June 3, 2021

JF2466: Things to Know Before Investing in Real Estate

Today Theo and Travis are sharing their mistakes so you don’t make them.  From doing due diligence and finding good team members to finding mentors and teaching their children, listen for things to know before investing in real estate. 


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

Travis Watts: Doing great, Theo. Happy to be back.

Theo Hicks:  I’m really looking forward to this topic. We’re going to dive into some stories that I have and that Travis has, because the topics of today are things to know before investing in real estate. I’m going to talk about my stories from an actively investing perspective and then apply it to passively investing. I’m sure Travis is going to be a little bit of both, because he’s done active and passive… But the whole idea here is to provide some mistakes, bumps in the road that we’ve experienced, and then the takeaways we’ve gotten from those, so that as Travis is going to say, we’re able to learn from other people’s mistakes and not have to do them ourselves. Travis is always going to give us some reflections on why we are talking about this topic today.

Travis Watts: Yup, that’s exactly it, Theo. The famous quote –I forget who quotes it– “We all learn from mistakes, but those mistakes don’t have to be our own.” That’s very true, just from a human standpoint. But that’s the point of this, is to help everybody listening circumvent the circumstances. To your point, some tidbits and some advice to help all the listeners make better decisions. I’m curious to hear your stories. We haven’t discussed any of this, it’s freehand, and vice versa. So stories of success and failure. I’ll let you start, Theo, if you want to pinpoint one or two, and then I’ll dive into some as well.

Theo Hicks: Yeah, so mine will be focusing on stories of failure. I’ve got two things that I wish I knew before investing. Funnily enough, both of these lessons really apply to a lot of the things we’ve talked about on the show before. The first one is the focus on doing your proper due diligence, and then the second one is the importance of having experienced team members, not just team members. Again, these are active investing, but I’ll twist them into how they can apply to passive investing.

For proper due diligence, I bought three fourplexes in one go. They’re on the same road, they’re definitely older, I think, built in the 50s or the 60s, and they all had boilers. I had never bought a property that had boilers before. So I had the inspector go through it, he inspected everything, and there’s a couple of things that came up that were not necessarily deal-breakers. I moved forward; didn’t re-negotiate the price, just moved forward. I think I bought them in late summer or early fall. So winter comes around and I looked up what we must do for boilers. It said you need to basically get them turned on. I find some guy to come out and basically just turn the boilers on for me. He goes there and he essentially identify all of the problems, not only with the boilers themselves, but the radiators in the actual units.

It cost so much money to put band-aids on the boilers, and put band-aids on the radiators… And he walked me through, once he identified all the problems, and they were so obvious. You could just look and see that this radiator was completely rusted out. But the problem was that the inspector that I used didn’t specialize in boilers. I learned that boilers are more or less unique, at least in this area of investing… So you had to find someone who specializes in boilers to look at them. These boilers were so old, and probably original. Obviously, the lesson here is to do your due diligence, but you need to have that understanding of what to even do due diligence on in the first place.

This kind of plays into my next point about having experienced team members that realize, “Hey, you should probably have these boilers looked at.” But the whole point is that I could have saved myself a lot of money and stress by doing that due diligence upfront. As a passive investor, you know, when it comes to doing due diligence on the team, the market, the deal, you can just look at it on paper and say, “Oh, this looks really good” and not really dig any deeper, and you might be okay, but you might also have the equivalent of a rusted-out boiler occur at some point during the deal. Again, one thing I wish I knew beforehand was how important was doing your proper due diligence was, and actually diving deep and not just doing the surface-level stuff. That’s number one.

The second one – it kind of plays into the number one, but that is experienced team members. A story here is that I was actively managing my own property. I was the property manager and I was not a fan of it at all, so I decided to get a property management company. After the whole boiler debacle, I wanted to make up some of the income by getting a property management company that would basically charge me the least amount. I used someone who had a very small portfolio of properties they were managing at the time, and by taking my portfolio, it essentially doubled their units under management. I won’t go into too much detail, they were really nice people, but in a sense, they were learning on my dime. They hadn’t managed that many properties before, they didn’t have the efficiencies that a large property management company will have… They weren’t really implementing the best practices.

