Elijah Vo: It outperformed. We had projected like a five-year hold on it.  I think part, for sure, was us. I’m not saying that we did everything. But the other part was also the fact that Atlanta was just growing, and we bought it at the right time. We were able to hold something for two and a half years, do a forced appreciation play on it, and then sell for almost double.

Slocomb Reed: Awesome. Where can our Best Ever listeners get in touch with you?

Elijah Vo: They can reach me at eli@investwithamg.com.

Slocomb Reed: Eli, thank you very much for being here. It’s been great to learn from your success with your shorter-term holds on your apartment deals. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.

Elijah Vo: Awesome, Slocomb. Thank you very much.

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JF2677: Unlock the Fund of Funds Model with Hunter Thompson

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Hunter Thompson shares how you can utilize the Fund of Funds model to scale your business.

Register for the Best Ever Conference here: www.besteverconference.com

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the Best Ever Conference 2021. This year, the Best Ever Conference is back in person, February 24th through 26th. Come join us in Denver, Colorado. You’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today and will be beneficial for you.

Hunter Thompson: Alright. For those of you who don’t know me, we are about to dive in deep into the details. Buckle up, get your pen and paper ready, and make sure to write down questions as they come up. Because I definitely want to get into the Q&A and just burn through as many questions as possible. It’s likely that a lot of things will come up during this conversation. If you’re not yet familiar with this concept, let’s talk about what this is. Why listen to this presentation?

Before we get into the details of what this is all about – this presentation is going to outline a concept, a structure, a model that’s going to allow you to provide your investors with access to operators with extremely large minimums. It will allow you to act as a capital raiser while avoiding challenges associated with becoming a registered representative under a broker-dealer, which I am; it’s kind of a pain, but you can avoid that by doing this. You can also provide economies of scale if you’re just getting started.

So if you just want to be a capital raiser, for example, it usually doesn’t make sense to do that and go through all that process and compliance unless you can raise, let’s say, five million dollars in a year. This will allow you to start with raising half a million, raising a million, raising two million. And if you want to continue to just be a capital raiser, perhaps at that point, you can go and be a registered representative.

Also, if you’re an operator – this is so key; I know a lot of attendees are operators here – it will allow you to create structures that attract fund of funds managers. This is how you can get someone to write you a check for two million, three million, five million dollars, such as my firm, Asym Capital; we’ve done this many, many times. And if you’re an operator and you’ve got a lot of capacity to invest or raise capital, but your deal flow slows down, you can actually create your own fund of funds and invest in someone else’s deal. Lastly, and potentially most importantly, there’s nothing better to do. Everything’s closed down, so you’re stuck with me for the next 20 minutes. So let’s rap about it.

So this is what a traditional real estate partnership looks like, and this is something that has been going on for hundreds of years. You have a capital partner – it’s very common in the real estate business to have a delta between a capital raising partner and the operating partner. One person focuses on operations, the other person focuses on the placement of capital. Those people get together, they form a management company, and that management company purchases real estate. We’re very, very familiar with this.

So as the Jobs Act happened, and as podcasts such as Joe Fairless, as in my own, and many, many others started taking place, people recognize “Wait a minute. I have access to half a million dollars through my friends and family. Perhaps I can be a capital partner in one of these deals.” So what ended up happening is a lot of people in the industry took this co-GP model that’s been proven over millennia and turned it into something that looks a little bit different.

Now it’s like this – a capital partner is here, they’re going to raise money for a deal; we’ve got the operating partner, and they’ve created this management LLC. But the capital partner can’t come up with 100% of the capital because the deals are getting bigger and bigger… What happens is they invest in this deal, but maybe it takes this capital partner, this capital partner… They’ve added all these capital partners in, and the SEC is basically saying, “Look, you can’t just have a bunch of people raising money for a deal, each of which is getting compensation basically exclusively on how much capital they raised. They’re basically acting as a placement agent, but they’re not doing so under a broker-dealer.” I know this is super, super common, and I’m not really saying, morally, there’s anything wrong with it. I’m just saying from a guidance perspective going forward, I would say that this is not ideal, especially the more people you have. If you have 30 capital raisers for a deal, the SEC would really have a problem with that.

So this enters the conversation of the special purpose vehicle. These two terms, SPVs and fund of funds are used interchangeably. That can actually create a lot of confusion, so I’m trying to get in front of that really quickly. The SPV, of course, it’s short for special purpose vehicle; it’s considered a pass-through entity. This is the part that causes a lot of confusion; just because we say a fund of funds does not necessarily mean there are multiple assets. When I say fund of funds, it’s a structure that I’m about to outline, but it doesn’t necessarily mean you’re investing in mobile home parks, self-storage, you’re investing in Florida, Texas, etc. It just means the structure itself; they’re used interchangeably.

Break: [00:05:31][00:07:10]

Hunter Thompson: Here’s how this typically works. You’ve got a bunch of investors and they invest into a fund of funds or a special purpose vehicle, and that entity then invests in an investment opportunity, let’s say a typical deal with Spartan Investments. But there is a manager of that fund of funds. In this instance, this would be the placement agent that’s sole duty is to create the entity, identify the operating partner, pool investors together, and then invest into that other person’s deal. This overcomes a lot of those challenges with third-party compensation, because your compensation is being derived at the fund of funds level. Now, when you look at this and you’re an investor, and you’re attending Best Ever and you’ve got a bunch of friends that you know, from this conference or otherwise, you’re like, “Why would I ever invest in a special-purpose vehicle that then just invests in someone else’s deal? Clearly, I’m getting a middleman-ed.” That’s a lot of what we’re going to talk about today.

Why would this ever happen? Most importantly, I’m going to give you the tactics and the strategies, but this is a very important slide here. Your clients desire your expertise; I cannot overstate this enough. Price is not the determining factor. The difference between a 16% IRR and a 14.9% IRR is not the difference between investors moving forward. The reason is that your clients desire your expertise, they trust you, etc. Now, it may also give them access to operators that otherwise aren’t available. So you can come to them and say “I formed the relationship, I did all this due diligence, I provide access to this relationship through the structure.” It may also create a situation where they have access to an operator that has a very high minimum investment. We did a deal a year ago where the operator has a two million dollar minimum. Well, our investors can’t reach that minimum individually. But if we pull them together in a special purpose vehicle, then we can invest in an operator that’s extremely high quality, a billion dollars under management, etc.

And lastly, as I mentioned, your dream clients – they’ve been attracted to you. And if you’re not focusing on your dream clients and specifically creating your marketing to attract those people, you’re leaving money on the table and you’re not working with people that you love. You want to work with investors that you love, and the way to do that is to focus on attracting them.

Of course deferring to your due diligence, most investors are not like you. As fun as we like to spend our whole weekend going to these virtual events that Ben has done such a great job putting together, most people don’t want to spend their time attending conferences. They just want to go about their business, live their life, work their W2, etc. And of course, as I said, price is not it, that’s never the answer. If you’re struggling, it’s not because of price, it’s because you haven’t increased the value in your customer’s eyes enough for them to want to move forward. So the economics is not necessarily the reason, but it is not even the case that through the structure, they’re less favorable. I’ll give you a quick example.

So you can actually negotiate that your SPV itself gets a favorable treatment that can make up significantly for the fact that there is an intermediary in the deal. Here’s how that would work. Operators want to focus on implementing the business plan. Remember the original example I gave where there’s an operating partner and a capital partner? This is the same concept. They want to focus on actually doing it, not talking to investors. If you’re a capital raiser and you like talking to investors, you feel like, “Oh, that’s clearly the best and funnest part of this whole space.” I tend to agree with you, but that’s not what most people want to do that is focused on the operating side of the business. They want to focus on management, they want to focus on implementing the business plan. So you can leverage what you’re bringing to the table as a negotiation tool to get favorable treatment for that. And you can even get things other than just economics – you can get voting rights, and all these things; transparency, additional reporting, etc. This all results in operators willing to forego some of the economics, to receive larger checks.

How many times have you heard about institutions that have 80/20 or 90/10 splits? The reason they’re able to negotiate that is that they are going to write a $20 million dollar check or 100-million-dollar check. This is the same concept at a smaller level, and this is how it typically plays out. By the way, if this is the first time you’ve seen this concept – watch me; there’s going to be more and more. Not because I had anything to do with it, but it makes a lot of sense, and we’re seeing the industry flow this way. So you can create different classes of shares based on the investment amount.

Now, if you’re an operator and you’re not doing some version of this, you’re going to be so excited when you start. Here’s how this works. Class A minimum is a $50,000 investment. Then there’s a Class B minimum with a $500,000 investment. And the $500,000 investment can have slightly or significantly more favorable preferred return, waterfall structure, voting rights, transparency, etc. This is typically done by creating these different classes of shares, but it can also be done through a side letter agreement. And when it comes to side letters, the issue with those is that it’s a secret kind of agreement. I don’t like to do secretive things in my real estate deals, so I prefer doing these clear class of shares delineations that says, “Hey, look, you want to invest half a million? You get favorable treatment. If not, no problem. Class A is for you.” And by the way, when you do this in your documents, which is pretty much free to do, you’re going to find that random investor that’s going $50,000 investment here, $100,000 investment here… All of a sudden, it’s a miracle; they find half a million dollars and they want to get what everyone wants to get, which is a good deal. So just simply having the opportunity to do that makes a lot of sense.

Let’s talk about what this will look like. I’m sorry to say this is really, really complicated. I couldn’t remove this slide from this presentation, this is the only way to explain it. I will let you know after the fact how to get access to the slides. So I’m going to just run through this really quickly. Let’s say there’s a typical deal that’s an eight pref with a 60/40 split. Let’s assume that the property level average ROI is 22%. That’s prior to the waterfall. Here’s what a typical investor would receive if they did this. 22%, take away the pref, multiply the remaining balance by 60%, add the pref back in, you get 16.4% ROI, just an average return on investment.

Now, let’s assume that you create an SPV and get favorable treatment. Rather than an eight pref with a 60/40 split, you get an eight pref with a 70/30 split for investing half a million dollars or more.

Break: [00:13:49][00:16:45]

Hunter Thompson: I know we’re probably losing some people but bear with me for a second. We’ll show you structurally what this looks like in a moment. The same exact calculation with a more favorable treatment. 22% property level, take away the pref, multiply the remaining balance by 70%, add the pref back in, and you get 17.8%. That’s what the SPV would receive; not the SPV investors, but the SPV.

Now, as an SPV manager, you want to make some money for putting all this together, for doing the due diligence, for pooling investors, etc. And let’s assume that you basically pass through an 8% pref with a 90/10 split to the SPV manager. Now, some of you probably see where this is going, but you’re basically taking a 90/10 split on profits above the pref. Here’s what this would look like.

The SPV itself receives a 17% return. What do we do? The same formula. 17%, take away the pref, multiply that number by 90%, with 90 going to the investors, put the pref back in, and a 16.82% ROI net to the SPV investors. Holy cow, they’re getting a better deal than those that went direct!

Now, there’s a lot to go into details here, there’s all these fees that we can do, and this is just back of the napkin math. I’m trying to show you that it works, and it’s not necessarily less favorable. Here’s what the structure looks like from a structural standpoint. You’ve got the investment opportunity, sending out 17.8% into the fund of funds, you got the eight pref at the fund of funds level with a 90/10 split, investors receive 16.82. And you, the fund of funds manager, all you’ve done is create an LLC, done the due diligence, and put in a ton of work, obviously, but you’re getting 0.98% every year based on capital raised, as long as the deal performs as projected. So here’s what this means. If you raise a million dollars and you operate a fund like this for 10 years, you make $100,000. That’s my favorite way to make $100,000. I’ve done this, and made $100,000 many, many times over. So there you go. This is a wake-up call, both if you’re an operator or a capital raiser; this is a really good way to do this.

I do want to say though, just because this is possible, just because your investors can get a similar deal, or the same deal, or even a better deal, don’t let that goal be a limiting factor in your deal flow. What I mean is, you’ve probably heard the concept of 20 plus two; this is a private equity split. This is far better. I just gave you an example that was a 90/10 split. The two is an asset management fee, the 20 is the carry that these firms like Goldman Sachs implement. Price is never the deciding factor. We’ve implemented the structure alongside groups that have had investors where there was like a 60/40 split at the SPV level, and their firm has a billion dollars under management, which mine does not. So how is that the case? It’s because they’re people that know, like, and trust them, they’ve got more of them, they positioned themselves in such a way to be able to successfully do this… And you would recognize their names. This is not country bumpkins or family offices that don’t really know what’s going on. These are elite players.

As an example, Goldman Sachs doesn’t have a real estate firm. They’re not operating real estate, yet they’re making billions on real estate, because they’re doing this 20 plus two. I’m actually going to skip that just for the sake of time. But here’s a quick note about compliance. I’m trying to give you all the tools. This is not so much the fun part but this may be the most important slide I’m going to share right now. And the industry has not yet caught up to what I’m talking about, but this is really, really important. Get your screenshots ready for this. This is the $100,000 idea. When you create an SPV and you invest not into real estate but into someone else’s deal that’s a security, this has significant implications in terms of the Investment Company Act of 1940, and the Investment Advisors Act of 1940. These are not acts that most of your attorneys specialize in. I know this, unfortunately, because this is a realization that I had to make up on my own.

So here’s what the idea is, if you’re going to go this route – make sure you hire or consult with an attorney who specializes in what they call the 40s Acts; not issuer-focused attorneys. That’s all you got to say, “Do you specialize in the 40s Act?” “No.” “Do you have someone at your firm that does? Great. Can I get an introduction?”

I want to do the key takeaways but you guys already know it, I blitzed through it. Here’s what I’m going to do really quickly. If you want the slides, go to raisemasters.com/FOF-slides. This will allow you to download everything. In fact, there are far more downloads. Raisemasters is our Mastermind, and you just got something super, super valuable that people have paid quite a bit to get some access to, so go there. If you don’t find the URL or it doesn’t work, check me out at the booth and I will see you there.

