May 30, 2022
Joe Fairless

JF2827: How to Create Financial Independence from Real Estate | Round Table


Each week for the Best Ever Round Table, the three Best Ever Show hosts — Ash Patel, Slocomb Reed, and Travis Watts — come together for a deep dive into a commercial real estate investing topic. 


In this episode, Ash, Slocomb, and Travis discuss financial independence as it pertains to real estate. 


 

1. Defining Financial Independence and Retiring Early

When discussing financial independence and real estate, the FIRE movement often comes up in conversation — Financial Independence, Retire Early. While Ash believes this is an important concept, he acknowledges that it looks different for different investors.

“For me, if I’m retired or not, I’m still taking down deals,” Ash says. “So I think it’s important to know what financial independence means to you, and what retiring early means to you.”

Younger people often think of financial independence as not having to work, but as they get older, that definition changes as well, Ash says. For him, financial independence meant having the option to leave his corporate job. It could even mean having the freedom to work full-time in a job you love, simply because you love it.  


 

2. Investing Strategies as Paths to Financial Freedom

Slocomb started his path to financial freedom by house hacking, He followed advice from Robert Kiyosaki’s Rich Dad, Poor Dad: Instead of going out and buying a Porsche, save the money and buy an asset that produces the cash flow that pays for the Porsche. “As an active investor, you can buy assets that will begin to cover that cost with cash flow and get to the point where you gain independence when your cash flow covers those living expenses,” he says.

Ash prefers to make both passive and active investments — the determining factor for him is returns. “Right now, multifamily passive returns are a lot lower than they were seven years ago when I started,” he says. “My own returns are much higher in commercial assets. When that tide shifts, if it does, I’ll reconsider passive investments.”

Travis, however, chooses fully passive income as a path to financial freedom. “Passive income can allow you to focus more time and energy on the things you love and outsource or spend less time on the things that you don’t,” he says. 



 

3. Pros and Cons of Active and Passive Investing

 

Active Investing Pros

  • Adding value to others and receiving value in return for your work
  • Having control over major decisions in a deal
  • Returns are less capped than returns available through passive investing

 

Active Investing Cons

  • Can become stressful
  • Can be very time intensive

 

Passive Investing Pros

  • Not having to make major decisions in a deal
  • Provides time freedom

 

Passive Investing Cons

  • Lack of control over major decisions in a deal
  • Can be very capital intensive

 

 

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TRANSCRIPT

Travis Watts: Welcome back Best Ever listeners. This is our weekly episode of the Round Table. I am here with Ash, I'm here with Slocomb, I'm Travis Watts, and we'll go around and do a real quick intro of who we are. I think we forgot to do that last week, but this is basically a round table where we have different topics every week. We gather our mastermind of thoughts, if you will. We've got a very exciting episode today we are talking about financial independence as that pertains to real estate. Going over different ideas, strategies, thoughts in general. Thanks so much for being here. Ash, if you want to start, just give the listeners --I know everyone should know you at this point, but in case they don't-- a little bit about your background, and then we'll follow up with Slocomb.

Ash Patel: Travis, thank you. Best Ever listeners, Ash Patel. I've been a full-time commercial real estate investor for over 10 years. I buy everything that doesn't have residents in it. Any commercial building, warehouse, industrial, retail, medical, land, office, all the non-multifamily assets.

Travis Watts: Awesome. Slocomb.

Slocomb Reed: Yup. I'm Slocomb Reed and I am an apartment owner-operator here in Cincinnati, Ohio. Primarily residential, a little bit of office rental. I started as a house hacker just about nine years ago, actually.

Travis Watts: Nice. Love it. For those that aren't familiar with me, I'm Travis Watts and I am a full-time passive investor, so I'm a limited partner mostly in multifamily syndications. I also work with Joe Fairless at Ashcroft Capital, multifamily syndication firm. We've got a very diverse background. I'm sure we've got a lot of overlap too in all of our experience, so I'm really looking forward to this conversation. As I mentioned briefly at the beginning of the episode, I think a lot of people are interested in real estate to begin with to build up financial freedom over time. There's been a lot of books written on the subject. There's a lot of conferences and trainings and mentorship things that you can join. So let's pull that together.