As a result, I was paying them less money, but the cost savings that were missed, or the extra expense that came from that, more than offset by the amount of money I was saving, so I was probably spending more money. The lesson here is it’s better to pay a little bit more for someone who knows what they’re doing, than to pay them a little bit less, but have them literally learn on your dime.

In a sense, it’s kind of what the whole passive investing strategy is in the first place. You can kind of go out there and figure it out yourself, or you can hire that experienced syndicator who knows what they’re doing and is not necessarily learning on your dime. It’s fine — sure, people will invest with someone in their first deal and it could work out perfectly fine, but I would much rather invest with someone who’s been doing this for a long time. Just like I should have hired a property management company that was managing properties for a very long time. Those are the two biggest things I could think of, that I wish I knew beforehand – the due diligence and then the experienced team members.

Break: [00:06:31][00:08:33]

Travis Watts: For anyone who’s ever had a property or single-family home that they live in with a boiler, it can be a lot of trouble. I only had one house, thankfully, they had a boiler. 1932 built. It was at that point where when we moved in it’s “Should we upgrade this system and just go modern, or just keep it in place?” And to your point, it’s very expensive to maintenance them. So we made the decision to keep it in place. That thing flooded our basement, I was always down there having to clean this thing out; to your point, it was rusty, and you dump in these nasty buckets of water all the time… It was nothing but complications. Somewhat efficient on just the heat and your overall bills, but then the second something goes wrong, it’s thousands of dollars. so I guess you’ve got to put that in perspective.

That could certainly be a red flag too, if you’re a passive investor, someone’s buying an apartment complex and they have lots of boiler systems… Just keep in mind if they’re washing over that, like “Oh, no big deal. It’ll be fine.” It may not be fine. Great point.

And then to the point of specialty – I love it. We’ve talked before, my story on that was about finding a CPA that specializes in what you do, particularly… And it wasn’t until I made that shift that I realized, “Hey, I’m now saving tens of thousands of dollars.” That’s pretty critical… Where I was trying to cheap out before, because I had a tax prep service; it wasn’t even a CPA, it was just a tax prep service… And I was paying them next to nothing. A couple of hundred bucks for my tax returns. Well, now I pay almost five grand for tax returns; I have to file two. But still, I’m saving so much money, because they specialize in proactive approaches, strategizing, and planning. It is so important to find specialty. Great topics, love those.

Okay, so a couple for me. Since you went with the failure route, I’m going to go with the other side of the coin to kind of balance it out. I was thinking about that as you were talking… I don’t want to be a doomsday episode with all of our stories. So number one to me – and we’ve talked about it a lot, but it’s the foundation for me – is having a mentor and self-education. Nothing cuts the learning curve like somebody who is experienced, somebody who’s done what you want to do successfully, and being able to meet with these people. Whether that means paying for mentorship, or a program, or coaching, or it just means networking and finding a buddy, whatever it is. I’ve mentioned this before, in 2015 I read 52 books that year. Wow, cool; you think that’s a great thing. But what can a book not do? At the end of that year, it couldn’t tell me about the current status of the economy. It couldn’t tell me if that book were in my shoes, what actions would it take?

It wasn’t a mentor, it was a mentor of sorts; it helped open my mind to bigger ideas, but there was no practical immediate takeaway or action from it. Mentors are just invaluable, or they can be, I should say. I mean, not every mentor is a great mentor. And mentors change, too; you may need a mentor to get you to the next level, and then that mentor is no longer relevant for what you need to do now. So mentors change. It’s just this idea that you’re leveraging people’s knowledge and experience above you. That’s really what it comes down to.

So I found a couple of mentors in 2015. A quick story on that… This is when I was shifting from single-family home investing to multifamily syndication investing, and I found a couple of guys who were in their 60s and 70s and they’ve been full time limited partners for decades. That was a route that I was exploring at the time, “Is this right for me? If so, I’d like to find someone that’s actually done it and pick their brain.” This is exactly how that unfolded. They opened up to me, they shared their experiences, I fell in love with the concept of being a full-time passive investor, and the rest is history. Six years later, that’s what I do. So it can be huge. So that’d be number one.