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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JF2676: One Secret To Successful Investing – How The Rich Get Richer | Actively Passive Investing Show with Travis Watts

In Travis Watt’s experience coaching and mentoring others in passive investing, he finds that there is one fundamental piece of advice that many investors fail to follow. In this episode, Travis shares his personal philosophy combined with Robert Kiyosaki’s method from Rich Dad Poor Dad for approaching asset and liability management.

Want more? We think you’ll like this episode: JF2468: Following the Cash in Asset Management with Dave Sherbal

Check out past episodes of the Actively Passive Investing Show here: bit.ly/ActivelyPassiveInvestingShow.

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TRANSCRIPTION

Travis Watts:  Hey, everybody. Welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. Just like last week, I am shooting a video on the fly on one of my walks around the neighborhood. I should call these segments Walks About Real Estate, or Real Estate Talk with Travis, I don’t know; some Mr. Rogers kind of crap. But anyway, sometimes I get these moments of clarity when I’m exercising or walking and that’s what happened today, just like last week.

I was thinking about a fundamental piece of the puzzle when it comes to investing. A lot of my friends and family have reached out over the years saying, “Hey, what is it you do? I want to get involved. I want to do what you do. How do I get to where you are?” Whatever it is, I’m always happy to share, I’m always happy to help, to coach, to support, encourage, and educate, all these things. But the reality is, after doing so, I find that the majority of folks have one thing backward, and that’s what we’re talking about today – is what that foundational piece to the puzzle is that a lot of people seem to miss for whatever reason. And I don’t want you to make the same mistake. So that’s what we’re talking about in today’s episode.

I will tell you right up front, this is a combination of Robert Kiyosaki… I refer to him a lot in these episodes. The author of Rich Dad Poor Dad, the founder of the Rich Dad company. It is part of Robert’s philosophy, but it is also part of my own philosophy that we’re talking about. So it’s kind of a mash, a merge.

You’re not going to find this content quite like this stated anywhere else. So with that — I’ll sit down over here, so I don’t get too out of breath. I’m not the most in-shape person. Let me sit down and talk to you about this just for a minute. Here’s the thing – Robert Kiyosaki, I learned this years ago from him, a great message… He’s great about teaching the fundamentals of investing and finance and this kind of education. He said, basically, buy assets to pay for your liabilities. To me, trying to think back and remember off all the things I read, there wasn’t a lot of great extraction from that, there wasn’t a lot of “Here’s exactly what I mean by that message, a, b, c, d.” That’s what I’m doing for you here today, is trying to break that down in a more simplified and understandable way.

Break: [00:02:53][00:04:32]

Travis Watts:  This is how I approach liabilities and assets in my own life, and what’s worked for me, and what I think is very powerful that I want to share with you. Let’s say, for example purposes, that you want to buy a new car. Generally speaking, if you’re going to buy a new car, there are three ways to do it. You pay all cash, you lease a car, or you make a down payment, you finance the car, and then you make payments every month, which is much like a lease. Let’s break down my interpretation of what Robert Kiyosaki was trying to say and what I’d do personally in those three scenarios. Here’s how I look at it.

If I want to buy a new car and — and just for example purposes and simple math because I’m bad at math– $50,000 is the car purchase price. So if I’m going to pay all cash, this is my rule to myself – I have to have an investment in my portfolio that I am selling this year, this year that we’re talking about, whether it’s 2021 or 2022, that I can sell right now, like stocks, bonds, and mutual funds that are liquid, or that is selling, like a syndication or something, where I’m going to get at least $50,000 in a long-term capital gain or short-term capital gain to pay for the liability. So the investment was made first, it already did what it did, and now I have to be able to extract a gain to offset 100% of the purchase price of my liability, which is the car. Now, that may be a pretty big ladder for some people, to come up on the fly with $50,000 or whatever to buy a car.

Let’s say I want to finance the car. So I’m going to make a small down payment and then I’m going to have monthly payments thereafter. The same principle for the down payment, but see, it’s going to be a far less hurdle. Let’s say the same car 50 grand, I need to put $10,000 down; that’s 20%. So now I just needed an investment where I can extract $10,000. And then for the payment that I’ll have every month – again for simple math because I’m bad at it – the payment is going to be $500 per month. Then I need an investment in my portfolio that produces cash flow, positive passive income on a monthly basis that covers the $500 payment that I’m going to have. What would that look like?

Let’s use real estate as an example, because it’s a real estate show that we’re on. So if I put $75,000, if I go invest that amount of money into a piece of real estate – single-family, multifamily, syndication, do it yourself, whatever – I need to have at least $500 per month. That would be what? 8% return on an annualized basis, 75,000 times 8% I think is $500. Again, I’m bad at math; just bear with me in this example. That’s what I would have to do in order to make my payment every month.

Break: [00:07:31][00:10:28]

Travis Watts:  So the last example is leasing the vehicle. We’ll say that the payment is $500 per month, same example, same concept. I need an investment — in this case, it doesn’t have to have any kind of gain. I need no kind of capital gain at this point. I just need to first take my money and invest it in something that produces cash flow or passive income, that on a monthly basis will give me more than $500, so that I can make the payment for my liability, and I don’t have to eat away or sacrifice my principal.

These family members, these friends, whoever it is that’s saying “I want to do what you do, blah, blah, blah” and I educate and I share what I can to help, and then the next thing I know they’re rolling up in some brand-new car or they’re on some exotic luxury vacation, and I say “Hey man, amazing car. It looks great. How was that vacation? It looked like fun. How’s the investing stuff going?” “Oh, yeah. I just don’t have the money to do it right now. But eventually, I will. At that point, I’ll reach out to you.” Nine times out of ten, that’s kind of the answer that I get back.

You and I both know the reality is they’re never going to get the money together to do it, until they get serious about the fundamentals of assets and liabilities.

Robert Kiyosaki says an asset is anything that puts money in your pocket every month, and a liability is something that takes money out of your pocket every month. So know the difference, know that as a fundamental investing key. Hopefully, you guys found some insights in this little message here today. I know it’s a really short episode, but I wanted to get right to the point, share that with you in a way I’ve never shared that with anybody, and help clarify what that message is all about. And at least, if nothing else, it gives you something to think about.

The whole idea – my fundamental philosophy, is using passive income and cash flow to enhance or pay for your lifestyle. It all comes down to that fundamental; so know the fundamentals. We’ll see you next week on The Actively Passive Investing Show. Thank you, guys, so much for tuning in.

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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JF2675: How to Catch Red Flags in Deals as a Passive Investor with Sam Giordano

When Sam Giordano first set out to invest in real estate, he wanted to find a way to minimize risk in any deal he joined as a limited partner. After creating a spreadsheet that helped him perform this risk-analysis, Sam quickly realized this was information other passive investors could use. In this episode, Sam discusses the syndication deal analyzer he created, along with the main red flags passive investors should look out for before closing on a deal.

Sam Giordano | Real Estate Background

  • Co-founder of Passive Advantage, which is a website designed to help passive investors vet real estate syndication deals on the path to financial freedom. They’ve created an LP Deal Analyzer tool that uses specific metrics and questions that limited partner investors can use when analyzing a real estate syndication deal.
  • Portfolio: 10 syndication deals as LP.
  • Full-time job is as a practicing gastroenterologist
  • Based in: New Jersey
  • Say hi to him at: passiveadvantage.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, Sam Giordano. How are you doing, Sam?

Sam Giordano: I’m doing excellent, Joe. Thank you for having me. I appreciate it.

Joe Fairless: It’s my pleasure. I’m looking forward to our conversation. A little bit about Sam – he’s co-founder of Passive Advantage, which is a website designed to help passive investors vet real estate syndication deals. He and his team have created an LP deal analyzer tool that uses specific metrics and questions that limited partner investors can use when analyzing real estate syndications. I’m very interested in learning more about that during this conversation.

He’s a limited partner so he knows from experience how to vet deals, and he’s in 10 deals right now as a limited partner. He is a full-time gastroenterologist based in New Jersey. With that being said, Sam, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Sam Giordano: Absolutely, Joe. I just wanted to take the time to thank you and your team, Theo and Travis, over the last couple of years for helping me to edify some of my knowledge points. Some of the variables that we use in vetting, some of the syndication deals we came across, we were introduced to those concepts on your show. I just wanted to thank you and your team. You put out a quality product and you’re sort of one of the leaders in the field. Thank you in advance for that.

My name is Sam Giordano, I’m a physician in New Jersey; my wife is also a physician. I’ve been practicing for about 10 years now, she’s been practicing for about eight years. I started from humble beginnings, my father only finished eighth grade, wound up joining the Police Academy, and then working for the Department of Treasury. He sort of self-made himself and had several different businesses along the way. My mom only graduated 10th grade in a business school. So I’m the first physician in my family, one of the first few people to graduate college. So I came from humble beginnings in New Jersey, went up through college, met my wife in residency, and somehow convinced a California girl to stay here on the East Coast. We now have my beautiful young family. I have a six-year-old, a three-year-old, and a one-year-old here in New Jersey that we’re doing our best to try to keep the sanity in the house.

Basically, when I first graduated from medicine, the first couple years out, we were doing the traditional personal finance things that we’re taught to do, in terms of maxing out our retirement accounts, paying off our student loans, and contributing to our children’s 529 plans… And then several years in, we started contributing to a post-tax or taxable brokerage account. I would say once the loans got paid off, we had a little more disposable income, then I started to try to figure out ways that I could improve the tax situation being someone that lives in New Jersey. In particular, when we lost the ability to state and local income taxes back in 2017, even if I can’t do much about our current tax situation since both my wife and I are W2 employees, but I wanted to try to figure out ways to diversify my taxable income. That’s where I kind of came across real estate.

Joe Fairless: You’re currently in 10 deals as a limited partner. Most people would passively invest in the deals, but not choose to create a website that helps other passive investors look at deals and let alone have that be a focus of theirs in addition to a full-time job, which I imagine is very demanding. I’m grateful for you and your wife and what you do, and the other physicians out there. I think you all put up a lot of stuff from insurance companies and other places. Whatever your compensation, in my opinion, you’re not compensated enough for everything that you do.

Sam Giordano: I appreciate that, Joe. Thank you.

Joe Fairless: …he’s a hospitalist. He just got sued for some frivolous thing and it’s just ridiculous the type of stuff you guys and gals have to go through. But passive advantage…

Sam Giordano: Thank you, Joe. I appreciate that.

Joe Fairless: Yeah, I mean it. Passive advantage – why create that? I’d like to get into some specifics about the metrics and questions that passive investors should look for and ask.

Sam Giordano: I appreciate that. So to be honest with you, I didn’t intend to form a website come up with the tool either. I think all physicians, in a sense, are sort of OCD or have a detail-oriented personality. And as you know, when you get involved in these private placement syndications, generally, they have a pretty significant minimum, outside of sort of the crowdfunding platforms. You can be talking $25,000, $50,000 minimums. When you get into that type of money, the significance of it, I wanted to be sure that before I jumped into this, I had some education and baseline foundation to where at least I kind of had an idea of what to look at, what to look for. I spent the whole first year before I wind up jumping into any syndication deals back at the end of 2016, 2017, sort of learning all I could. That’s where your podcast and a couple other podcasts came in. I read your book and other books, I was active on the BiggerPockets forums and other real estate forums that are geared towards passive investors or limited partners.

I used that first year to come up with an Excel sheet where I was making it for myself, just kind of looking at the metrics that I wanted to look at in a deal, like what did I want to see in terms of the sponsor… It’s not novel, the main categories that we all look at as passive investors in terms of the sponsor, the market, and the deal. But then within those categories, what are things that kind of I wanted to see, what are some standard ranges? These can vary from deal to deal and the type of deal, but I just wanted to make sure there weren’t any obvious red flags that I was going to go into my first deal and make an obvious mistake.

So that’s sort of how it happened. Then I was sharing that information, either on the forum or with other investors that I personally know that are looking into real estate syndications, I saw that there was a demand for having access to this type of tool. And to me, it is really a tool. There are components of it in terms of direct feedback, where it sort of changes cells, red, yellow, and green, depending on where those numbers are. But in my opinion, it’s really a tool for education, so that a limited partner going into the deals and learning about deals at least has an idea of knowing what they don’t know, or some of the things that may be obvious to kind of pay attention to. And once I saw that demand for this type of thing, that’s when I was like I want to make sure that I’m not off base on my metrics, and that’s when I looked to partner in forming an actual commercialized product that we have, the LP deal analyzer, and then subsequently forming the website, and trying to be able to help limited partners that are learning the process, whether they’re early on or further long, maybe avoid some of the mistakes. I don’t like to say it’s used to tell you which deals to invest in; that’s all personal choice. But it’s really just to kind of help people assess risk points and deals, and if there are obvious red flags. That wasn’t there for me, and I kind of created it on my own, and I didn’t realize the demand for it. But then once I did, like maybe I can affect people at a bigger scale as opposed to just the 700 physicians that work in my hospital, that were approaching me. Then I also have a place to refer them to when they come to me and say, “How do I learn about this?” Then instead of having to have the same conversation multiple times, I could just have them go to the website, look up some of the resources, some of the books I recommend, and some of the tools. So that’s sort of how it evolved. But it was by no means intentional, Joe; it was more serendipitous by nature.

Break: [00:08:26][00:10:04]

Joe Fairless: What are some examples of risk points that your analyzer would identify?

Sam Giordano: To me, by far, the most important point is related to the sponsor. There are objective categories that aren’t as amenable to the sponsors. I mean, there are some, like in terms of I look at how many full-cycle deals a sponsor has… It used to be the main criteria when I first started looking into this was, has the sponsor been around prior to 2008 or one of their team members? Because that was the last recession. Now things over the last couple of years have kind of been turned on their head in terms of the number of sponsors out there. There’s really not a ton of groups that were around prior to 2008. There are some, but a lot of them sort of transitioned into the private [unintelligible [00:10:48].13] space or deal with only family offices and stuff like that. So some of the sponsors that are around now, not a lot of them were around prior to 2008. So full-cycle deals, how long have they been around for, how long have they been involved in real estate syndication? Some people say they’ve been involved in real estate for 10 years, but they may have been an agent, or they may have owned their own properties; it’s not like direct dealing with syndications and executing plans. What is the succession plan in relation to the sponsor? God forbid – not to be morbid, but God forbid if something happened to one of the other sponsors, will the deal still be able to be executed? So those are some of the general numbers in particular in relation to the sponsor itself, or some of the metrics that we look at, or that the tool that we use looks at in relation to the sponsor. I can go into more detail if you’d like me to, and some of the other subcategories.