I guess let's start by talking about investing strategies, so different paths to what I call FI, financial independence, and what strategies you deploy personally, what you've seen work for other people. We're all co-hosts of the Best Ever podcast, so we've had a lot of experience talking to other people as well. No specific script here. Let's just go off-script with some general thoughts and things like that. So Slocomb, if you want to kick us off and share anything and everything on the topic of investing strategies.

Slocomb Reed: Totally. Thanks, Travis. In preparation for this conversation, I was thinking back to one of the sequels to Rich Dad Poor Dad by Robert Kiyosaki. I said I got into real estate investing as a house-hacker. One of the things that Robert Kiyosaki talks about when he explains how to invest or how he invests to increase his lifestyle, which is something that a lot of people are considering - instead of going out and buying the Porsche, to use Kiyosaki's example, save the money to buy an asset that produces the cash flow that pays for the Porsche. Coming from a larger scale mindset with a more sophisticated audience like the Best Ever listeners, that's effectively what house hackers are doing. They're buying an asset that covers some of their living expenses.

As a real estate agent now, I myself bought effectively an office building to put my office in that also has rental space that I'll be able to use the cover the cost of having my own private office, in my own neighborhood, a few blocks, a nice walk from my house.

So speaking with regards to financial independence and understanding effectively the expense that your lifestyle costs, as an active investor, you can buy assets that will begin to cover that cost with cash flow and get to the point where you gain financial independence when your cash flow covers those living expenses.

Travis Watts: 100%. I love that. A couple of things that piggyback off of that. I think a lot of us got in the real estate game in one way or another because of Robert Kiyosaki's words of real estate. Funny thing is though Rich Dad Poor Dad really isn't a real estate book. It's more of an accounting book, but it definitely opens your mind to thinking about taxes and cash flow, to your point. Very cool, man, I like to hear that stuff. Ash, general thoughts on just investing strategies, either things that you've done personally, or to piggyback off what Slocomb said, or what you see a lot of people doing these days.

Ash Patel: I'll get into investing strategies, but I want to talk about financial independence. I think when we're young, our version of financial independence, or our definition, is we don't have to work. You want to sit on an island in Mexico and never have to worry about money. Maybe that's some people's definition of financial independence. For me, it was getting out of the corporate grind. I did it for 15 years, did well at it, but never enjoyed it, was never passionate about it. So to me, financial independence was working for myself or doing what I love doing, and not having to wake up and report in to a corporate job and play politics and fight for promotions that are well deserved.

Even today, I am a full-time commercial real estate investor. I often work 12-hour days, but I consider myself financially independent. My wife is the same thing. She absolutely loves what she does. I've asked her, "Why do you work? Why don't you stay home? You don't need to work, find something else to do, do what you enjoy doing." Her response is always, "I love what I do. I want to do this." So to me, that's financial independence when you're doing what you love. I don't think sitting on an island is going to be as enjoyable as taking down real estate deals.

In terms of strategy and investments, I've done both, and I continue to do both in terms of active and passive investments. I started out actively investing in my own deals, and never stopped, but when I found out about real estate syndications, I thought, "Man, what a great way to grow money." Later I found out there's some great tax consequences that come along with that as well.

So now, what makes the determination of an active or a passive investment is the returns. Right now, multifamily passive returns are a lot lower than they were seven years ago when I started. My own returns are much higher in commercial assets. When that tide shifts, if it does, I'll reconsider passive investments.

Travis Watts: Love it. You mentioned some awesome things. Anyone who's ever followed, for example, one of many examples - Kevin O'Leary talks about when he became a billionaire and how he took this time off and he traveled the world. To your point, you want to visit all the major beaches across the world or something like this. He gets bored a month into it, and he's like, "God, I got to get back and I've got to build a business. I've got to do something."