Number two is just knowing that you can passively invest. Right now, I’m helping my nephews learn passive investing. The youngest is 14 and the oldest is about to turn 19, and I’ve opened brokerage accounts for them, and a couple are custodial accounts… But just starting with 100 bucks; teaching them this concept that if you buy a publicly-traded REIT that does monthly distributions, even if you’re only getting $1 a month, this is passive income. This is income coming into your portfolio that you’re not having to work for, and all you’ve got to do from here is scale it up; every time you’ve got an extra 100 bucks, put it in your brokerage account. When you get 1000 bucks, put it in your brokerage account. One day, hopefully, they’ll take that seriously, and over 20 to 30 years they’ll be so far ahead of most of their peers and have an actual cash flow that they can live on and have choices in life with.

When I started in 2009 in real estate mentor, I just thought that real estate investing meant “Buy a single-family house and self-manage it or flip it.” There are only two things you can ever do in this world – this was my mindset back then – flip a house or buy and hold. I discovered so much more, with short-term rentals, with house hacking, and with all these creative outlets… But ultimately, as many know how my story unfolds, after five or six years of doing everything myself, to your point earlier, Theo, self-managing, building these teams, finding out a lot of teams aren’t competent, I cheaped out on a property management company that promised me the world and then ultimately, they quit on me, because I had some tenants that were kind of rough and tough to deal with, and it just wasn’t worth their time. For what they were getting paid, it was like “Hey, we’re dropping you as a client.” It really sucks just to learn all this.  And what I learned through this whole process was why am I actively in real estate. The foundation of our show, the Actively Passive Show, is to talk about active and passive components to investing. Active is actively participating in the business of real estate. It’s finding your own deals, it’s doing your own underwriting… And/or. It doesn’t have to be all of this. Managing your own properties, finding property managers to manage your properties, deciding when to refinance or sell – these are active strategies and these are active components, and I didn’t realize you don’t have to do that. You can invest in real estate and you can be passive. So what does that mean?

I just pulled up actually the definition right before our show… So a passive investor is one who does not participate in the day to day decisions of running a company. In partnerships, such investors may be deemed limited partners rather than general partners. That’s exactly it. I’m talking about being a passive investor in real estate private placements, a.k.a. syndications, or like my nephews are doing, buying REITs and stocks that give out dividends or interest, and stuff like that.

Break: [00:15:26][00:16:03]

Travis Watts: I wrote a blog about a year ago –I can’t remember exactly when, but I think it’s on joefairless.com– How to Earn Less and Have More. This was my key pivot moment. This was the big picture for me. What it paints in this blog is you could have $300,000 a year, let’s say, in total income, working 80 hours per week. Or you could have 200,000 per year in income working 40 hours per week. The whole point was, if you read through the blog, it’s about quality of life. I used to work 100 hour workweeks, and I would try to do single-family investing on the side of that. All in all, I don’t know, 110 to 120 hours a week. It was ridiculous. And I had no life. When you do that long enough, money (to me anyway) quits mattering. It’s like everyone said, “Do you want to be the richest person in the graveyard?”

At a certain point, you need to live your life. That’s my philosophy on it. So I’m much more inclined to take that option of 200k a year working 40 hours per week, where at least I have a balance of quality there.

So that was the biggest moment, “Is active or passive right for you?” Well, it depends and maybe you’re kind of a combination. But if all you do is active everything, you burn out, you max out, you start thinking, “Am I just chasing dollars here, and what’s the point over time?” So finding that balance is critical. I think that’s what passive income can provide to people.

So what is your time worth is the lesson learned. I discovered that basically giving up a little bit of profit, managing all the single-family homes, working 100 hours a week, moving away from that kind of model gave me my life back. To me, time was more important than money, basically. That realization was a game-changer. Those are my top two.

Theo Hicks:  I really like that concept of there’s the ROI, but it’s also the ROT, the return on your time. In that $200,000 working 40 hours a week example, versus $300,000 working 80 hours a week – sure, you’re making more money in one scenario, but that’s not really the only metric that matters. You need to also look at how much time you’re actually investing, which might arguably be more important than amount of money that you’re investing.

That’s kind of the biggest eye opening for me, was like I could buy these properties myself, deal with dumb boiler issues, and have to deal with investing a lot of time and also energy and stress, even though I’m not necessarily at the property doing stuff… I’m thinking about it, it’s taking away from managing other things, to make a 15% ROI… Or I could just passively invest and spend 10 times less time and energy to make half as much. The ROT is so much higher for the first one, or the return of energy, or whatever you want to call it. I could totally agree with what you’re talking about in that second one.

