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JF1259: Putting Together A Financial Plan As A Real Estate Investor with Chad Shaw

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Chad is here as a financial planner to very high net worth individuals, to tell us how to plan our financial future. As real estate investors our path can be different than a W2 worker. Chad has helped a lot of investors make financial plans so have pen and paper ready for this one! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Chad Shaw Background:

-Founding partner of MST Financial Wealth Management and Insurance Services

-Qualifying member of the Million Dollar Round Table, the premier association of financial professionals

-An investment advisor and broker, working closely with real estate investors

-His team of five financial advisor partners offer high quality investment, tax, insurance & wealth management advice

-Say hi to him at http://chadshaw.nm.com/

-Based in Orange County, California

-Best Ever Book: Principles by Ray Dalio

 


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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, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Chad Shaw. How are you doing, Chad?

Chad Shaw: I’m doing well, Joe. Thank you for having me.

Joe Fairless: My pleasure, and I’m glad you’re doing well. Welcome to the show. A little bit about Chad – he is the founding partner of MST Financial Wealth Management and Insurance Services. He works with clients and he has a focus of working with real estate investors, so we’re gonna enjoy our conversation with him because he has a lot of clients who are high-income ranging up into the billions of dollars. The focus for our conversation today is putting together a well thought out wealth plan for us as real estate investors, because we’ve got to look at it in a different lens than what’s perhaps typical for maybe a W2 employee… And maybe Chad can help us identify some blind spots that we might need to pay attention to as well along the way.

A little bit more about Chad – he is based in Orange County, California and you can say hi to him at his company’s website, which is in the show notes page. With that being said, Chad, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Chad Shaw: Absolutely. I grew up right outside of Buffalo, New York. Both my parents are realtors, owned and operated their own small brokerage there and were investors themselves… So growing up having behind-the-scenes view of decades of ups and downs, good and bad in the real estate space, and then in college between semesters did a little bit of work in the construction space, thought I might end up in the real estate world myself.

Life took me a different path and ended up in the financial planning space. Having a comfortability with the real estate space over the last decade or so, I’ve spent most of my time serving that marketplace all across the country, and as you mentioned, a lot of our clients are well-established individuals who are doing pretty well and had some unique challenges.

Much of my insights in the work that we do today has been a gift, so to speak, from some of the stories we’ve learned and things that clients are happy they did or maybe wish they’d done differently over thousands and thousands of meetings. Today we’ve got our team in Orange County putting together comprehensive financial plans for folks, and often times they are concentrated assets within their be it real estate or privately held businesses, so… Happy to share with you guys the best I’ve got.

Joe Fairless: Good, I love the part about talking to a bunch of clients and learning what they’re happy they did or wish they’d done differently, so how about we start there?

Chad Shaw: Absolutely. I am a very observant person by nature, and whether it’s been learning from books or interactions with people that I’ve never met has been fantastic, but to me the stories that hit home are the ones directly out of the mouths of some of my clients and people that I interact with.

One individual in particular who’s actually become a very great friend, through some of our meetings and interactions I asked him, I said “Hey listen, I’m pretty familiar with the real estate space, but if you would, I’d love to take as much time as you’ll give me, just give me everything you’ve got, the best of what you’ve learned in your 50 years of investing.” Today he’s got a sizeable net worth; he’s seen ups and downs, he’s done a lot of great things, and one of the things that I admire even more is he’s an incredible human being. For me, he had built the dream for every real estate investor.

The first time we sat down he says “Okay, I’m gonna be able to teach you in two or three hours more than 99% of so-called real estate experts are gonna ever anticipate.” Then he starts to draw a few drawings out on a piece of paper. So he draws an A, meaning where we are today, and he draws a B down the road, and he draws this upwardly-sloping curve, right? And he said “Chad, over decades the real estate market looks about like this. You’ve got peaks, you’ve got valleys, and no matter what anybody tells you, that’s always gonna be the same.”

What’s interesting is the individual that had introduced us has the same age, same friend group, same opportunity, same everything, very different outcome… Not nearly the space that this individual was in. And I asked him the first time I met him, I said “Hey, I have my own ideas, but out of curiosity, what’s the difference between the two of you? How come you ended up where you are and he ended up where he was?” and without blinking an eye, he said “Chad, pigs get fat, hogs get slaughtered.” I said, “Okay, I think I know what you mean by that, but give me a little bit more on that”, and that’s when he started to draw this curve.