Joe Fairless: Yes, please.

Sam Giordano: Okay. So in terms of the market – and these are sort of readily available data on the internet. There are some more comprehensive sites like CoStar and things like that that you can pay for to get access to the data, but we look at such things as to what markets are in the path of progress. It’s the main hot markets that everyone is looking at these days, across the Sunbelt, whether it’s Phoenix, some of the Texas markets, Denver, Atlanta, some of the Florida markets – these are areas where jobs are growing, people are moving, there’s population growth. There’s hard data that you can look at in terms of what is the population growth in those areas? What is the unemployment rate in those areas? Some of those metrics with working from home have become a little more difficult to analyze because some people are working in places that they don’t live, in terms of unemployment and things like that. But whether or not what’s the standard income in those areas, or the average income, what is the delta between the average income to what you would have to sort of pay for a mortgage on a home in that area, versus what the rent is, and whether it’s desirable… Because these days, if there’s not much delta between buying a home and renting a nice apartment, a lot of people are going to buy a home. But you want to look in a market where people, where there’s a delta between that.

Those are some of the general market metrics that we look at. There are some other ones as well, what is the average rent growth in the area? Some of these things are a little bit tougher to come by. But a lot of the metrics I talked about in relation to the market are readily available on websites like citydata.com, or census.gov, or things like that, that you can kind of look this stuff up.

Joe Fairless: What about the deal?

Sam Giordano: Yeah, so the deal is where you get a little more objective. The deal in our analyzer is sort of broken down until the income and rent projections. “What is the rent growth projections?” is a big one. It was during the heat of COVID, I wanted to see deals that weren’t [unintelligible [00:13:33].25] a lot, weren’t projecting rent growth year one. But obviously now looking back, we realize that that was completely unfounded. The rent growth has been crazy through this market.

But just from a safety or risk standpoint, coming back to that general theme, just because of the uncertainty, I kind of wanted to see deals where they were looking at less rent growth, especially year one. I don’t like to see any particular year that’s projecting over a 5% rent growth. If anything, later on in the deal, I usually like to see that inch up somewhere in the one to 3% range to what the rent growth projections are. What is the breakeven occupancy? What is the current vacancy rate versus the projections?

Then you also look back to if you can get access to the T12 to see sort of what the comparisons are in terms of both the vacancy rate, the expense ratio of the property, how is the sponsor looking at what the expenses will be, versus what they were… So these are some of the metrics in relation to the deal; not speaking about the return, or the fees, or the debt which is also important, but in the subcategory of the deal, that’s one of the things, we look at in terms of what the rent growth is, and what the current dynamics are of the property itself.

Joe Fairless: When putting deals through this analyzer, where have been the most red flags when looking at specific opportunities?

Sam Giordano: I think the biggest thing these days, Joe, is in three categories. One is what the entry versus exit cap rate is. It’s difficult right now because the cap rates are so low. In order to try to make money in these deals, the delta between the interest rate and the cap rate is getting smaller and smaller. There are some groups that are not uncommon. They project the same entry cap versus exit cap. Now, that may be true and it’s the kind of market that’s not unheard of for that to happen. But I just don’t like those projections in the deal. I think, these days, I don’t have to tell you, but there’s so much capital out there that are just chasing yield and it’s a tricky time. The difficulty is that right now – I think people need this kind of deal analyzer more than they need it in a bad market. Because I think in a bad market, it flushes out some of these sponsors and it sort of shows some of the shortcomings that they may be doing in their projections. Whereas right now, everybody’s making money, there’s so much capital, and everybody’s deals are filling up within a couple of days… It’s just a risky time.

So this kind of feel analyzer metric evaluator is important because of the fact that there’s just so much capital that sponsors are able to get away with a lot of things. Even back to 2017, I’m sure you’ve seen it evolve as well. I know you invest in deals as limited partners. The metrics I’m looking at now are very different than what they were.

Now, things that haven’t changed that much – like, the fee structure really hasn’t changed that much. I don’t see people changing that — maybe like a half a point or something like that. But the basic acquisition fees, asset management fees, things like that haven’t changed that much. The return structure hasn’t changed a ton. Maybe you see a little bit lighter preferred return now than what you did in the past, but they’re very similar. But I think, in my opinion, the metrics that are different that you have to really keep an eye on now are some of the exit cap or entry cap, the rent growth projections, the debt evaluation I think is a huge risk point right now. A lot of people are doing bridge debt, which a lot of times makes sense these days. There’s not a lot of people doing traditional debt like they were a couple of years ago, where they were doing like 10-year fixed rate. But you’ve just kind of make sure if they do a bridge that, there are caps, there are ways to kind of mitigate some of the risks of the bridge loan.

I know it’s a long-winded answer, Joe, but that’s kind of some of the big things that I look at these days and the deals that I’m looking at, in particular in relation to the multifamily space.

Joe Fairless: I heard two specific things, and correct me if there’s something else specific. I heard entry versus exit cap, and I heard the type of debt that they have on the property, which might not be a red flag, because there’s certainly, at least in my opinion, a place for bridge loans versus agency debt.

Sam Giordano: I agree with you.

Joe Fairless: What are some other red flags? Sorry if I missed it during your answer.

Sam Giordano: The other one was the rent growth projections. There are some deals right now that are over a 5% rent growth projection year one. Like I said, it’s been that way for a year or so, so it’s not out of the question that that couldn’t happen. But depending on the severity of the value-add, maybe it makes sense in a class A where they’re really not doing anything. But if they’re doing some value-add and you’re going to need some vacancy in there to make these improvements, to project that kind of rank growth year one or income growth is difficult to do. So that’s the other one, the rent growth projections, entry versus exit cap, and nailing down the specifics in the debt.

ANd I agree with you, Joe. I’ve invested in two deals this year that are bridge debt, but they make sense with the business plan. Like, if they’re looking to execute the plan and turnover property in a short period of time, and it seems like they’ve got a track record to do that, then in some cases bridge debt makes more sense than to lock yourself into this huge prepayment penalty where you’re less nimble a year down the road. But if you have the proper caps on that and you mitigate some of the risks that are involved with the bridge debt, then there’s a lot of situations right now that it does make sense. I’m with you.

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

Sam Giordano: I think the best advice ever would be don’t be afraid to spend time on your education. When you learn about these syndications – and I know when I first learned about it, I’m like, “Man, there’s got to be a catch. Why didn’t I know about this? It seems like some Ponzi scheme or there’s something weird going on with it.” And your initial inclination is to just invest money and sort of start things up. But I think for passive investors in particular, don’t be afraid to take the time, take a step back, educate yourself so that when you do make that move, there’s a lot less risk of having a problem down the road.

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

Sam Giordano: Absolutely.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:19:45][00:22:37]

Joe Fairless: What deal, if any, have you lost the most amount of money on?

Sam Giordano: Thankfully, Joe, right now I haven’t. Of the 10 deals I’m in, I haven’t lost any money on those deals. Some of that is probably a function of the time… But I think it’s been a learning experience. It’s not that I lost money, and I know you recently switched the fund model, but initially, I invested in several funds, and it’s just more difficult to predict when the capital calls are going to be and when the distributions are going to be, when things are going to start to roll out in terms of the properties, and then you can’t really vet the deal at all. You’re really relying completely on the sponsor… Which is not the end of the world. But at this juncture of my limited partner investments and things like that, I think right now, I’m mostly focusing on single-asset deals. But I wouldn’t be opposed, down the road, say, 7 to 10 years from now, once I’m at my financial independence number, that I would be more likely to invest in fund deals. So it’s not that I lost money, but it was just a learning experience in terms of figuring out the difference between the single asset versus the fund model.

Joe Fairless: What’s the best way you like to give back to the community?

Sam Giordano: My wife and I have a donor-advised fund that we’re able to financially support causes that mean the most to us. The second way is I like to get back through education, through coming up with the website, the deal analyzer tool, having countless conversations with my physician colleagues via the Internet, as well as at my personal hospital that I work at, to try to get people involved and to learn more about this type of investing, so that they can put themselves on the path to financial independence.

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

Sam Giordano: They can reach me at passiveadvantage.com. There’s a free eBook to download to get some more information about some of the metrics that we look at, as well as access to the deal analyzer tool that we previously mentioned. If you want to reach me personally, you can reach me at sam@passiveadvantage.com. I’d be happy to help in any way I can.

Joe Fairless: What an enlightening and educational conversation, especially for limited partners, but also for general partners to understand how limited partners should be looking at your deals in the lens that they look through to evaluate if it’s a good opportunity or not. Thank you so much, Sam, for being on the show sharing your insight and what research you’ve done over the years to get to the spot where you’re at now. Much appreciated, I hope you have a Best Ever day, and talk to you again soon.

Sam Giordano: Thank you, Joe, I appreciate it.

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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JF2669: Why You Should Chase Opportunity, Not Passion | Actively Passive Investing Show with Travis Watts

We typically hear that if we follow our passions, that will naturally lead us to success. However, in today’s episode, Travis questions the validity of this advice. What if you turn out to be bad at your passion? Or, what if you lose steam for your passion–what are you left with then? Take a walk with Travis as he discusses the idea of chasing your passion vs. chasing an opportunity.

Want more? We think you’ll like this episode: JF2407: Find Your Real Estate Passion with Kristen Ray

Check out past episodes of the Actively Passive Investing Show here: bit.ly/ActivelyPassiveInvestingShow.

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TRANSCRIPTION

Travis Watts: Hey everybody and welcome to another episode of The Actively Passive Investing Show. I’m your host, Travis watts. If you’re tuning in on audio-only, I’m sorry about the audio. Case in point right there. I’m on a walk today, and sometimes I get these moments of inspiration, these little epiphanies… And I want to share them and it’s best to do it at the moment and not days later, as I forget what my point was in sharing the message. I appreciate you being flexible with that. If you’re tuning in on YouTube, you can enjoy this beautiful walk with me. Again, apologies if you’re tuning in on audio.

Today I wanted to talk about kind of a unique message. Here we are in December, you wouldn’t know it. Where I am here today in Florida, it looks like mid-summer. But I had this epiphany and I was thinking back, been doing a lot of self-reflection… Here we are at kind of the end of the year in 2021 and I was thinking about chasing your passion versus chasing opportunity.

A really interesting story… I grew up with people telling me to find my passion, get good at it, follow my dreams, pursue my passion – all the generic advice that you get from adults, peers, and whatnot. I did that, you guys, I actually took that advice. My passion back when was music. I was a drummer, I was a singer in bands, and I wanted to work with musicians, I wanted to open a recording studio, I wanted to go tour, I wanted to do Broadway work, work in theaters, I want to do all of it. I pursued my passion from junior high, high school, college, and post-college, slightly post-college. That was my passion, was doing that kind of stuff. And it was fun, but what I failed to realize is, quite frankly, I wasn’t very good at drumming, I wasn’t very good, certainly not good at singing… I wasn’t good at business, I wasn’t good at all this stuff. Yes, I could have gotten better at it but as I really immersed myself into the business, as I did an internship, as I actually moved to New York City, as I actually got to networking with people who had been doing this for a very long time, I quickly fell out of love and kind of lost my passion for what it was I was pursuing. And it was really going to be going against the grain, so to speak. This was 2008 and 2009 as I was going through college, so I’m coming out of the tail end of the recession. No one’s hiring, everybody’s laying off, people with 30 years of experience aren’t getting jobs… Then here I am, somebody with very little skill set, no real-world experience, trying to enter the job market in a highly competitive space that requires a lot of connections, and who you know, and what you know, and all this kind of stuff. And I made a decision; I had a little quarter-life crisis, so to speak, I decided I’m going to move back to Colorado where I was raised, and I’m going to find an opportunity.

And one of those opportunities – I ended up finding two that I decided to pursue, rather than pursuing my passion. The first was entering the world of the oil industry. So there was a big problem – Colorado was blowing up with oil production, and they couldn’t find enough people to do manual labor, be away from home, work 100 hours per week, outside in the elements, swinging sledgehammers. I guess that makes sense, especially in today’s world. I still don’t know how they find people who are willing to do that kind of stuff. But anyway, I took one of those jobs, because I knew that I wanted to get into real estate, which was the second opportunity.

Break: [00:04:37][00:06:16]

Travis Watts: Real estate in my market was about 40% off from the previous price levels just a year or two prior to this time, pre-recession. So with that, I certainly wasn’t passionate about the oil industry; I knew nothing about the oil industry. I certainly wasn’t passionate about working in negative 20-degree weather swinging a sledgehammer. But it was the best earning opportunity that I could find. And I knew one thing back then – this is the way that my mind worked, was I needed to make more money if I want to get in the real estate game.

I didn’t know anything about syndications, or raising money from other people, or any of that kind of stuff, all I knew was I wanted to buy up more and more real estate at a discount and I needed some pretty big money to do it. So I did make a lot of sacrifices and be very frugal. I’ve shared a lot of these stories in previous episodes. But long story short, I pursued the opportunity, and the opportunity at that time was working a job I really wasn’t passionate about, for the money. I’m not recommending you or anybody else do that specifically, but that’s an example of what I mean by pursuing an opportunity.