For the first one, I’m not sure if it necessarily relates to passively or how it would, but a big thing for me when it comes to having a mentor – because there’s the pay them option, or it’s like someone you know or have built a relationship with and they do it for free… But then the third way, which is to actually work for that individual, which is what I did. Again, not necessarily sure exactly how that works for passive investing… So if we’re talking about things to know before getting into real estate, if you want to learn something, the best way to learn is to actually do it. And the best way to do it and to learn from other people’s mistakes, as we were talking about in the first place, is to work for someone who is further ahead than you are. They’re able to do things that you just can’t do, because you don’t have the relationships, the time, the money, or the experience to do. That’s kind of what happened with Joe, where Joe already had a couple of syndication deals and already had the infrastructure. I worked for him for free for a while and I learned so much. Now I have a full-time job working for Joe. Again, not exactly sure how that would apply to passive investing, but definitely along the same lines of how having a mentor.

Travis Watts:  Yeah, I can tell you one quick way how that relates to passive investing. Just working as Director of Investor Relations at Ashcroft with Joe, a lot of people come in with the goal or the mindset of eventually they want to be a general partner. They want to run their own syndications. But they recognize it, they need a little more mentorship and training. They come in as LPs in the deals, so that they can learn how we do the underwriting, how we do the reporting, what works and what doesn’t, what’s their approach, how do they address these different scenarios; they learn so much from that, even indirectly. Plus, of course, they have communication open to all of us there, including Joe. Then years later, they start doing their own deals. That’s one form of mentorship, as an LP.

Theo Hicks: That’s a good point. I mentioned that we have a blog post, something along the lines of Why I Passively Invest in Other Syndications. That’s a blog that Joe wrote and explains why he as an active GP, passively invests. It’s kind of what Travis talks about. It’s a little bit different, because Joe’s obviously already doing it, but the whole point is to explain how passively investing in syndications can help you become a better general partner, or eventually transitioning from being an LP to a GP.  So those are the two things that I learned, and then, I guess, two extra things based on what Travis talked about. Travis, is there anything else you want to mention before we sign off?

Travis Watts:  Bottom line, education starts here. Thank you, everybody, for tuning in to episodes like this. My take on episodes like this, and anything you read, any podcast or seminar, is that you’re probably not going to have a major breakthrough moment in a 20-minute episode or in one book that you read. But the point is to jot down a couple of things; get one or two takeaways from each person you talk to, all your mentors, all your podcasts, all your books. Over time, it’s that compounding effect that makes a big difference, and you will see that happen, that’s my firm belief; it just takes some time. Even if one thing resonated out of this that you took away, jot it down, put that in the storage bank, and then just keep adding to it. Over time, you’re going to realize a tremendous compounding effect. It’s something that Charlie Munger talks about all the time, Warren Buffett’s business partner – try to go to bed each night a little wiser than when you woke up. That’s the key. You’re not trying to hit these home runs or these big epiphanies every day, every week, or every year. But over time, it’ll pay off. That’s it.

Theo Hicks: ‘I just want to add one follow-up thing. I was talking to someone and they were talking about how they had this great idea while they were doing something, but then they forgot about it, and they lost it. Obviously, some people are doing a lot of this self-education while they’re driving, so I’m not recommending doing this while you’re driving. But you should always have your phone with you, and just open up an app, open up your notes, or text it to your significant other, so that way you have it and don’t have to recall it later. When you’re listening to self-help while you’re out for a walk or something, or you have some idea of some content you want to create… Again, it’s super straightforward, but I thought it’s interesting because I just recently had a conversation with someone who forgot something. I was like “Put it in your phone, [unintelligible [00:23:03].29]”

Travis, thanks again for joining us and telling us the two things that you wish you knew before investing in real estate. We have a total of four things to know before investing in real estate today. Best Ever listeners, as always, thank you for tuning in. If you want us to talk about a certain topic or if you want us to cover a topic on our 60-second question segment, you can email me at theo@joefairless.com, and we will add that to the queue. Thank you for tuning in. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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