His story, among many other conversations that I’ve had with people, has led me to — I don’t wanna say “coin the phrase”, but three layers of what I’ll call a savvy investor. His lesson here was if you ask the average individual – whether it’s stock market, real estate, you name it – what does it take to get from A (presumably where we are today) to B (more, whatever that looks like down the road)… He said if you ask the average American, the average individual, they’re gonna tell you it takes growth, or rate of return, right?

Joe Fairless: Yup.

Chad Shaw: So yes, that’s ultimately what people are looking for, he said. That’s a key ingredient, and we need that. He said “But where the great separate themselves is during those downturns”, and then he started to do some math with me. So most of his properties are large multi-unit properties, and just to make the math easy he said “Okay, if I value a property at (let’s just say value is net operating income over cap) — hypothetically speaking, if I’ve got a property with $100,000 net operating income, and a cap rate today (I’ll make up a number) of 3%, that property would be worth 3.3 million dollars, wouldn’t it?” I said “Yup.”

He says “When it goes here, let’s say in ’08, ’09, or something like it (and again, he was just making up hypothetical numbers), let’s imagine I have the same net operating income of $100,000, but now cap rates are at seven. $100,000 divided by seven is 1.428 million. Let’s imagine I put a million dollars down on the building (or whatever the number is), I borrowed 2.3 when I initially purchased it, viewing a 30% equity position as safe… Let’s imagine we’re here today, and now the property is worth 1.428, what do I do?” He said, “Historically, over my 50 years, cashflow has dipped about 20% for a multitude of reasons (and sometimes they’re different). When the market goes down, cashflow goes down; the available equity to borrow typically shrinks on my balance sheet, the cost of borrowing goes up and you have this perfect storm.”

He had made some mistakes along the way, and he said “What that teaches us here is in addition to focusing on just growth-oriented — and we know real estate is gonna appreciate as time goes on, or at least we think… There’s a second layer that’s allowed me to separate myself and it’s positioning my balance sheet to be in a position to never be forced to sell something at a loss. Because if we build our Lego tower one on top of another on top of another on top of another, sooner or later it’s gonna come crumbling down, and if we’ve gotta start from zero once a decade (give or take), it’s gonna be an issue.”

So the second layer being avoid being in a position where you’re forced to sell something at a loss… The third is really where in my opinion he’s been able to separate himself, and if you follow Warren Buffet or Ray Dalio or some of these guys, I’ve observed some of the same characteristics in them… The third layer is to be in a position to buy at a loss. Joe, have you read any of Warren’s letters to shareholders or anything like that?

Joe Fairless: Nope.

Chad Shaw: They’re really interesting, you can find them online. This last one that he came out with, he had a paragraph in there that stuck with me, and the paragraph said something along the lines of “Once a decade (roughly) the economic skies are gonna darken, the clouds are gonna come in and it’s gonna rain gold. And when it does, we’re not gonna go outside with teaspoons, we’re gonna go outside with wheelbarrows and bathtubs.” What he meant by that – and he’s been known for his phrase he’s fearful when others are greedy and greedy when others are fearful – is when he’s in a position and everybody’s running from the hills and panicking, he’s out there scooping up things on sale.

As an advisor, the stock market and the real estate market tend to be one of the only places that I’ve ever found where people are afraid of things when they’re on sale.

Joe Fairless: Those are three powerful lessons, and I wanna make sure I got this first one written down right… Is it “Be growth-oriented”? Did I get that  first one right?

Chad Shaw: Yeah, so whatever our chosen vehicle, be it the stock market, be it real estate – and there’s a million different ways to do all of them – whatever the chosen vehicle or method of growth, there has to be an element of being able to generate income or returns or something in there… And risk or opportunity for growth is pretty easy for just about anybody to find; we can all find something and master it. The challenge then becomes how do you sustain your empire? Taller mountains need fatter bases; how do you sustain your empire and make sure that structurally it’s never gonna come crumbling down? And then imagine you go through a period of time like a 2008, and you’re not only in a position where you can hang on to everything – you’re fine, you don’t need to sell; family’s needs are met, employee’s needs are met, everything’s good – but imagine you’re also in a position to become a significant buyer at that point in time.

Getting into the industry about that time, one of my first interactions with a high income/high net worth individual – and I can’t take credit for what he did – one of my first observations, and this guy was a business owner, and as you can imagine, the market tanked, revenues dropped significantly, and he had had a pool of money that was at par or better in a couple different places, that he went down to Florida and he bought 14 properties for roughly 50 cents on the dollar of what they were valued at a year or two prior. Three years later he sold four of them, paid off all the remaining debt, and today – or at least I think he still has all ten – he’s got about ten properties free and clear of any debt, spitting off an income.