The second was, as I mentioned – real estate’s 40% off, I want to get in the game, and I wanted to start accumulating cash flow. So at the time, I knew nothing about real estate either. I had never invested in real estate, and didn’t probably even really understand fully the tax advantages and the full meaning of cash flow, but it certainly wasn’t a passion of mine; it was just an opportunity, that prices are depressed. Did you know — a side note really quick; I just learned this the other day… In the great real estate recession in the United States, the average national rent only dropped $100 per month on multifamily. On apartments, the average rents were $1,300 a month going into the recession, and then dropped to about $1,200. That’s pretty crazy to think about. If you or I owned a single-family home and we went through one of the worst recessions that we’ve ever had in US history that was specific to real estate, and all we had to sacrifice was $100 per month on our rental – not too bad. Obviously, some markets were beaten up worse than others, like Las Vegas, Miami, there were really hard-hit markets where I’m sure those statistics… That’s not accurate to there. But that’s just the national scale and something to think about.

So I knew one thing, I wanted to pursue real estate for the cash flow, not for the equity upside. Quite frankly, in 2009, when I entered the real estate market, a lot of people say “Oh, great timing.” I was catching a falling knife, so to speak. Everyone was telling me not to buy real estate. Quite frankly, real estate prices were still dropping. The market didn’t start to recover, at least where I was, to probably late 2011, somewhere in 2012. That’s where it really got a nice up-kick and started reversing, that’s where I started flipping houses and changing my strategy, which is another example of chasing the opportunity, not passion. I certainly wasn’t passionate about flipping houses. I hated every second about it, but it just made a lot of sense. I was buying these homes, some homes I was buying and doing almost nothing to, renting them out for about a year, and selling them. A couple of those, I nearly doubled my money. It was really just a crazy opportunity, but certainly not being a drummer in a band.

So the point that I want to make here is –this is what’s interesting… Even though I wasn’t passionate about the oil field, for example, and I certainly wasn’t, I ended up finding a passion in the oil field, because it was paying me well. And what that meant to me was that I could buy more real estate, which was my ultimate goal.

So the oilfield started helping me achieve my goals, therefore, I got passionate about getting good at what I was doing, so that I could get bigger bonuses, I could work more overtime hours, and all these things, so that I could acquire more real estate. That was really the purpose. I ended up getting very passionate about something that, at first, I had no passion for, whatsoever. Let’s say that you’re doing something that you’re not very passionate about; just making this up for example purposes, but let’s say that you’re a programming engineer IT professional, you don’t really have a passion for that, and you’re just kind of doing it for the money… Well, here’s the thing – you could, for example, invest in cash-flowing real estate, and over time, build up enough cash flow to leave that job and to pursue something that you actually want to pursue.

For example — we’ll use my example. If I still had, today, a passion for being a drummer in a band, or a singer, or I wanted to tour, or I wanted to go open a recording studio, or something like that – which by the way, that’s not my passion anymore. But if it were, I would now have the ability to go pursue that kind of stuff without having to worry about the financial side of it, because I have enough cash flow to cover my lifestyle and my living expenses.

Break: [00:11:25][00:14:22]

Travis Watts: My big picture philosophy, you guys, which I’m sure I’ve shared before, is I believe people should pursue overall long-term thinking here when you’re achieving your goals… Pursue the things that you love, but then outsource the things that you don’t love. The best way I’ve found to do that is through investing in cash flow and through investing in real estate. But the investing game, to me, is very simple. It is that you invest in things that produce passive income or cash flow. You use that to enhance your lifestyle; 101 at its basic bones, that’s really what I believe in, that’s really what I do, and that’s really what I teach.

So with that in mind, you guys –I know this was kind of a shorter little offbeat snippet episode… But really consider that you can find passion in things you may not be passionate about. Like, what I do today is I found that I’m actually passionate about coaching people, about educating people. I don’t do coaching as a paid service, I’m just saying I do this to give back and to help people, because that’s what I’m truly passionate about. If I find something in life that works, I want to share it with other people. That’s just me and that’s always been the case. I don’t care if it’s a weight loss program, or a workout program, or a new car, whatever it is, if I find something that I see as a true value to others, or to me rather, I want to share that with others.

But anyway, for what it’s worth, the message is don’t pursue your passion, rather pursue the opportunity. Do I think real estate is still a good opportunity in 2021 going on 2022? I do. The primary reason, the amount of money that’s been printed in the system I don’t think is a reflection of the current pricing that we see on real estate. I still think there’s some room to go there. But I’m not a big advocate for buy-low/sell-high anyway, so I still think multifamily real estate has a competitive yield compared to other asset classes. In other words, if I could only make 6% cash flow on real estate today, but I could go put my money in the bank at 8%, I certainly wouldn’t be an investor in multifamily, I would go put my money in the bank. But today I get nothing by putting my money in the bank. I get nearly nothing out of bonds, or CD’s, or anything like that. For what it’s worth, I still think we have some room to go. But you know what? That’s my opinion, it doesn’t really matter. You do you, but I wanted to share my thoughts on this and hopefully you guys found it valuable. Thanks for tuning in. As always, we’ll see you next time on The Actively Passive Investing Show. Have a great 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.

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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JF2663: 3 Ways to Find Deals as an Introverted Investor with Camilla Jeffs

Camilla Jeffs was a burnt out, introverted landlord. When she learned about passive investing, it sounded like the perfect elixir to her fatigue. There was just one problem: commercial real estate is a team sport, and as an introvert, the idea of having to talk and network with groups of people was overwhelming. However, Camilla was able to create a strategy to work with and overcome a lot of the anxiety that surrounded the necessity of networking. In this episode, Camilla shares three great tips that introverted investors can use to overcome their anxiety and seek out amazing deals.

Camilla Jeffs Real Estate Background

  • Founder and CEO at Steady Stream Investments, which helps people achieve an elevated level of financial health through investing passively in cash-flowing real estate that impacts local communities, all without the hassles of being a landlord.
  • Portfolio: 107 multifamily units passive, 600+ multifamily units active, 64-bed assisted living new construction, totaling to $80M AUM.
  • Based in: North Dallas, TX
  • Say hi to her at: www.camillajeffs.com

 

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Camilla Jeffs with us. How are you doing Camilla?

Camilla Jeffs: Fantastic. Thanks for having me on.

Slocomb Reed: Great to have you here. Camilla officially went full-time as a real estate investor about 10 weeks ago. She has 18 years of commercial real estate investing experience as a multifamily syndicator, both active and passive. Her current portfolio includes 107 multifamily units in which she’s invested passively, 600 plus multifamily units where she’s an active investor, and a 64-bed assisted living new construction, totaling at 80 million in AUM. She’s based in North Dallas, Texas, and you can say hi to her at camillajeffs.com. Camilla, tell us about yourself. What got you into real estate?

Camilla Jeffs: Thanks. I want to clarify one point on the bio. You said I have 18 years of commercial real estate experience. That’s not true. 15 of that was actually residential. I spent 15 years in the residential space doing single-family rentals, some small multifamily as well… But what got me into real estate? Well, it really was necessity. My husband and I were living in a garage apartment, had very little money, we were both students in college, trying to make ends meet, working full-time, school full-time… And our landlady came to collect the rent one day, because that was back in the time where you put the rent in an envelope on your door and they would pick it up. I started a conversation with her and just said, “How are you doing in what you’re doing? I know you have multiple rentals. I know you’re a realtor as well. Tell me about this.” As we started talking, she suggested that maybe I should buy a house. I was like, “No, we’re poor. We don’t have any money. There’s no way we can afford a house. We can barely afford this garage apartment that we are renting.”

She said, “Actually, there’s a really cool strategy you could use where you could buy a house that has a basement apartment, and then you could rent it out, and your monthly payment might even be lower than what you’re paying in the garage apartment.” I thought about that for a minute. I thought “That’s really interesting.” That’s exactly what we did. We worked with her and we found a six-bedroom home. It was giant. Well, for us it was giant, because we’re in this little tiny, nasty apartment. And we bought this home as owner-occupants, so we were able to put just 3% down and got the best interest rates… And then it had a basement apartment, it had a kitchen in the basement, three bedrooms in the basement, and we rented those out, and we were able to live there for about $150 a month, is all that we paid for that house. And it had a pool in the backyard. How cool was that?

Slocomb Reed: That’s awesome.

Camilla Jeffs: And it was the only way that we really could get into it — well in our minds, at that time. That’s the only way we thought we could get into it. So today the term is house-hacking, and it’s a fantastic way to start in real estate for anybody. I recommend it for anybody to house-hack. And then that’s when we started thinking, “Okay, there’s something to this real estate thing”, and I started diving in, reading all the books I could find, and figuring it out. Then we just grew our portfolio, one house at a time. We were not the 10Xers, we were not the one out there massively pounding the pavement and getting it; we were just growing our portfolio.

So for 15 years, we grew a nice single-family residential portfolio, and then I hit burnout. I hit this point, because we were literally doing everything ourselves. I was mowing the lawn, we were fixing the toilets, answering the tenant calls, all the things. I was just to the point where like, “I’m tired.” And we had five kids by then, so there was a lot going on. Then I decided to pivot into large multifamily. The first thing we did was sell a bunch of our properties and invest passively. Then second, now I’ve built an active multifamily portfolio by focusing on teaching other people how to invest passively into real estate. That’s where I am today.

Slocomb Reed: Awesome. So you made the transition from single-family and small multifamily into larger deals, primarily to get yourself out of the day-to-day tasks that you were doing when you were self-managing?

Camilla Jeffs: Yeah, I was definitely looking for more time freedom.

Slocomb Reed: That’s awesome. What does your active investing look like now? Are you specifically in the Dallas Metro? What size properties are you looking for?

Camilla Jeffs: We just barely moved to Dallas about a year ago, so I’m still figuring out the Dallas market. I actually don’t have any assets in Dallas yet, but I plan to pick up a couple next year. But my portfolio consists of four assets in Arizona and two assets in Oklahoma. I like both of those markets, for two different reasons. Arizona, that’s where we used to live, so I know that market well and spent a lot of time in that market. It’s growing like crazy high appreciation, it’s booming; so that’s a great appreciation market to take advantage of that. And then Oklahoma is just a fantastic cash flowing market. It just cash flows from day one, really nice returns in terms of cash flow. Those are the two markets that I focus on currently.

Slocomb Reed: Is there a particular part of Oklahoma?

Camilla Jeffs: I have an asset in Oklahoma City and one near Tulsa. Both are great.

Slocomb Reed: You said you sold some of your portfolio, your smaller stuff, to get into passive investing. As a passive investor, what attracted you to particular syndicators or operators? Who is it that got your business, and why?

Camilla Jeffs: To be honest, it wasn’t very scientific for me in the beginning, because I didn’t know what I didn’t know. I’ve been a real estate investor for 15 years, so I thought I had a good experience, I thought I knew about real estate… But actually, investing in commercial real estate is completely different. There are different metrics, they use different numbers, they talk about it in a different way. With my real estate investing, for example, I never thought about equity multiple. And in commercial real estate we talk about equity multiples. Well, that’s because in my single-family portfolio, I didn’t have a set end date. I couldn’t project over five years, for example, which is what we do in commercial. So equity multiple was a very fascinating number for me to fixate on that.

So how did I find the people that I ultimately invested with? Again, living in Arizona, so I knew I wanted to invest in an Arizona asset, so I could drive by it and see it, because I wanted to be able to touch it. That’s what I had done with all my other properties; because I’m still in this DIY mindset. I’m trying to figure out “How can I even partner with other people? How can I trust these people to take care of my money?” It caused a lot of anxiety for me. I knew it was the right thing to do, I knew it was the right way to level up and to get out of being a landlord, but it was still hard to pass my money over and feel 100% confident. I don’t think you ever feel 100% confident in an investment. There are always risks, there’s always things, but you can do some steps.

One of the steps I did was I wanted to meet the people that I was investing with. So I got out of my comfort zone – and I think we’re going to talk about being an introvert a little bit later, in a bit… But I’m an introvert, and I never, never in my 15 years of investing, in the beginning, did I go to a real estate networking event. That was way too scary, I didn’t ever want to do that. So I didn’t really have any other friends who were investing. Well, to invest in commercial, it’s group investing; you can’t do it on your own. So I had to get out of my comfort zone, so I literally googled multifamily meetup in Arizona, and I started going to some of those. Some were very inexperienced people like me, who’d never done anything, that were trying to figure it out how to do something. And then some had more experience, folks that were there. So I just started networking and talking to some of the folks.

After I’d gotten to know a certain guy for a while, he came to me and he’s like, “Hey Camilla, I have a deal.” I was like, “Okay, show me what this deal looks like.” He walked me through the deal, he answered all my questions, and then I was like, “Okay, let me think about it. I’ll get back to you.” Over the next couple of weeks, he just followed up with me; he was just right there like, “Hey, what do you think? Do you have any other questions? How can I help?” He was very responsive to me and I really appreciated that about him, that he didn’t just, “Okay, if she’s interested, she’ll get back to me.” Because honestly, I probably never would have. I never would have gotten back to him, because I just needed someone to kind of push me along and help me to do that.

So really, after looking at what he had, talking to him about his track record, like “What have you done in the past?” And I’ll admit, it was light, it wasn’t even like someone who’d been doing it for 10 or 15 years. He’d been doing it for a couple of years. But I really liked the deal, I liked the concept of group investing, and I wanted to have that experience and have that as part of my portfolio. So I ended up investing $50,000 into that investment. And it’s going really well, it’s awesome. I get checks, I get notifications, and updates on it… And that’s the only thing I do. I don’t have to do anything. It’s amazing.

Slocomb Reed: Very different from taking your own maintenance calls, and cutting your own grass, and showing your own houses, for sure.

Camilla Jeffs: Yeah. 100%.

Slocomb Reed: That’s awesome.

Break: [00:10:32][00:12:12]

Slocomb Reed: Camilla, thinking about yourself around three years ago when you invested passively for the first time, thinking of yourself as an introvert do-it-yourselfer who wants to get more time freedom and get into larger deals, take better advantage of the wealth that you built for yourself through your own active investing – thinking back to yourself three years ago, what advice would you give to other people who find themselves in the same situation? They’ve been shoveling garbage out of their parking lots, and showing apartments, getting stood up, getting paint on clothes they never thought would have paint on them… What advice do you have for those people to get into passive investing?