My saying is always that passive income can allow you to focus more time and energy on the things you love, and outsource or spend less time on the things that you don't. So to your point, yeah, some people want to work forever, other people do want to take a year or two off, some people want to travel, others just want to launch a business, be more charitable, things like that.

What comes to mind when I think about financial independence is the FIRE movement, Financial Independence, Retire Early. I know last episode we briefly hit on this, but I was always part of this movement without even realizing it. It's this core concept that you're earning money actively in most cases, your highest and best earning potential, you're saving very heavily. I had a 70% savings rate for many, many years.

I was putting all of that into real estate to build passive income so that, to your point, Ash, I could outsource, number one, the job I had, which was working in the oil industry, which I really didn't enjoy. So the freedom was all about being able to pivot careers, being able to work with Joe Fairless at Ashcroft, being able to work with investors, and be on stage, and do conferences, and do educational training, and stuff like that. That was really where my passion was. So to me, that's how I see it.

I won't take too long on that answer myself, but let's dive into the next segment, which is about the pros and the cons, as you just alluded to Ash, of active and passive investing. Again, whether it's your own experience or just general thoughts. Slocomb, you want to start us on that question?

Slocomb Reed: Sure. The first thing that comes to mind, and to part of the point of what you're saying about Kevin O'Leary and what Ash was saying about finding what you love, a lot of people are attracted to active investing because they develop a passion for it. When you find what you love doing, you absolutely ought to do it, especially when it's lucrative and you're adding value to others and receiving value in return for your work. One of the biggest differences that I see, recognizing also that active apartment investing is a skill that I've been developing for years, so I'm not saying this as a newbie... A big difference for me is control.

I was just at a lunch meeting with a business partner discussing this, and he said one of the concerns he has about being a passive investor is that in the event that we were headed into a recession, someone else is deciding when to sell the building and not him. And he knows that if it were his call, considering it's apartment investing and these are assets that should produce cash flow or at least cover expenses through a recession, that he would rather just ride it out. And being an active investor gives him the ability to have the control to dictate what happens with the asset when it gets sold; what storms do you weather, what storms you skip out on? We'll call it there. Control is one of the bigger differences between active and passive investing.

Travis Watts: 100%. Love that. Ash, your thoughts?

Ash Patel: Yeah. I agree with Slocomb but I have the opposite verdict. I would rather the people that I'm investing passively in make those decisions. My passive investments have solely been limited to Ashcroft Capital. I have no affiliation other than I'm a podcast host for Ashcroft and I'm an investor. Not on their payroll, not in any way affiliated with them, but I've invested in about a dozen or so of their deals. I know the decisions that they make are probably way better than ones that I would make, so I'm fully entrusting my money passively to them and I don't want to hear about it. Just make the payments, give the returns out, sell whenever.

I've seen when they've gone through some trials and tribulations. The Big Freeze in Texas, they've had fires in some of their apartment complexes, and they've always come out ahead.

So to me, I trust their decision-making fully and, if it's a passive investment, I don't want to hear about it. I want it out of sight, out of mind. So I don't want the control, I'd rather the experts have the control on that.

Break: [00:12:47] - [00:14:35]

Travis Watts: You bring up the most valid point. If you're the type of person that says, "I have to have control. I need to make the decisions. I feel like I can do it best," then being an LP in a deal is probably not for you, first and foremost. On the flip side, my experience was about six and a half years actively and now about seven years passively full-time, so I'm a 50/50 mix.

What ended up happening in my experience as an active investor is I started getting very overwhelmed and very stressed out, because the more properties I would acquire, the more problems I had. I had tenants calling me and I had property managers that would quit on me, and I'm always trying to find new deals, I'm working 100 hours a week in the oil field. It was just a disaster, it was totally a recipe for disaster. I fully recognize that was my circumstances, those were my issues. That doesn't mean, anybody listening, that you shouldn't be an active investor or anything like that. It's just that I didn't find it very scalable at a certain point, and I just found myself caved in.

