JF1363: How To Create Passive/ Residual Income Through Real Estate #SkillSetSunday with Matt Theriault
Matt has shared his lessons learned quite a bit already through his own podcast, Epic Real Estate Investing. Today he joins Joe on the Best Ever Show and explains how anyone can create residual income through real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Matt Theriault Real Estate Background:
- USMC “Desert Storm” Veteran who enjoyed 15 successful years in the music business prior to becoming an accomplished real estate investor and mentor
- Has built a cash flowing real estate portfolio of 100+ units over the last 10 years
- His approach to real estate investing is conservative, simple and efficient.
- Based in Los Angeles, California
- Say hi to him at https://epicrealestate.com/
- Listen to his Best Ever Advice Here: https://joefairless.com/podcast/jf86-eliminate-these-points-of-failureor-else/
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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, Matt Theriault. How are you doing, Matt?
Matt Theriault: Very good, Joe. Good to be here.
Joe Fairless: Yeah, nice to have you back on the show, my friend. Best Ever listeners, you recognize Matt’s name and voice probably because he’s been on the show a couple times. The first time was an episode way, way, way back – episode 86! I have no idea what episode number this is. I know it’s in like the 1,300’s, so it’s been about 1,200 or so days since we last talked, at least initially… We’ve talked I think since then, too. Welcome back to the show, my friend.
Matt Theriault: Thanks, and congratulations on so many episodes.
Joe Fairless: Yeah, thanks a lot. A little bit about Matt, just as a refresher – he was a marine, and he is a Desert Storm vet, so first off, thank you for your service.
Matt Theriault: You bet.
Joe Fairless: And he also enjoyed 15 years in the music industry prior to becoming an accomplished real estate investor. He’s got a podcast, he’s got a website you’ve gotta check out, EpicRealEstate.com (if you haven’t already). That’s also in the show notes link. He’s based in L.A.
Today we’re gonna be talking about how to create passive residual income – that is a skillset that we’re gonna be talking about today, because it is Sunday, and we’re doing a special segment called Skillset Sunday, like we normally do on Sundays.
With that being said, how should we start our conversation?
Matt Theriault: [laughs] Yeah, I get e-mails like that, like “How do you sell a house?”
Joe Fairless: Right, yeah.
Matt Theriault: How should we start the conversation? Well, I guess maybe start with why you would even want to create residual income.
Joe Fairless: Yeah. From your standpoint, I think wanting to create residual income – or for anyone’s standpoint – that’s most people’s goals, but the challenge is most people have a certain amount of money to invest, and we’ve got to do it intelligently so that we maximize the return on time and on our time, so what’s the approach you take us through?
Matt Theriault: Well, I think in any real estate investing strategy, regardless of what it is – apartment buildings, or mobile homes, or storage facilities, or single-family residence – I think every single strategy begins with find the deal. You’ve gotta find a deal, preferably with equity already in place. Secondarily, one that’s gonna meet your own minimum deal standards, that’s gonna get you to your goals the fastest. And if your goals are to create residual income, then you have to set some sort of barometer, I guess, on what type of deal is gonna get you there the fastest.
And then also just shifting the mindset, shifting that mindset from saving piles of cash to creating streams of cash is a big shift, and it’s easier to say and easier to think about and come up with the idea that that’s a good idea, but actually taking action on that on a daily basis can be really difficult.
For example in our office, on a daily basis, we’re faced with the decision – do we flip this property and put $30,000 in our pocket, or do we hold on to it and put $300 a month in our pocket? That’s a really tough decision to make, particularly when you’d actually be staring at that pile of cash… Because most people would wanna flip the property and take the 30k, thinking that they’re progressing and they’re moving forward, and in all reality, when you start doing the math, you’re actually taking a much longer path to get your residual income goal, because you probably have to flip ten of those properties to put that money in the bank somewhere, earning a 4%, 5%, 6% in something very traditional, to generate that $300/month of passive income… Or you can just hold onto that one deal and create $300/month of passive income.
I think once you start getting that math and understanding the seemingly slow route and small cash route is actually the fastest route to get you to your residual income goal, I think that’s a big barrier for a lot of people to overcome.
Joe Fairless: Is there a certain point where we should switch from the piles of cash to then creating a stream, or should we go straight out of the gate creating streams.
Matt Theriault: Yeah, I think with every deal you find, it should be your intent to hold it. That should be the intent. Now, it’s not always going to be feasible or practical to do so, but I think you should look at every deal “How can I hold this?”