Camilla Jeffs: Yeah, I ruined a lot of pants. [laughs] That paint, you just like accidentally bump a wall, you’re like “Dang it!” [unintelligible [00:13:07].00] those pants.

Slocomb Reed: Best Ever advice for people who have to do their own manual labor – wear scrubs, what nurses wear. It’s tough, it’s durable, it’s lightweight, it doesn’t matter how hot it is outside… I have so many dirty, bloody, painty scrubs from when I’ve had to do that stuff myself. Sorry Camilla, please continue.

Camilla Jeffs: I love it. I love it. [laughs] Okay, so what advice would I give to a fellow introverted burnt out landlord? Number one is there is a better way; there just is. It’s pretty crazy that the returns that I’m getting on this passive investment beat out some of the returns that I was getting on some of my single-family properties. I literally don’t have to do any of the work. That was mind-blowing to me. So number one, there’s a better way.

Number two – yes, it’s going to take a little bit of getting out of your comfort zone to get started. I think that’s the hardest part. The hardest part is getting out of that comfort zone a little bit to get started. And what I mean by a little bit is you don’t need to meet 50 syndicators; you need to meet a couple. You need to find a couple of people that you feel comfortable with, that you feel like they have the same vision and values as you, that you feel like are going to be very communicative, that you feel comfortable with their experience, their background, and what they bring to the table. Then you can start evaluating their opportunities.

So how do you meet them? Well, you’ve gotta attend some networking events. The whole nature of commercial real estate investing and some of the rules that we have to follow for the SEC are you have to have a personal relationship, a lot of times, to even get in these deals. So what is a personal relationship? It could be as simple as a call that you’ve had, like a Zoom call, face-to-face, or you met up at a real estate conference, or things like that.

You can go to real estate conferences… Go to a real estate conference. I know that’s even scarier than a smaller meetup. So here are my strategies for doing that; here’s my Best Ever advice for introverts, at real estate networking. Number one, when you walk in the room, find someone who’s sitting alone. Chances are that person is also an introvert and is just as uncomfortable as you are. Go sit by that person and strike up a conversation. They will be so grateful that you did. And then you have your one-on-one conversation. No awkward, “Oh, there’s this clump of five people who are talking and laughing, and I’ll try to like waddle up and see if they’ll notice me, or insert myself…” No, that does not work for introverts. We don’t do that, we don’t work like that. So find someone there.

Number two advice is to set a goal for yourself, whether that’s three people or five people – set a small goal for yourself that says, “I cannot leave this conference until I have met five new people.” And then, once you’ve hit that goal, give yourself permission to leave. And if you’re still uncomfortable after meeting five new people, you have full-on permission to leave. You’ve hit your goal, you can pat yourself on the back, “I did it! I met five people. I got five business cards, people I could follow up with and talk to you later. Great. I’m done. I can go home.”

Because one of the challenges that introverts have is that, being in those large groups of people, it drains our energy. It’s not that we don’t like it, it just drains our energy, because we gain energy from being alone, in our thoughts, reading a book, walking in nature, things like that. That’s how we gain energy. Whereas extroverts, they gain energy from being with people, and they really feed on each other. It just drains introverts. But it’s not that we don’t want to be there and we don’t like talking to people; that’s a myth about introverts. But that’s my advice for introverts at networking conferences.

Slocomb Reed: That’s awesome. Find the other introverts; you know how to identify yourselves because they look and feel the way you look and feel, walking into a big room. And set a goal for how many people you know you’ll talk to. Then give yourself permission to be done when you need to be done and the tank is empty. That’s awesome. Camilla, taking the perspective of I know a lot of our listeners were active investors, and taking the perspective of myself if I’m honest, and you now as an active investor, what advice do you have for us when we are looking to attract passive investors to ourselves, particularly introverted passive investors?

Camilla Jeffs: To attract passive investors, you need to be heavily focused on education. I always say that Steady Stream Investments is an education company, because that’s what I do, I really focus on education. So if you think about a passive investor – and I thought really hard about my own experience and what my own experience was like, what I could have used to feel even more comfortable about investing… Because I felt like I was the one that was pulling for the information. But if you can set yourself up as someone who is pushing information to your investors, your investor database – that’s key, you’ve got to start building an investor database, and then nurturing that database in some shape or form.

My favorite thing to do is at first — but first start your database, you need to send out a sample deal… You need to come up with a sample deal, like “Here’s the types of deals I’m looking at.” If you’re in your mind, you’re like, “My next deal, I probably need to raise money from passive investors. I’ve never done it before. What do I do?” Put together a three-page thing on this deal. What is this going to look like? Where’s it going to be? Why do you like this market? What type of deal will it be? What kind of returns would the investor expect to receive? Everybody you know that you have their email, send this information to them and say, “You know, I’ve been an investor, and I’ve been doing this, and this, and I’m really excited about the next steps. My next step would be to start a group investment where I can allow other people to invest with me. So if I had a deal like this, would you be interested?” Everybody who says yes, you put them on a list. Now, this is the start of your investor database.

This is where most people get it wrong… Because they’ll do that, they’ll start, and they’ll get all these people who say they’re interested, and then they think, “Okay, great. Now when I have a deal, I’ll send it to all these interested people and they will invest.” Well, there’s a big difference between someone who is interested and someone who actually invests in a deal. Everybody’s interested in real estate, everybody knows that real estate’s a great investment. But to get them to actually invest, you have to really be strategic in educating them; so you can’t just leave them alone. So you’ve got to be sending out information constantly, and then think really hard about the information you’re sending out. Is it tailored to a passive investor, what a passive investor needs to know, or are you just touting your accomplishments and achievements and “Here are all the things that I’ve done, and here’s what I’m doing”, just to stay top of mind?

Again, a big difference between sending out information that says, “Here’s what I’ve been doing all the time. Here are all the podcasts I’ve been on. Here’s all this stuff” and then you flip that and say, “Hey, you investor, here’s what you need to know to be prepared for the next deal. Here’s how you vet a sponsor. Here’s how you vet a deal. Here’s what you need to understand about equity multiples. Here’s what you need to understand about the average annual return. Here’s what you need to know about IRR.” Hardly anybody understands IRR. That’s a hard calculation to figure out. So think about how you’re educating your investors… And I guarantee, if you flip the script and focus on the education of your investors, by the time you have a deal, they will be ready and they will invest in your deal.

Break: [00:20:59][00:23:56]

Slocomb Reed: A personal question, Camilla… This is coming from me and I hope it is relatable to some of our Best Ever listeners. Let me set the scene for you. I host Cincinnati’s Best Ever Real Estate Investor Mastermind at Joe Fairless’ investor meetup here in Cincy… And I am a large, gregarious man, 6’4″, 300 plus pounds. When I raise my voice to make an announcement, everyone just naturally gets quiet, turns around, listens, and then does whatever I tell them to do. The opposite of the introvert experience at meetups like that. I know there Best Ever listeners here who host local meetups and want to engage everyone who walks through the door. How can I help 2017 Camilla feel welcome at my meetup and how can I help you get connected with the people she showed up to connect with without draining the energy tank too quickly?

Camilla Jeffs: Well, number one — as an introvert, when I walk into a room, I immediately scan the room and try to figure out who is safe for me to talk to, and who’s going to be a safe person. I think as the host of the meetup, I think you need to work really hard on your own safety vibe. What vibe are you giving off? I think the way you approach – so you can’t approach gregariously, or I’m going to be like, “Whoa…! You’re too much. I can’t handle you.” But I think you can definitely approach me and welcome me; that’s really helpful, actually, for an introvert to be welcomed immediately, as soon as we walk in the space. So I think being the greeter at the door would be helpful for you.

Anybody who’s hosting a meetup – greet at the door. Don’t be standing in the front of the room behind your desk, or table, or whatever. I get, you need to set up, but you got to set up well before the time that people started coming, so that 10 minutes before, you can be at the door and greeting people as they come in. And you’ll know immediately who a new person is, because you’re the one running this meetup. It depends on how big your meetup is. I walk in, I’m a new person…

Slocomb Reed: Introverts tend to show up early.

Camilla Jeffs: That’s right, we do. Because we want to sit up front, so we don’t have to be distracted by all the people. So as I walk in the door, you greet me and you’re like, “Hey, welcome. I haven’t met you before. What’s your name?” Immediately, I’m put at ease, because I don’t have to be the one that starts the conversation. I think it’s hard for introverts to start a conversation. If you ask me a question, I’m happy to answer that question. Then ask the second question you alluded to, “What are you looking for? How can I help you?” Then as they answer that question, in your mind, you should be thinking of people that you can introduce them to. The third step is to take them over to Sally over here and be like, “I think you would really like to meet Sally”, introduce them to Sally, and then you leave them on their own, and then you can go back to greeting more people. That would be a perfect scenario for me as an introvert walking into a brand new meetup.

Slocomb Reed: Awesome. Let’s wind down with this… Camilla, give me an example of a passive investor who remains nameless, of course, who you have engaged with to educate them and help them not only learn passive commercial real estate investing, but also invest in your deals – how you engaged with them to give them the confidence to invest with you.

Camilla Jeffs: I do that through multiple avenues. I started out building my email list, and then I do send out newsletters. I also added on webinars, so I hold monthly webinars with my passive investors, and we cover a certain topic. Last month, we did the three biggest risks to investing passively, so they could fully understand their risks. Then I have a one-on-one conversation with every single investor that comes into my database to answer their questions and help them out.

So I have a pool of investors, sometimes they’re in the background and they’re just kind of watching the education and reading it, and it takes them a while. And it doesn’t bother me at all. It doesn’t bother me at all if someone comes into my thing and they don’t invest for two, three, or four years; that’s fine. If you need that time to feel fully educated or feel like you have enough money saved – whatever, totally fine.

I had one who was in my database for almost two years, and finally, they invested. When they decided to invest, once I launched a deal, they put in a commitment. I was so excited to see their name on there, because I’d been working with them for a while… And then we had several conversations about it, because they’re still a little bit nervous and still wanted to fully understand everything. When it’s the first time investing, it’s a lot to take in. When you’re faced with that PPM that’s 100 pages of legalese, in really big letters, and it says risky, risky, risky, risky all the way through… It’s a lot, and I think that’s something that I’ve been able to really develop, kind of my superpower, is really helping the first-time passive investor fully understand the process so that they feel comfortable… 90% comfortable. Again, as I said, you’re never going to be 100% comfortable. But once you’re at 90%, you can invest, and getting them into a deal. And then we celebrate. It’s very exciting for them when it’s your first time investing in a deal, then you start receiving the distributions, you receive the monthly updates, and that’s when you start feeling really good about the choice that you made.

Slocomb Reed: Awesome. That’s good stuff, Camilla. Thank you. And thank you for sharing your personal story and what it is that you’re doing to help investors now. If you are a burnt-out landlord, there is a better way. Re-listen to this episode. Camilla has shared her story to tell you about that better way. Get out of your comfort zone and do networking. Commercial real estate is it team game, it’s a group investment. When you are looking to attract passive investors for your active deals, focus on educating them and be proactive. Be the one who reaches out to the people who are looking to invest, to get their questions answered, their concerns addressed, and get them investing in your deals. Camilla, thank you again. Best Ever listeners, we hope you have a Best Ever day and we’ll see you tomorrow.

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JF2661: 4 Simple Ways to Vet a Syndication Operator | Actively Passive Investing Show with Travis Watts

What makes a syndication operator or general partnership reputable? How do you make sure you’re working with a competent team that will lead you to success? And how do you establish your own credibility and authority? Today, Travis Watts presents four painless ways to vet future groups and how you can use these methods to boost your own credibility.

Want more? We think you’ll like this episode: JF2424: What Can Go Wrong Investing in Syndications? | Actively Passive Show with Theo Hicks & Travis Watts

Check out past episodes of the Actively Passive Investing Show here: bit.ly/ActivelyPassiveInvestingShow.

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TRANSCRIPTION

Travis Watts: Hey everybody. Welcome back to another episode of The Actively Passive Investing Show. I am your host, Travis Watts. This week, what we’re talking about is what makes a syndication operator or a general partner reputable. We’ve definitely hit on this topic before in kind of more vague ways. But today, we’re going to go into a lot more in detail. I want to outline four categories for you, whether you’re an active investor, or a syndicator, or operator yourself, or whether you’re a passive investor, like me, just looking for groups to partner with. We’re going to go into what makes a group reputable.

Now, you may have heard this saying before, especially if you are an active investor or syndicator. If the deal is good enough, the money will come. I call false. I don’t think that’s true at all. Why wouldn’t that be true? Here’s why. If an operator has a low probability of actually being able to execute on the business plan, or if they’re just not a very trustworthy individual or group, then what good are the projected returns? The money is not going to show up just because you put some fake numbers in front of a bunch of people. There has to be a little more substance to it. Let’s go ahead and dive right in. I want to talk about the first category, which is exposure and transparencies. Let’s talk a little bit about that.

Investors, at the end of the day, want to work with people that they know, like, and trust. We’ve talked about that here before on the show. But more importantly, if I’m an LP, a limited partner investor, I’m a passive investor, and I’m looking for groups. The first thing I’m probably going to do is get on a Google search or somewhere online and start trying to find these syndication groups. I’m probably going to be on YouTube, social media outlets, blogs, and forums, maybe Bigger Pockets or something like that. These are going to be my starting places. If you’re active, think about that. You want to have some kind of online presence because most people are online when they’re finding operators to partner with. I always think it’s a good idea to have a thought leadership platform, maybe having your own podcast, your own forum, your own community, so to speak. I see everybody’s got Facebook groups or LinkedIn groups. I think it’s all generally a good idea because it puts you in a position of authority if you’re an active individual, and you’re helping bring a lot of conversation, transparency, and hopefully adding value to others through your outlets and through your platform.