So the way that he perceives the world is not to just be aggressive when the getting’s good, but how do we also take advantage and separate ourselves in a downturn as well, and what does that do to your balance sheet ultimately, as time goes on?

Joe Fairless: Those are powerful, I love it. Be growth-oriented with the focus of income, number one. Number two, never be forced to sell anything at a loss, and number three, be in a position to buy when everyone else is losing.

Chad Shaw: You’ve got it. And the only other comment that I would make on both of those is what I’ve found is that the large somebody’s got, the more seasoned, maybe the more bumps and bruises they’ve had over the way, they start to view the world in terms of decades; or maybe large institutional money or family money views it over centuries instead of a small slice of life, be it a month or a year, or something like that.

Joe Fairless: I love that approach, yeah. It reminds me of something Tony Robbins talks about. We tend to over-estimate what we can do in a year and under-estimate what we can do in a decade.

Chad Shaw: Ain’t that the truth?

Joe Fairless: Yeah. I love the philosophy that you’re bringing into the conversation. What else as it relates to your experience that is relevant to real estate investors should we talk about?

Chad Shaw: The other thing that I would talk about that I think is often looked at is there’s really in my opinion two phases of this. You’ve got the accumulation or the building of your empire, and then at some point in time — and some people build forever, but at some point in time people’s gears shift, their values change, and things start turning into “Who is this gonna go to and how are we gonna get it to them? Is it gonna go to loved ones? Is it gonna go to charity? Do I want this to go into a foundation? What does that look like? How do I do it?” And a lot of times people have their immediate satisfactions — in the society that we live in, people are so focused “No, I need to do this today. I’ll worry about that later on” that they have their head in the sand and sooner or later they wake up and — and they’ve done it, they’ve built it, they’ve been so focused and driven over decades; they’ve done this, and then they find that they might have a huge state tax issue, or no way of transferring [unintelligible [00:15:17].06] They start to dive into taxes and gifting and all these nuances that are an ever-moving target… But along the way, I find that in addition to setting up their balance sheets to be offensive in any season, a lot of times they’re looking at life within a silo.

What I mean by that is if I’m the classic real estate investor… And I’ll use my dad as an example – the first time I got into the financial services world, he said “Chad, I know what I can do in real estate and I know that I’ve been satisfied with my returns… Why in the world would I take my money and put it somewhere else?” And that’s a good question, right? What I’ve come to find out is as these people are building their balance sheets and strategically placing assets in there, they have a purpose… Much like if we were going golfing, and the name of the game is to hit the ball in the hole in as few shots as possible; people might spot the obvious if they’ve never golfed and say “Hey, the one that I can presumably hit the ball the furthest with is the driver.” Now, you can have 14 clubs in a bag, but if I gave somebody a bag of 14 drivers, good luck playing an actual round of golf.

We’ve heard the saying “There are two things certain in life – death and taxes” and I have a third, and it’s that life doesn’t always go according to plan. So these folks have found a way to position themselves to be able to pivot and move strategically in these subtle nuances that make consistently large differences spread out over extended periods of time, just in the same way as in my golf example we certainly can’t hit the ball with a sand wedge or a putter, but if we plan on scoring, well, we’re gonna need them.

That would be one thought with it, and then the other side is looking at what I’ll call a collective return [unintelligible [00:17:10].02] What I mean by collective return is if we’re getting — I’m gonna make up a number; somebody comes to me and says “Okay, Chad, I get 15% or 20% on my real estate deals historically.” And then maybe they’ve got cash on their balance sheets, and maybe their 10 million dollars of cash on their balance sheet is getting – again, I’ll make a number – 1%, but they’re in a high tax environment like we are in California, they could theoretically be paying North of 50% in taxes. So if they’re paying 50% on 1% and they net a half, but inflation might be 2%-3%, it’s a mathematical drag on their balance sheet. So while they may be experiencing positive returns in real estate or some other assets that they invest in, and they have this negative drag that’s a necessity perhaps in real estate, they need to start looking at everything as a collective, and then isolating and saying “Okay, how do I make this piece for the purpose it’s meant to serve as efficient as possible?” And most of them are very superb at what they do in investing in real estate, and it’s often some of the unknown spots that they get caught up.

Joe Fairless: Based on your experience working with investors, and also growing up in a real estate investor family, what is your best real estate investing advice ever?