If you think back and you go 20 years ago, and compare what your life would be today if one path you chose “I’m gonna flip 20 properties” 20 years ago, or “I’m gonna buy and hold 20 properties” 20 years ago, where would you be today? Even if holding each one of those properties was an extreme struggle to do and you had to play all resources and all ingenuity and everything you could, and even make sacrifices, where you’d be today would be just a significantly different place, a much better place.
Joe Fairless: And with that approach – there’s pros and cons with every approach – the con would be that you won’t get… Well, I’m about to correct myself, so let me just go with the initial thought, and then we’ll say how this could be a solution… But the con could be perceived that you’d go get the streams of cash slower, because you’re not selling the properties, but I imagine your answer is cash-out refinance.
Matt Theriault: That, or the streams of cash – one comes from work, and one comes from management, right? So to create those big streams of cash faster, like that $30,000 flip – once you flip it, you’ve gotta go find the next deal. So you’re constantly working. You’ve got a job, a high-paying job albeit, but it’s still a job; you’re never gonna get to take your foot off the gas. So with residual income, it seems slow – $300/month on that first deal, that’s not gonna make a significant impact on anyone’s life; it’s not gonna change anyone’s lifestyle too much. But if you wanna get to $10,000/month, you have to get the $300 one out of the way, so you can put the next one to create the $600, to do the $900. Then once you’ve got four or five of these things under your belt, now it’s all really starting to make sense.
Joe Fairless: I’m thinking about when I got started, my situation – it took me 2-3 years to save up $20,000, I bought a house, and that got me $150-$200/month in income. And if I would have — instead of buying more of a turnkey property, if I would have bought a value-add deal and successfully increase the value of the property and then did a cash-out refinance and held the property, then I could have gotten farther faster, versus what I did initially… I just bought basically four turnkeys, and it took me about — first one a couple of years, and then the one after that a year to save up money for each of the next ones. So I could have gone faster if I had done more value-add deals and did the cash-out refinances.
Matt Theriault: True. And choosing that path and going turnkey – I actually buy turnkey properties myself these days, just because I don’t feel like doing all the work all the time… But going that route, you’re paying a premium for someone else that has gone out and found the deal and found the equity, and they’ve marked it up and given you something, they’ve given you this finished product.
The way to do that a lot faster when you’re talking about saving money – that’s the mentality of a lot of people… They think they have to make a lot of money and save a lot of money to start buying these properties… But if you go out and get your hands dirty and you get a little bit more involved, and you’re actually sourcing the deals yourself, you’ll find that it’s a difficult thing to do, and because it’s a difficult thing to do, it holds a lot of value in the transaction… Meaning that you might feel like money is the hard part for you – just recognize that for somebody else that’s the easy part for them; find the deal is the hard part for them, where it could be the part that you focus on, where that’s where you bring the value to the table.
So you can really accelerate by just contributing different aspects through the transaction, and there’s a whole lot of value in finding the deal, and it doesn’t take $20,000 to find every single deal. So that’s another approach to do it and really accelerate your progress in that fashion.
Joe Fairless: We’re talking about creating passive, residual income… With your personal portfolio, how would you break out the categories by percentage for where your passive income is coming from?
Matt Theriault: I was just asked this question a little while ago… It’s about 60% of single-family homes, 40% notes on single-family homes.
Joe Fairless: Got it. So no commercial stuff. How come no commercial?
Matt Theriault: I went down that road and I fell on my face miserably, so I came back to what I know, and now I am much smarter and experienced, so we’re getting ready to pull the trigger again on commercial… But I just got started with single-family, I got good at it, and so that’s why it’s there.
Joe Fairless: And what have you done differently as you’ve started, to now where you’re rockin’ and rollin’ with the single-families, that you can share with us, that will help us get better if we are investing in single-families?
Matt Theriault: Really when it comes down to — and to all passive income… A lot of people income passive income with uninvolved income, and that’s a big mistake. You still have to manage it, and I think the secret to cashflow, regardless of what the asset class is, is the management of the asset. Property management – you’ve gotta do as much due diligence on your team, on your property manager, as you do on your properties themselves. So that’s where we’ve made a lot of mistakes, but we’ve been able to pull it all together to where now it works for us.
So people will look at diversifying their asset class, they’ll look at diversifying their location… I’d recommend everybody diversify their teams as well. In every market – this is what’s really made it work for us – we’ve got at least two property managers. We make sure that they know about each other; not in a evil, mean-spirited way, not in a gross, ugly, competition way, but we do make them know that we’re working with somebody else in their market… And what we’ve found is it inadvertently just kind of forces performance to go up, it forces expenses to go down, and you just get better service. That’s probably the biggest thing that we’ve been able to put in place, that has increased and stabilized the performance of our properties or our cashflow.