Video is always my preference, always has been my preference, I think. We live in 2021 going on 2022 and I think video speaks volumes for transparency. If you’re active, I would really consider video. It’s something I’m personally working on as part of a very big mission for working with Joe Fairless, over at Ashcroft Capital, and doing a lot more video production for 2022. I want to get in the units and the apartments that we’re buying, I want to talk about renovations from beginning to end, and I really want to show a lot more of the transparency on visual. It’s one thing to send someone a before and after photo, it’s quite another to go walking through an actual property. Let’s meet the crew, here’s the manager who’s on-site, and here’s some of the construction crew in here, let’s meet the maintenance staff. It just adds a whole ‘nother dynamic and layer. If you can do video, do it professionally, do it right. I would recommend everybody do video. That’s a little bit about exposure and transparency.

The bottom line is you want to have an online presence, you want to be out there, you don’t want it to be; you hear about a group, you go research them, they don’t have a website, they’re not anywhere to be found, they’ve never written any blogs or books, they’re not on YouTube, they’re not on social media. A lot of people just simply won’t move forward if that’s the case, speaking from an LP perspective. So totally cool if you want to use that approach, just saying it’s going to be even harder to raise capital. And it’s going to be harder for investors to do their due diligence because, after all, if we all invest with people who we know, like, and trust, how are we supposed to know someone, like someone, or trust someone if we can’t even find anything out about them? It’s pretty much impossible. You’re really working against the grain, so to speak, if you’re not going to leverage the online platforms and online presence.

Break: [00:05:22][00:06:55]

Travis Watts: Let’s talk a little bit about track record and experience. Because at the end of the day, this is probably the most important aspect that you really have, as far as your due diligence goes. What is your track record? How many times have you done these types of deals? What does your success or your losses look like? What I always tell the newer groups that are in the space, who I’ve certainly partnered on deals with, doing their first, second, or third deals is, “Look, if you don’t have the experience yourself, maybe you want to partner with someone who does.” Have a co-general partner, have a co-sponsor on your deal, or have a coach or mentor that’s part of your network or program that you can kind of lean on and leverage and say, “Look, we’re working with ABC over here who’s got 30 years’ experience doing this.” A lot of mentorship programs that exist today will allow you to leverage their brand when you’re putting deals under contract. You can say “I’m part of this ecosystem, I’m part of this network, I’m part of this group.” So that can go a long way too. Just make sure that you relay that to your investors, that you are part of a network that has a very positive reputation in the space if you yourself don’t have your own track record.

My general rule of thumb these days is I like to partner with groups that are beyond their first, second, and ideally, third deals so that they’ve actually gone through the process a few times, worked out their kinks, and now they’re kind of rocking and rolling. I will tell you from firsthand experience that if you’re saying I only want to work with groups that have 20 to 30-year track record and I’ve done hundreds of deals, good luck getting on their list. They probably won’t let you in because they have too many investors waiting on a deal and not enough deals to present. It can be very tricky to partner with some of the very experienced firms. On the flip side of that too, a lot of these really experienced firms will end up going public or doing what’s called a REIT roll-up. Anyway, they’ll be publicly traded or doing some other kind of institutional capital strategy at this point so you may not be able to partner with them anyway. The sweet spot, in my opinion, is to ride the wave, where the group’s just gaining their momentum and stability, and they’ve still got some room to run. Hopefully, you can invest in many deals with them, those deals turnover, you do more deals, and you’ve got a nice 10 to 15-year track record that you can kind of go through with them, alongside them.

Another thing, just kind of skipping back real quick, that I left out is the track record and experience of the property management group that you’re going to be using on the property, or if you’re a passive investor, that the operator is going to be using, leverage their track record and expertise because you guys, after all, day to day, week to week, month to month, who’s actually managing the day to day operations of the property. You’ve got some oversight from the asset management group, from the general partnership, but really, it’s the property management group. You really want to put a lot of emphasis on their track record and their ability to execute a business plan. One of the best ways to do your due diligence, in my experience, is to visit a property that this particular property management company has already been managing. Walk in like you’re a prospective renter and just see. Is the team there responsive? Does someone greet you when you walk through the door? Are they nice? Are they polite? Are they willing to show you the units? How do the units look? How is the place kept up? Is it dirty? Is it trashy? What’s their marketing like? This is again, visual. We’re all mostly visual learners at the end of the day. This can be a great way to understand how a team is going to operate on the property you are going to put your hard money into.

The last topic that I’m going to put under this category of track record and experiences is the general partnership putting their own money into the deal. That’s something I look for as part of my criteria. “How much” is kind of subjective. If it’s a very experienced group, they’re probably going to put a little more capital in. If it’s a group doing their first deal, they may not have a ton of capital to put in. But the bottom line is, I want to know that if things go south, the general partnership has skin in the game at the same level that I do. So they are, in other words, buying into the limited partnership shares with the same terms that I have so that if they can’t meet the preferred return, they’re not getting paid either, stuff like that. It’s just simply an alignment of interest.

The next category I want to talk about is the power of word-of-mouth referrals, word of mouth references. I can tell you from working years and years in investor relations, in numerous capacities, this is the number one best source for finding new investors and for finding leads. Here’s an audio or a visual example for you. Imagine you’re at home, you’re watching TV, and here pops up an infomercial. This infomercial says “Buy our miracle pill and you’ll lose 10 pounds over the next two weeks. Order now.” How likely are you to pick up your phone or get online and go order that product? If, of course, you were wanting to lose 10 pounds and that was your goal. Versus, you have a long-term friend or a family member that says “You know what? This is really crazy. But a true story, I got this miracle diet pill. I actually lost 10 pounds over the next two weeks. It’s incredible. I didn’t expect it to work but it actually did. You should check it out.” How likely are you to check it out now, now that it came from a trusted source? Again, somebody that you know, like, and trust. It’s powerful, you guys. It’s really, really powerful when someone can say “I’ve been investing with this group for many years. This has been my experience. It has been very positive. They’re very transparent. They’re great about communication. They’ve always under promised and over-delivered.” It’s a very, very big thing. Something to be considered.

Break: [00:12:56][00:15:50]

Travis Watts: Another thing is, on the same topic, as you’re going through your due diligence, if you’ve ever read online reviews, how likely do you think it is someone’s going to write a review online that the general public can see if they got screwed out of a product or a situation, or they got hosed in some way, versus someone who bought a product or a service and just sort of received what they expected more or less? Well, no, there’s far more negativity online than there is positivity. The likelihood that someone writes something negative by getting hosed is like 10X. All of that to suggest that if there’s a bad actor in the space, if there’s a bad sponsor out there, you’re probably going to be able to dig up some dirt on that relatively easy. Just through a Google search, or getting on some forums, or just talking around at conferences, or events or meetups. You’ll probably discover that maybe there’s a handful of groups you may not want to partner with. Do your due diligence.

What I want to close out with here is kind of our fourth category is, your goals and your interest. My number one rule of thumb is to ensure that the operator or the GP is aligned with my own goals, my own philosophy, and my own interests. In other words, if my end goal is to have multiple passive income streams through cash flowing real estate and I want to live on that income, I’m probably looking for operators in the space that are purchasing stabilized apartment communities that are cash flowing right out of the gate, that have preferred returns that may be due monthly distributions, things like that. I try to reverse engineer in order to meet my goals. I’ll give you a simple math example. If my goal is that I want $100,000 per year in passive income within the next five years, that’s my timeframe, then there’s a couple of ways I could look at this. If I had 1.5 million to go deploy and invest, I could maybe say “Okay, I want to diversify among about 10 different deals. That’s about 105,000 per deal. If each of these deals could average about a 7% cash flow, give or take, that would give me about $100,000 per year in income.”

But remember that my time horizon was five years to hit this goal. Let’s say I don’t have 1.5 million to deploy right away, maybe I have 900,000 today that I could start with and I want to work towards my goal. I might diversify the 900k among 10 different deals, and instead, I might look at maybe the IRR, the internal rate of return projections. If I could average about a 15% IRR among my portfolio, then in theory at least, in about five years, give or take, that 900,000 could turn into 1.5 million as these deals sell-off, if I’m looking for deals that typically sell in a three to five-year timeframe. Then I would have the 1.5 to then go put to work at 7% cash flow to get my 100,000 per year. There are different ways I’m not giving anybody any financial advice or strategy. These are example purposes only, something to think about. How can you reverse engineer to get to your goals? It starts with simply identifying your goals. What kind of lifestyle do you want to have? Why you’re investing in the first place? What it’s really all about. You’re 42% more likely to achieve a goal if you actually write it down. Share your goals with family, friends, or a spouse, whatever you feel comfortable with. Figure out what you want in life, reverse engineer the strategy, set some goals, and take action.

There are four practical takeaways from this episode. Thank you, guys, as always for tuning in. This is Travis Watts, host of The Actively Passive Show. I hope you found some value in this episode. Always happy to hear from you guys. Reach out, LinkedIn, Facebook, joefairless.com, email travis@ashcroftcapital.com. I’ll see you guys next week on another episode of The Actively Passive Show. Have a Best Ever week. Thanks so much.

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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JF2655: The Lost Decade and How to Avoid 0% Returns on Your Investments | Actively Passive Investing Show with Travis Watts

Were you taught that smart investing must always follow the “buy low, sell high” structure? In today’s episode, Travis Watts shares why this mentality may not be the best choice when it comes to investing due to situations like the Lost Decade. The Lost Decade was a span of time between 2000 and 2009 where the market fluctuated so much over the years, and ended with a recession, that most people had 0% returns on their investments after ten years. This episode will discuss why this occurred and how you can potentially prevent that outcome from happening to you.

Want more? We think you’ll like this episode: JF2305: How To Prepare For Economic Recession | Actively Passive Investing Show With Theo Hicks & Travis Watts

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Travis Watts: Hey, everybody. Welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis watts. I have a very interesting topic to share with you today. What we’re talking about as the lost decade and how to avoid 0% returns. Allow me to elaborate. I was doing a webinar here recently to a group of physicians and medical professionals, and I added this as a subsection to my presentation, because I just thought it was interesting. I was going through some data, and for anybody who’s, let’s say, 40 years old or older, I’m sure you remember this painful period of time in the stock market. If you were in the stock market, whether that was through your IRA, 401k, brokerage account, or basically any vehicle tied to the performance of the stock market, for those not so familiar with the lost decade, this is around January of the year 2000 through December of 2009. Basically, the reason they call it the last decade is if you had invested in January of 2000 in, say, the S&P 500 index, or the stock market broadly, you would have ended up with nearly a 0% return over about a 10-year period. The reason why is we were at the top of a market cycle. We had the dot-com bust, so the markets trickled down for several years after the year 2000. Then we had a recovery and the market started coming up almost back to breakeven, and then we hit the great recession, and the markets took a nosedive once again. Everyone would have been at a loss, had you invested back in 2000. Then we had a recovery, of course, post-2009. But the bottom line is that 10 years went by with very little to no cash flow, and very little to no net worth change or valuation in your portfolio. So the reason this happened – not the economic reasons and the policy reasons, but the reason from a high-level that this would have been the outcome for you or I is because we were using a buy low/sell high investing mentality.

I’m not suggesting that there’s anything wrong with that in particular, but raise your hand if that’s how you were taught about investing… Whether that was through school, colleagues, friends, parents, whatever. It was this idea that “Oh, yeah. I understand investing. I buy a stock at 10, I hope it goes to 15. If and when it does, I sell it, and boom. I made a profit.” This is how a lot of people think of investing, this is why so many people are speculating on the crypto space because they think, they predict, that they’re going to buy today and that one day, it’s going to be a 10x return, because historically, that has happened in that space. But it doesn’t always happen. Sometimes people buy into Bitcoin at 60k and then it goes to 30k. You can go the other direction with it. But long story short, that’s why, and I want to share with you an alternative way of thinking. What if you would, instead of doing the whole stock market thing in index funds, you would have invested in multifamily apartments.

Here’s a couple of interesting stats to consider. I want to be as fair and unbiased as possible. Check this out. Multifamily real estate investments have provided an average annualized return of about 9.75% from 1992 to 2018 according to CBRE research. That’s the data that they chose for that. We know in 2019, ’20, and ’21 multifamily has continued performing great so I’m sure that wouldn’t change too much if we had that data in that statistic. Equally so, the S&P 500 for the past 90 years, because we have a lot more research on that, was around 9.8% annualized return all things considered. So you would look at these numbers potentially and say, “Well, there’s not a lot of difference there. So why not just invest in the stock market?” In other words, what’s the advantage of investing in multifamily? Volatility. We’ve talked about it a lot on the show, but I can’t say it enough. Volatility is probably the number one thing that sets stocks apart from private real estate. Again, according to CBRE, the standard deviation for multifamily returns is around 7.75%. And according to Seeking Alpha research, the standard deviation of the S&P 500 is around 19.7%.

Let’s break that down. If you’re not familiar with standard deviation, I want to define that in my definition. Get on Google and you can go read paragraphs and paragraphs and paragraphs about what standard deviation means, what it is, and how it’s calculated, but here’s the bottom line – it’s a measure of volatility. It’s the amount of variation from an asset’s true value. In other words, if the book value of a stock is let’s say $10 per share, but it’s currently trading at $20 per share or $8 per share, this is the deviation away from its actual value. With those two stats in mind, you can see that stocks have twice –actually a little bit more than twice– the standard deviation of private multifamily real estate. So the prices fluctuate more, they crash harder, they boom bigger. All of that is summed up and could be categorized as general volatility.

Break: [00:06:01][00:07:34]

Travis Watts: Something to keep in mind is that stocks, statistically speaking, when we’ve had recessions in the US – they’ve lost about 33% of their value during times of recession. Which means they may not be the best vehicle for preserving your capital. There’s been a lot of news and headlines for years that maybe we’re at the top of a market cycle. The truth is that nobody really knows that, and there are so many things out of our hands with policies, government, the Fed, stimulus, and all these things that you are I have no control over, neither do the talking heads on TV nor any guru in the space. That doesn’t stop people from making their predictions. But I’ll be the first to tell you, I don’t have a crystal ball and I have no predictions for you. So I say “Who knows.” That’s my best guess at the future. But it’s crazy, you guys. Something like 80% of fund managers in the public markets and Wall Street licensed professionals, this is what they do, day in day out, full-time for careers – 80% underperform the S&P 500 index over a five-year timeframe. That’s insane. That tells you that if true professionals can’t time the markets accurately or choose which investments will outperform or be best, then what chance do you or I have? I don’t know. You may feel differently about it. I used to feel differently about it when it came to syndications. I used to think this individual deal is going to outperform that deal, so I’m going to go heavier on it. And it turns out, I wasn’t always correct on that.