Chad Shaw: My best real estate investing advice ever would be to view the collective goal as one, and stay connected with the Why you’re doing it. What I mean by that is view this journey, this adventure of building your real estate empire with purpose. Somebody once told me “Your values determine your goals, your goals determine your strategies, your strategies determine the tools that you use.” Sometimes people start with the tool or the strategy; owning real estate is a tool, it’s a strategy, it’s not necessarily a plan.

Along those lines, sometimes people get caught up in the economics of it and they forget that there’s this emotional component as well as to how they feel, or how their family feels, and then once they wake up and say “Hey, I forgot what I was doing this for” – and I hope that never happens to them, but if they wake up and say “Hey, I forgot what I was doing this for… It turns out I don’t want more real estate, or I don’t want more return.” Those are just the means to an end, and that end is X. It’s a happy family life, it’s a lifestyle that I desire, it’s peace of mind. But if once a decade you’re in a position where things are chaotic because we stretched ourselves and you can’t sleep, and I’ve had clients that have told me they didn’t sleep for two or three years during different periods of time.

My advice would be to connect those values and those goals and remember why you’re doing it, and view everything as one, instead of just in a silo of saying “How do I make the most money?”

Joe Fairless: I love it. That will allow us to have a sustainable career in whatever we do, because as we have the peaks and valleys, we’ll be able to ride through that because we’ll have a more compelling reason why, versus just doing it just for the sake of trying to get cashflow.

Chad Shaw: You’ve got it. It’s the big mistake versus the little mistake. A little mistake might be “Hey, maybe we’ve missed out on a little bit of return or this potential opportunity here”, but the big mistake might might be sacrificing your family’s emotional health, or maybe over-extending yourself and having everything come crumbling down to nothing, and the emotional tolls that come along with that.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Chad Shaw: I’m ready, my man.

Joe Fairless: Alright, I know you are. First though, a quick word from our Best Ever partners.

Break: [[00:20:53].02] to [[00:21:45].16]

Joe Fairless: Chad, what’s the best ever book you’ve read?

Chad Shaw: Best ever book I’ve read… I’ve read a lot of good ones; I’ll give you the most recent one – I would say Ray Dalio’s Principles. If I’m allowed to add in a second one, I don’t know if it’s in book form, but Jim Rohn had an audio program called Challenge To Succeed; it’s four hours and some change long, and I’ve probably listened to it 50 times. It’s changed my life.

Joe Fairless: Best ever deal, or in your case maybe a client story, that you can think of?

Chad Shaw: The best one that I can think of is taking a guy that was a real estate investor and business owner, and just by some strategic restructuring of his assets and plans, we ended up redirecting somewhere in the ballpark of 20-25 million dollars to people that he loves and cares about and charities that he cares about, that otherwise would have went to our friend, the tax man.

Joe Fairless: Oh, yeah… I love that. Let’s see – what’s a mistake you’ve made as a business professional?

Chad Shaw: That’s a good question. The biggest mistake that I’ve made as a business professional was just putting my head down and again, thinking if I built more, everything would sort itself out, instead of sitting back and thinking at some of the big picture. Being a business owner and investor myself, I experienced the same ups and downs as everybody else. So the early years was full of metaphorically getting punched in the mouth, and just like the fame philosopher Mike Tyson said, everybody’s got a plan until they get punched in the mouth. From a business standpoint, it happened earlier on, and I hope I’m learning from them.

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

Chad Shaw: We’ve been doing a few things the last couple of years. This last year we’ve built a playground; we’ve raised some money and we built a playground through a company called KaBOOM! that helps put playgrounds into low-income areas. This year we’ve been raising money and giving back with an organization called Negu… Jessie Rees Foundation – awesome, awesome organization, helping out kids with childhood cancer. I’d say those are the two biggest ones at the moment.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Chad Shaw: The best way is — Megan is in charge of my schedule. Her number is 949-863-5893, or folks are welcome to e-mail me at Chad.Shaw@nm.com

Joe Fairless: Chad, I really enjoyed our conversation and learning more about your philosophy and your approach. The three layers of a savvy investor – one, be growth-oriented with a focus of income; two, never be forced to sell anything at a loss, and three, be in a position to buy when everyone else is losing… And view things over decades or even centuries, versus months or years.

Thank you for being on the show. I hope you have a best ever day. I really appreciate your time, and we’ll talk to you soon.

Chad Shaw: My pleasure, thank you.

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