Joe Fairless: You mentioned diversification of asset class, teams and locations. Clearly, you’ve got the diversification of teams that you’ve just mentioned… It doesn’t sound like you do with asset class, and then what about locations?
Matt Theriault: So the asset class – I’ve got notes and properties, so that’s the diversification there… And we’re looking to go back into commercial. So I’ve got single-family and notes, and we’re gonna be back into commercial, so that’s our diversification of the asset class.
The diversification of the geography – we’re in 12 different markets across the United States, so we’re probably most diversified in the location than anything else.
Joe Fairless: When you look at a market, what are some of the characteristics that you look for?
Matt Theriault: Good question. We look at all the normal stuff that everyone else looks at. We look at what is the job space like, is the industry diversified, the major employers diversified? What’s government contributing? What’s the migration and the population look like? We look for all that stuff that everybody else looks at… But what really determined whether we go into a market or not is the relationship with our team, the property management.
You can find the best market, with all the market indicators that point up and give it a green light, and you go in there with bad management, that’s gonna be a terrible experience for you.
Joe Fairless: So true.
Matt Theriault: You can go into a mediocre market with a great team, and that can be a fantastic experience for you?
Joe Fairless: What type of properties? Can you give us an example of maybe the last deal that you bought? What type of property is it, from a single-family standpoint? Returns, that sort of thing.
Matt Theriault: We’ve just picked up a single-family in Birmingham, Alabama. I like that market. We happen to have our best team there, but I also like the market, because over the years we’ve had a good experience of cashflow and appreciation, which is kind of hard to find in the same market. But it’s like a 13% cash-on-cash return, with leverage in place, in a nice neighborhood; I’d call it like a B-, B neighborhood… Good tenants, good management… It’s been really easy. I think we’ve got a dozen in Birmingham now. I really like that market.
Joe Fairless: With taking a giant step back – our conversation is around creating passive residual income, and we started out by talking about finding a deal that meets your goal, and then you said instead of creating piles of cash, you create streams of cash… So from a Best Ever listener standpoint, what would be some practical steps coming out of this conversation that they can do to create that residual income?
Matt Theriault: Practical steps… I would say the first step is focus on finding the deal, and recognizing that 95% of all real estate transactions that happen are conducted through people that want to sell. No one in their right mind is gonna give you a deal on their real estate unless they need to sell, so you need to look for that 5% that need to sell. There’s some sort of distress in place – there’s financial distress, there’s personal distress, or the property itself is in distress… And just kind of going with the mindset, understanding that people will exchange equity for peace of mind.
So I think the first practical step is identify the type of problem that you want to solve for people… Somebody that just went through a divorce, or somebody that just went through bankruptcy, or someone that’s in foreclosure, or someone that has liens on their property, whether they’re tax liens or [unintelligible [00:14:39].28] or code violations…
So identifying the problem that you’re going to solve, and then promote the solution to that person of what they’re looking for… And come to them as being the white knight on the horse, and they’re gonna give you equity in exchange for being that person. So I think just identifying who’s the person you’re gonna help, and deploy all resources in helping that person, so you can get that deal under contract.
Joe Fairless: What’s been a challenging problem that you and your team have solved for a person?
Matt Theriault: A challenge for a person?
Joe Fairless: Yeah, for a property owner… They had a really challenging problem.
Matt Theriault: One that comes up frequently is someone that inherited a property and they live on the other side of the country, and they don’t feel like flying out to see the property, to try and hire a realtor and sell it. They just want the cash. That’s something that comes up frequently, and that’s pretty easy to do.
Another one is — recently, someone had a job transfer, and they had to get up and go, and they had no time to go and sell their property through conventional channels… And what we were able to do is put that property on the market for them, and find an investor/buyer for them, but in the meantime, while we were looking for them, we were able to pay for their moving expenses and storage of all their belongings that were in their property.
That cost us I think $1,000 for the three months that we were storing their personal property from the house, and then I think we paid like another $2,000 for their first and last month’s rent, to move into their apartment… So we put in $3,000 there, and that probably got us another $20,000 discount on the sale, for the purchase of the property.
So those types of problems, people are like “Just make this go away for me, so I can get on with my life”, and they’ll gladly sell to you at a discount.
Joe Fairless: On the commercial real estate front, what happened?
Matt Theriault: The first thing was I went in buying a 14-unit, thinking that “Hey, how difficult could this be? Just 14 houses underneath one roof.” I just kind of did not understand the nuances of managing an apartment building… And when it seemed like that one was going good at the beginning, I went wide too fast; I went on and bought a 50-unit building, a 44-unit building, and 8 and a 12, all just because they kept coming to me, and they were so cheap.