And I love this saying — a lot of people get coined as originating the saying. I don’t know who the originator is, but “Time in the market beats timing the market.” Something to think about and consider as you go through your investing journey.

So the heart of this conversation – why focus on cash flow? Or what if you focused on cash flow and passive income, and not buy low sell high in capital gains, and trying to flip things, and all of that. As we talked about in the last decade, you would have had basically a 0% return more or less over a 10-year period investing that way. Consider this. Let’s say you or I, for example purposes, invested –just making up numbers here– $100,000 in the year 2000 in multifamily apartments, generally speaking. It doesn’t have to be one deal, it could be your whole portfolio of different deals, whatever. Now, I want to paint this picture as conservatively as I can. So let’s say that the cash flow that was distributed to investors, you and I, was only 6% per year.

By the way, if anyone knows the statistics and the facts of multifamily during those timeframes, it was much higher, generally speaking. But I’m going to keep it conservative. That means that we would be collecting $6,000 per year in cash flow off our $100,000 investment, times 10 years. So at the end of 10 years, you and I would have effectively $60,000 collected from cash flow on our investment, regardless of the price fluctuations in the market; regardless of the stock market, first of all, regardless of whether we had bought into an apartment building at 20 million, now it’s 25 million, or we bought in at 20 million, and now it’s 15 million. But I want to paint a couple of examples here of what advantage multifamily has over single-family, because more people are familiar with single-family investing, which I did for many, many years, and then I transitioned over to multifamily.

So here’s the unfortunate truth about single-family. I could go out and buy an amazing property in an amazing location, single-family, and put the world’s best renter in there; and this renter, they take care of my place, they’re upgrading my place, they’re paying above-market rents in my place, I’m able to raise my rents 5% a year every single year with them.

Alright, things are great. But guess what? If all my neighbors have foreclosures and short sales, and they’re selling below market values for whatever reason, as we saw in the Great Recession, I lose money on the deal overall. In other words, if I want to exit my deal, the lenders and the appraisers of the world when it comes to single-family can care less about my tenant or how much rent I’m collecting off my property. It really would make no difference, because they go off of comps, comparable sales, in the surrounding area. So single-family investing as a strategy, generally speaking, is buy low, sell high. That’s true for wholesaling properties, that’s true for fix and flipping properties; that’s even true, in my opinion, for buy and hold. Because again, if you ever need to exit or get out, it’s all going to be based on the comps. And even though you collected a great cash flow, if you’ve got to exit and take a loss, it was a buy low, sell high strategy.

Break: [00:12:58][00:15:46]

Travis Watts: Multifamily, on the other hand, is treated much more like a professional business, like a commercial company. They look at net operating income as the primary factor in the valuation of the property. A few reasons for this. One, what if there are no comps in the area that could be supported off the price that you’re asking? For example, you’re investing in a brand-new built luxury high rise, built in 2021, 30 stories high, 400 units, in an old section of some downtown sector. Where all your comps are one in two-level buildings, they’re 80 units, and they were built in 1930. That’s not a comp; so there may not be any 2021, 30 story buildings to go look at. Instead, they’re going to say “What are you getting in rents, in income, and what are your expenses?” and someone’s going to come in and buy that from you at a multiple of what your net operating income is. So said another way, the rents and the cash flow in the passive income are the primary factor and focus to multifamily investing. With single-family, it’s more about buy low, sell high and what the property is worth, and the cash flow and passive income is a secondary consideration. That is probably the biggest difference between the two strategies.

The key to buying multifamily or investing in multifamily properties is to know that you can at least maintain your rents… By the way, on a side note, talking about maintaining rents. Did you guys know that, statistically, multifamily rents during the Great Recession, during this huge real estate collapse and downturn, went from a national average of 1350 a month leading up to the recession, that’s per unit rent, to 1250? That was the big collapse, $100 per month on a multifamily property. Just keep that in mind for perspective. Back to what I was saying. To successfully invest or buy multifamily real estate, you want to make sure that you can be cashflow positive, even if you’re not able to push the rents, and hopefully there’s even some margin if rents go down or soften up. But generally speaking, rents will go up. I think the national average is about 3.5% a year. But generally speaking, they go up as much if not a little higher than inflation. Right now, we’re seeing about 5% national inflation, that’s running a bit hot. Historically speaking, the Fed’s goal is to keep it around 2%.

But regardless, if rents go up 2% to 5% a year, multifamily valuations go up as well, even if the single-family home market softens and then we start seeing 20% discounts on single-family homes. That is secondary to investing in multifamily apartments. The same thing is true with the stock market. The publicly-traded REITs in the stock market, in general, fell 30% give or take in March of 2020 when COVID was just outrageous and crazy. Well, guess what guys? Private multifamily deals was not transacting at 30% discounts during the same timeframe. The volatility was not there. That was market volatility in the public markets, not in the private sector. What I encourage you guys to think about is just this idea that if I invest for passive income or cash flow, I don’t have to worry so much about what exactly the valuation, or the comps, or the comparables, are at any given time, if you’re just sole focus on creating passive income streams. I’ve asked this question before on social media, I may have mentioned it here on the show as well. Would you rather have $5 million in cash in the bank and no investments? Or would you rather have $30,000 per month coming in in passive income, but a $0 net worth?

Everyone’s going to have a different take, and again, I’m not telling anyone what’s right or wrong or what to do. I would choose the cash flow and that means that I put a lot less emphasis on net worth in that situation. But we’re all different. What’s right for you isn’t necessarily right for me, and vice versa. I’m not a financial planner or strategist so please always seek licensed professional advice. But with that, I really thought this extraction was worth sharing here on the show. I hope you guys found some value in it and learned a couple of new things. Again, my goal is just to share what I see as a mindset. Several people reach out every episode, and I love hearing from you guys. You can reach me at joefairless.com or travis@ashcroftcapital.com, or a lot of people reach out on LinkedIn. I’d love to get your thoughts. Leave a comment below. Happy to share, happy to be a resource. I’m no guru in the space, I don’t know what you would call me, I’m a thought leader, I’m one opinion out there. And if any of this resonates with you, I’d love to hear about it. Thank you, guys, for tuning in. We’ll see you next time on The Actively Passive Investing Show. Take care. Have a Best Ever week.

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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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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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.

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JF2648: Why You Should Reevaluate What It Means to Be Rich | Actively Passive Investing Show with Travis Watts

What does “rich” mean to you? When you picture a rich person, do you imagine yachts, tropical vacations, or a lavish collection of sports cars? In this episode, Travis Watts provides a different perspective on what being rich really means in terms of having to work vs. choosing to work, freedom of time, and freedom of location.

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Travis Watts: Welcome everybody to another episode of the Actively Passive Investing Show. I’m your host, Travis Watts. As always, I truly appreciate you guys being here every week to tune in, learn more, and hopefully get a unique perspective. Today, this is just top of mind because I was listening here recently. I was out in Miami at a real estate conference, I was listening to a conversation between a couple of gentlemen there and they were talking about the term rich. There’s a lot of confusion around it. I know I’ve highlighted some of this in previous episodes, but I really want to make a full episode about what it means to be rich.

Today in this episode, we’re talking about having the freedom to choose to work. You want to work because you enjoy whatever it is, not because you have the obligation, or because you have to work, or you have to go put in another 30 to 40 years climbing the corporate ladder, whatever it may be in your case. Additionally, we’re just talking about, in a general sense, waking up each morning without having financial worries because you know that your finances are in order, there’s nothing that you physically need to do. Last is just about having that general feeling that the money that you’ve already made, that you’ve already paid taxes on, that money is out there making you richer whether or not you choose to work. We’re going to dive a lot deeper. I know that was pretty high level, but let’s take it step by step.

I want to start by asking you a simple question. I want you to imagine, right now, a rich person. What does that look like? Some of you might see somebody sipping champagne on a yacht. Some you might envision he or she with their spouse, a bunch of kids, and close family around them. Maybe they’re all wearing that picturesque white clothing and those Tommy Bahama hats. Only joking. There’s a lot of marketing out there to portray and maybe what rich looks like. One image that probably didn’t come to mind when I said think of a rich person is someone working 80 hours per week where they have no free time to do anything other than going to bed, wake up, and go back to work. But unfortunately, in our culture, the hustle, the grind, and the work harder is a common theme.

Let’s break rich down in three different ways. I want to talk about financial, that’s the most obvious, I also want to talk about time, and then I want to talk about location. Alright, so let’s kick it off with financial. Money isn’t everything but it is a key component to the topic of being rich, it obviously plays a role. Like Robert Kiyosaki always points out in Rich Dad Poor Dad and other books and podcasts, rich has more to do with income than it does net worth. Here’s what I mean. In an example purpose, let’s say you or I, we have a two-million-dollar home and a one-million-dollar exotic sports car, just to use kind of a silly example. Let’s say that we financed or we leased these, we leased the vehicle and we finance the property. So we have $2 million in bad debt. It’s bad debt because these are liabilities depending on your definition of those at least. I think it’d be tough to argue that the car is not a liability. But in any case, $3 million was the purchase price of the car and the home, two million is what we owe in debt.

What this means is I have to have more assets other than this house and this car in order to have a positive net worth. If I had a couple of million bucks in cash in the bank and I still had that scenario with the home and car finance, I would be positive. So 101 is not to have bad debt, not to be sinking in liability debt, and to have an actual positive net worth regardless if you define rich as income or net worth. My point is that you still need to have a positive net worth overall either way. Ask yourself this question. This is kind of question number two. Would you rather have $5 million in cash sitting in the bank free and clear after paying taxes or would you rather have $400,000 per year in passive income for the rest of your life? Of course, assuming that this isn’t like a heavily taxed kind of income, so much like real estate where you’ve got some tax advantages to hopefully offset the 400k.

But still, that passive income is what actually, in my opinion, creates financial independence. By the way, if I had $5 million in the bank and I went to go make some investments that yield passive income, and I could get an 8% a year cash flow yield, that would be 400,000 per year. That’s kind of how I came up with that example. In one scenario, you’re not invested, in the other, you are. But when you’re invested, you may not have liquidity. Even though you have five million in investments, you may not be able to pull that out and go use it for whatever, buy a house in cash, go buy a sports car, and do exotic travel. You may not have big chunks of liquidity but you would have 400,000 rolling in per year. Again, for me, it’s about the lifestyle so we’re going to talk about that more here in a minute. Now, one thing I want to point out here is building financial independence and financial freedom if you’re a single individual is much easier than perhaps if you have 10 kids.

I would say for a lot of people, the focus isn’t necessarily to build up lots of passive income to offset lifestyle expenses when they have five kids. I totally understand if you’re a working individual or couple, that’s extremely difficult. So instead, what some people might think about is building up some assets that will later become what I would refer to as generational wealth. These are just assets you would pass down to your children over time. So we’ll use the example of real estate, maybe you’re buying some single-family homes, or some multifamily properties, or some vacation rentals, or whatever they are, you may hold those long term, pass away one day, and then your children inherit those homes. Actually, the other day, one of our neighbors has been evidently buying up the block. This guy owned four or five homes real close to where we live. I think he has three kids, so three of them are allocated to his children.

They’re going to basically inherit those homes and be able to use them however they wish. The other couple that he owns is going to be rentals, and then I think there might actually be a sixth. But in either case, he’s thinking about generational wealth. He’s building up the assets now, he’s paying them off over time, or I should say his tenants are paying off the mortgage when they pay the rent, then one day, hopefully, they’re all free and clear and as children get the step-up basis, come in and get to enjoy that. So different ways to approach it, just saying that when I was a single individual, I wasn’t even dating, and I didn’t have any pets, I had zero obligations, I was able to quickly build up passive income through single-family investing to where I had more passive income than I had lifestyle expenses. Technically, you could say that was financial freedom or independence, even though the numbers weren’t huge.

What I wasn’t factoring in in my early 20s or mid-20s was one day I will have kids and a family, theoretically or hopefully, and those numbers are drastically going to change. Alright, moving on to number two. I want to talk a little bit about time. This is a current theme to my mission, my purpose, what I speak out about at events. Freedom over your time is another element to perhaps being rich or one way you might define it. It has more to do with lifestyle. A lot of people, especially in the United States –I was one of these people years ago– get caught up in the success cycle is what I call it. I wrote a really long blog post about this, how do you climb the corporate ladder, you get all the skill sets, then you pivot, you launch your own business –just using these as examples– and then maybe you take that business public. The bottom line is you’ve made a ton of money, but you’re locked into the success cycle where it’s more, it’s more, it’s more, my cars are depreciating, I need new ones, my house isn’t big enough, I need a bigger one. Once you get the house and the cars then it’s “I need a second home.” Then once you get the second home, you need a yacht. Once you get a yacht, you need a jet. Once you get a jet, it just never ends.

You’re just trapped in this success loop. Statistically speaking, a lot of folks that have a lot of these luxuries, or what some might say liabilities, aren’t actually any happier than some people that are just dirt poor in other countries, or even here in the United States. Statistically, it’s really crazy how that works. You don’t want to get caught up and just make money, make money, money like I used to do in the oil industry because I burned out, and I burned out pretty fast over a series of just several years. I can’t imagine doing something like that for 30 to 40 years. I think you’d have some serious mental and health concerns at that point. The path to riches can’t involve nonstop work seven days a week.