But [unintelligible [00:17:02].28] way wide before I went deep and figured out how to make it work, and it just caught up to me.
Joe Fairless: And what are some specific things that now that you’re getting back into it you’re gonna do differently for making it work?
Matt Theriault: Definitely do a lot more due diligence on the front end, with regard to expenses and what the actual costs are to owning that property. Be prepared to pay double what the rehab budget is… It doesn’t necessarily means I’m going to, but I need to be prepared for that. And third would be to really vet whoever is going to manage that building for me.
Joe Fairless: And when you really vet them, what will you be doing differently that you weren’t doing before?
Matt Theriault: Giving them small tasks up front. One of the things we do for our property management now is we have a list of questions – I think we just googled it… Questions to ask property managers. It’s really the process of asking the questions, not the questions themselves that we’re looking for. So we’ll ask four of the six questions that we’ve got over the phone, just to kind of get a feel about the personality and the vibe…
They’re always gonna tell you what you wanna hear on that first call, so you never know if you’re getting the truth or not… But then we’ll call back after hours and leave two more questions on their voice mail, and wait to see what their response is. So that’s one of the small things that we do. We’ll do a lot of things — “Hey, if you were in my shoes, what would you do?” type questions.
With our single-family, I don’t know how this is gonna be different or how we’re gonna pull something off equivalent with the multifamily, but with our single-family we just give them one property to start with, and then we just micro-manage the hell out of them, and if they don’t like it, then they’re not gonna be the person for us… But if they do good, then we’ll start giving them more and more, and the more that they prove themselves, the less we’re breathing down their neck.
Joe Fairless: You’ve mentioned throughout our conversation “we” and “us.” Who’s on your team and how do you have it structured?
Matt Theriault: Good. I work with my wife, Mercedes, and she has a full-time assistant and transactional coordinator. I have one person for my marketing, Miguel, and I have one person for my systems and automation and managing the database – William. Then I’ve got a media team that provides Miguel with all the marketing materials.
Joe Fairless: The systems and database that William works on – what types of systems and databases (or database) do you use and find effective?
Matt Theriault: I found a system called REI Solutions. It’s a CRM and marketing machine all underneath one little umbrella. We went out and we tried the Podio thing, and it just kept on breaking on us, and we became more in the IT business than we were in the real estate business, so we just went with something ultra simple. So REI Solutions is what we do… It actually has the whole call rail engine inside of it. It’s got the testing features, it’s got landing pages, it’s got websites, and then it’s got project management… That just all works as one cohesive unit inside of that system.
Joe Fairless: Anything else that we haven’t talked about as it relates to building streams of residual income, that you think we should?
Matt Theriault: Just make it your intent to hold everything. It doesn’t mean you have to, but just make it your intent, and understand your marketing efforts and your deal-finding efforts – it’s not always going to produce stuff that you want to hold or that would be holdable, but there’s still alternatives of where you can make money on that… So don’t be afraid to flip a property or flip a contract. I think every business needs active income as well, while they’re building their passive income. I just wanna make sure that that’s clear – it’s your intent to hold everything, but a lot of times you’re not going to, so you might as well make some money off of it anyway.
Joe Fairless: Yeah, and you sell and then do a 1031 exchange, assuming that the numbers work out.
Matt Theriault: Totally. There’s endless things that you can do once you have the deal. That’s why I place so much emphasis on finding the deal. Because once you’ve got the deal under contract, now you’ve got all kinds of options.
Joe Fairless: Matt, thank you for being on the show. How can the Best Ever listeners get in touch with you or your team?
Matt Theriault: If they’re listening to this podcast, then you can go to Epic Real Estate Investing Podcast. The domain name of the website is epicrealestateinvesting.com. Either one is a great way to get in touch with us.
Joe Fairless: So when we come across an opportunity to make 30k or $300/month or something similar to that choice, we’re now gonna pause and think about this conversation… And think about creating streams of cash instead of piles of cash, because eventually we have to get to the $300 if we’re gonna get to the $10,000 or a million dollars a month, or whatever our goal is… So we’ve gotta start somewhere, and there are ways to access that equity even when we have a hold. Or if we do sell, then 1031 or other ways — so it’s just a thought process that you’re talking about. It should be our intent to hold it, and then we’ll maximize the opportunity as we have the opportunity.
Then also I love that you went into the three updates to your approach on commercial investing, the due diligence on the front-end, being prepared to pay double for what the rehab is, and really vet the management team… I love the example of calling after hours and asking questions to see what their response is from a time standpoint, but then also from a quality response standpoint, so thanks for sharing that.
Thanks again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.
Matt Theriault: Thanks, Joe.