Break: [00:09:51][00:11:24]

Travis Watts: Another thing to think about is all the richest people in the world, they all leverage and utilize some form of passive investing. Whether it means that they own companies that they don’t actually run, maybe they’re a board member, or not even that, or it’s real estate, it’s hands-off, and it’s passive like we’re going to talk about. But the bottom line is we all have the same amount of time, every day, every week, every month, every year. So how is it that some people can make $10 million per year in income while others struggle and make 30,000 per year working minimum wage jobs plus overtime? Some of the most hardworking people I know, friends, acquaintances, within my own family, they are harder working than I am, guaranteed hands down. I give them that any day of the week. But they are not getting ahead financially. Why? It took me about six years to fully grasp the concept and the benefit of leveraging other people’s time, expertise, resources. There are always going to be people out there that want to do it themselves. They want to be the person, they want to be the decision-maker, they want to find the deal, they want to do the underwriting, they want to manage the business, and that is excellent.

These could be CEOs of companies, these could be general partners or sponsors in the syndication space. But there’s also a lot of folks that say, “You know what? I like what you’re doing. I think you’re doing it great. I just want to piggyback off your success. I just want to share in your profits.” These are investors. These are passive investors, whether we’re talking about, again, the CEO at the fortune 500 company running one of the big-name brands. You and I can choose to buy into that stock, and we can share in their dividends, their profit-sharing, and their earnings. Whether we’re talking about syndications where the general partners are doing all the work, in leverage, putting professional property management and contractors on-site, and renovating. You and I can choose, if we wish, to just partner in that deal. Not have to manage the tenants, not have to do any of the hands-on labor, so that we can scale, so that we can build up our passive income streams, our portfolio, and our wealth without taking additional time to the theme of time.

The bottom line is that passive investments require very little of your hands-on time and commitment. Most often they can be managed, so to speak, “managed actively passive” from anywhere on the globe. I am invested in all these different syndications and all these different passive deals, I could be in Thailand right now, it wouldn’t make any difference. I don’t need to see these properties, I don’t need to be on the properties, I don’t have to show up for board meetings, I’m just an investor, and I have the choice to live how I want to live and where I want to live. It doesn’t matter, I know I keep using real estate as an example. This could be, again, stocks, dividends, interest, royalties, you could be a hard money lender, you could be all these different things. The point is, whatever investment we’re talking about, it needs to be truly passive. I’m not talking about buying a turnkey single-family property where some management company is already on-site and there’s already a tenant. That’s still active because you’re still going to have to make a lot of decisions and you’re still basically running the show.

You’re going to have to decide if you want to sell the property, refinance the property, repair the roof, patch the roof, replace the roof, there’s a lot of decisions that have to go into all this so you are still actively involved in the business. You’re more like a CEO. You’ve got folks below you kind of running the day-to-day, but you’re the high-level decision-maker, you are still active. So don’t confuse the two, I’m talking about truly passive investments. So what’s the big overarching benefit here? To me, you get to spend more time on the things you love –that’s different for all of us, friends, family, charity, church, whatever– and you get to outsource or focus less of your time on the things you don’t love. Here recently, my wife and I were doing a little bit of gardening stuff. I just realized I hate it. I mean, I hate it, like every element. Like trying to understand the different types of plants, get the right feed, and the right potting soil, plant it right, and water it all the time. I hate it.

There are some things I just want to outsource. I just want to say, “Hey, look. I’ve got the passive income, let me hire a landscaper.” I’ll say, “Hey, here’s the big picture. I want a bunch of greenery here, a little bit of mix of color over there. Alright, take it away. Thanks.” That’s where I want to be as far as landscaping is concerned. Then, in turn, I want to spend more time with my family and with my wife. As I’ve mentioned before, we’re expecting our firstborn here just around the corner. I want to be home with our firstborn, I want to actually have one on one time, be able to help out my wife, and be able to help out family members. That’s just me, though, we’re all different. But think about the things that bring the most fulfillment and joy to you in your life and think about being able to spend more time doing that. Maybe you hate doing the dishes or cleaning your house, or whatever it is, you can outsource that through passive income. That’s the only thing, it’s about time. That was number two, time.

Now I want to talk about location. With location, I mentioned that when you have these passive investments, you can live anywhere. You could travel all the time if you want to take two, three, four weeks off a month off, whatever. You have the choice to be able to do that. Unlike having the nine to five jobs with the two weeks of vacation per year, unlike having 25 single-family homes in a 10-mile radius where you’re trying to run around like a chicken with your head cut off like I used to do. It was crazy. It was crazy, you guys. It was just crazy. Of course, in my opinion, obviously, one of the best ways to passively invest and free up your time is through real estate. That is my preference, that is what I do, of course, that’s my bias because that’s where I’ve found success. But that doesn’t mean that’s right for you or that that’s the path you should take. That’s just the path I’ve found most lucrative.

Another quote that I absolutely love and I know I’ve shared it before here on the show. It’s Robert Helms from the Real Estate Guys podcast. I remember so many years ago, listening to that show. Robert says “Live where you want to live, but invest where the numbers make sense.” Here’s the deal, you might live in an outstanding market today, you might live in –I don’t know– Tampa, Florida, Jacksonville, Florida. These markets are seeing 12% to 13% rent increases right now. Single-family homes are just out of this world, everyone from New York, New Jersey is moving down there, it’s just insane, it’s blowing up. That’s fantastic in 2021, assuming that you own or invest in these assets. Hear me out though, 10 years from now, there could be a big political change, there could be a new government.

The state of Florida could say, “Hey, we’re a zero-tax state. We’re going to start rolling out a 10% state tax.” All of a sudden, everyone in Florida is going to pack up, they’re going to head out to maybe Texas who’s still a zero-tax state, and everyone’s going to be moving that way. Markets change, and markets evolve. I was fortunate to be investing from 2009 to about 2015 out in the front range of Colorado, kind of between Denver and Fort Collins. It was a great time, the market was booming, we were getting double-digit appreciation, it was just fantastic. But it’s hitting a slowdown much like you’re seeing in say, San Francisco or Santa Clara. Different markets out in California, they’re stagnant, some are even in decline right now. Just because you live in San Francisco and there was the golden era there where you were getting 15% appreciation per year.

That’s not always sustainable long-term. So if you’re in one of those markets, fantastic, and that could really work to your advantage. But if you’re starting to stagnate or decline, or you think “Hey, this market’s too hot,” this is what the beauty is to investing in real estate syndications, or even REITs –which I’ll share with you in just a minute– where you could be invested in properties all over the United States, for that matter, all over the world, even get some international diversification also. So let’s take a look at a few different ways to invest in real estate publicly and privately for passive income. First, you have crowdfunding. The bottom line here is that throughout history, there have always been investors that have funded business projects. So when you relate that to real estate, this is kind of what crowdfunding is. You put a deal out there either to the public or through a platform, and you say, “Look, we need 20 million bucks to go buy this big apartment deal that we think we’re going do A, B, and C to. We’re going to get these kinds of returns out.” Then you go get 100, 200, 300, 500 people to go invest and give some money to contribute to that deal.

That’s one way that the investors, the limited partners, or whatever the structure is, they are hands-off, they are passive, that’s a way for you and me to generate passive income. Generally speaking, with crowdfunding, there are really two types of ways you can invest. You can invest in the property itself, so you’re an equity holder. If the value of the property goes up, hopefully, you’re sharing in those profits plus collecting some cash flow along the way. Then you can also invest in mortgages on properties. As the mortgage gets paid, you get a percentage of that interest that comes in. There are different ways to invest. There’s debt and there’s equity from a high level.

Break: [00:20:42][00:23:35]

Travis Watts: Another way to participate in the real estate game for passive income is to be a hard money lender or note lender. There are so many fix and flippers out there, there are so many developers out there, there are so many people doing different things in real estate. They need capital usually on a short-term basis so there are things called, for example, like a bridge loan, which would be a shorter-term debt loan to someone. It’s kind of just bridging the gap. It’s like we need the deal today, we plan on getting permanent long-term financing in six months, but in order to actually tie this asset up, we need a hard money loan. Some folks are willing to pay higher yields, maybe they’ll pay you 8%, 9%, 10% for short-term money that you lend to them to get the deal rocking and rolling so to speak. I’ve done this, I usually do this more in a diversified manner.

Of course, not a financial adviser planner so please always seek a licensed advisor. I’m just saying I’ve done this through funds that are professionals at being hard money lenders. I’m investing in a fund or a pool, so to speak, where they’ve got 1000 of these loans –just for example purposes– spread out among all these different developers, flippers, and projects so that if any one of them decides they have to default, that is not going to crush my cash flow or my portfolio and I’m going to see a very marginal change in that. But again, you can do single notes, one deal, one partner, one transaction, here’s 100k, you can do it that way. Or you can invest in funds where you’re a little more diversified. But either way, lending is another way to get involved in real estate.

REITs, real estate investment trusts, they can be public, they can be private. We’ve talked a decent amount on the show about REITs. A REIT’s really just a special type of investment trust that’s dedicated to acquiring property. It’s usually commercial property because this is more or less, it’s Wall Street money, or it’s tens of millions of dollars, hundreds of millions of dollars in some cases. So you’re owning some shares of what, in turn, owns a bunch of these properties. REITs can be comprised of mobile home parks, or self-storage, or multifamily, or mortgages, there are so many different things. You definitely want to read and study into this and decide what asset class best suits you. This can be a liquid auction if it’s publicly traded, which means that there’s a public market to buy and sell so you could invest today. Then if in a week you need your money back, you could place a sell order, theoretically, get out in a matter of seconds, and get your money back. That’s a really nice feature.

But do keep in mind, if it’s in the publicly traded market, you’re subject to the volatility, the ups and downs, and swings of the market. If everything crashes like we saw on March of 2020, that could also be your portfolio full of REITs. Even though maybe the REITs are still performing well, they still might be dragged down by the overall market. Keep that in mind kind of as a pro and con. But this is usually great for small amounts of capital. I’ve mentioned before, my nephews have brokerage accounts. They’re between ages 16 and 19. This is how they’re getting involved with real estate with very little money. Even if they’ve got 100 bucks to go invest because they got a check for their birthday or whatever it was, they can go buy 10 shares of a $10 per share REIT or something like that. At least they’re going to get passive income and build the philosophy and the mindset of investing.

Last but not least, my personal favorite and what we talked about all the time on the show is real estate syndications or real estate private placements. Very similar to REITs, just on the private scale, so a little less volatile, a little more stable and consistent, generally speaking. But hey, there are risks and there are cons, such as syndications often they’re not liquid. When I go put 50k into a syndication, I may not see that money for five to seven years sometimes so I need to be okay parting with that. Kind of like we talked about at the beginning of this episode, where I said $5 million in the bank, or 400,000 a year in passive income. The trade-off is if you choose the income, then you don’t have the liquidity. But if you choose the liquidity, then you may not have quite the passive income or any passive income. That’s just the choice you’ll have to make. But syndications are great. You got the sponsor and general partner going out finding the deal, underwriting, managing, they’re being the asset manager, they’re raising the capital, they’re basically active investors.

Then you’ve got the LPs, limited partners like myself. I’m a hands-off investor, I’m a passive investor, along with hundreds of other people to fund the deal. Keeping in mind, as I said earlier, most if not all the richest people in the world have some form of passive investment or passive investing in their portfolio. When it comes to building wealth passively, you’re going to have to figure out what works for you. Listen to some other episodes that I’ve created on picking different asset types, or how to vet a deal, a market, a sponsor, whether to be active, or whether to be passive. There’s a lot of decisions that have to be made. I applaud you for being here to expand your mind and context, hopefully, some new information or new thoughts. To me, the key is to balance the risk and reward ratio. Is it possible I could go make some kind of investment out there and maybe double my money overnight? There are investments like that, but there’s usually a chance that in that same investment, I could lose all my money. It’s kind of like going to the horse races and putting 100k on a horse.

I could get an outstanding almost instant return, but I might lose all my money too. So it’s a balance between that and saying, “I don’t want to take any risk at all. I want the safest thing on the planet.” Okay, products like that generally exist, insured bank deposits and stuff like that. But I might also get 0.1% interest per year on that investment. Is that going to get me to my goals? It’s trying to find that equilibrium to say, “Alright, I’m getting a healthy overall return and I don’t feel like I’m taking too much risk while doing so. That suits me well for my goals, my lifestyle, and what I’m trying to achieve.” That’s what you got to think about for you. What does rich mean to you and what is it you’re really trying to achieve? There is Minority Mindset out on YouTube if you haven’t checked this channel out. It’s great. He goes out and talks to the general public about money, finance, and real estate. He’s asking people, “How much money do you need to feel completely financially secure?” Or whatever, different questions like this. It’s comical, you guys, it’s so funny. “I need five billion dollars in the bank.” Or “I need 10 million a year.”

It’s so goofy because when you sit down and you just think, how much does a house cost either to rent, to buy, mortgage, whatever? How much are two or three cars? Insurance, maintenance, upkeep, purchase price, lease payment, whatever. You can eat so much food in a month, you can only turn on your tap water so much and pay the utility. There are only so much resources that you can practically use. When you really run the numbers, you will probably find out that retirement could be here sooner versus later. It’s usually not such a huge 10 million in the bank. From a perspective, go look at stats and facts. How many people really have 10 million dollars? How many people are actually happy and retired with a whole lot less? I’m just saying, really find out and focus on what brings you happiness and fulfillment. Focus on what you want to spend your time on, the things you love, then write a list of things you hate and don’t like doing, and you’ll find out –like in my case, landscaping or gardening for example– that could be as little as a hundred bucks a month and I can completely outsource it.

I can never have to do that again in my entire life, for a hundred dollars per month. So to me, that is a heck of an ROI because it just brings me down when I have to do it. I digress from the subject. Thank you, guys, for being here, as always. Thank you for tuning in. I’m Travis Watts. This is the Actively Passive Investing Show. We were talking about what does rich mean to you? What’s the definition? Hopefully you guys found some enjoyment. As always, reach out. I’m on social media, joefairless.com, travis@ashcroftcapital.com. Connect, let’s learn, let’s chat. I’ll see you next week at the show. Thank you so much. Bye.

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