So yeah, to your point, Ash and Slocomb, this is where I relinquish control and said, "You can't beat them, join them, I guess." That's a general philosophy. These guys have a track record of doing this professionally and day to day. It's their passion, and it certainly isn't my passion, and I certainly can't compete at those levels. Long story short, I just converted my active into passive over time. So good stuff, you guys, I appreciate you sharing.

Slocomb Reed: I'd like to make another point here, because you guys are both making excellent points about when it comes to ceding control over your capital to a proven professional in the industry. Absolutely. I'd like to weigh that control against a couple of other factors, one of them being that investing passive is very capital-intensive.

I know that we have Best Ever listeners who are developing their skill sets, becoming more sophisticated when it comes to commercial real estate investing, but may not have the capital to deploy passively in these kinds of deals, or at least not enough capital to develop the kinds of returns or the kinds of cash flow and lifestyle that they want. So let's keep in mind that passive investing is capital-dependent. I was saying I'm not taking the perspective of a new investor when I say that being active gives you more control and having control is better. I'm the guy who has dealt with a lot of those things within my portfolio that Ash mentioned, and I've come out the other end better myself. I'm in a position where I can handle control.

Another thing is the returns that are available through active investing are less capped than the returns that are available through passive investing. They require work, but the ability to turn over your money, develop cash flow...

One of the things that Ash said is that in the last few years, he watched his ability to produce a return investing actively in commercial non-residential outpaced his ability to earn investing passively. I'm willing to wager, Ash - please fill in here - that's not just because of the switch and asset class within commercial real estate, it's also because you're the one putting the deals together and doing a lot of that work, isn't it?

Ash Patel: It is, and sharpening my skills over the last 10 years. So to that point, and a great point... The three of us are on different stratospheres and then we have one in the middle. Travis is primarily a passive investor. Slocomb is primarily an active investor. And here I am, doing both. So a great contrast between the three of us.

It comes down to what is it that we're looking for. Travis wants the freedom, Travis wants to not be inundated, and correct me if I'm wrong because I'm speaking for you, but Travis doesn't want to be inundated by tenant calls and spending time looking for deals and all the headaches that come along with it. Whereas Slocomb wants the high returns. He wants to kill it, he wants to put the time in, he wants to grow his network, his skills, his capital. I'm a little bit in between, if that makes sense.

Travis Watts: Totally makes sense. I couldn't agree more. And that's the beauty of all of this. At the end of the day, what I'm really an advocate for beyond all is just investing in general. I just think people should invest. If your thing is stocks or crypto or whatever it is, you go do you. Get educated, don't take unnecessary risks, but do try to do your best to get ahead... Because I think we're all ultimately trying to achieve for the same thing, which is the topic of this conversation, it's financial independence. So Slocomb, great point.

Okay, I've been asked this question before. "Travis, if you started over on day one again, would you be a passive investor?" No, for the reasons that you guys are talking about. I had short-term rentals too, I did house hack. I didn't do the wholesaling business, but I had cashflow that was 20%, 25% on some of my deals. Actively, I did flips where I'm doubling money in a very short amount of time. The ROI was exceptional. And generally speaking, to your point, a passive deal isn't going to be that, especially not in 2022. However, when you understand what it is you need for your lifestyle expenses and you have the capital to go deploy out there, there's a lot of doctors, and dentists, and attorneys, and pro athletes, and actors, actresses. There's a lot of people that have wealth to go deploy and invest.

Even if you ran some very conservative math on it, and you said, "Well, I'm just going to get a 6% or 7% or 8% cash flow," that might end up being $300,000, $400,000 per year for some people. For them, that might be enough, but they had to build to that point doing something. So that gets back to what I was explaining about the FIRE movement. Earn as much as you can earn actively with your highest and best until you have a nest egg to go deploy, and then maybe passive income makes sense for you. I think most of us end up in our 60s and 70s as some version of a passive investor, even if you think that having a 401K and IRA and fixed income from the government - that's hands-off, isn't it? So I think we're all heading that direction to that goal in one form or another.

Ash Patel: Yeah, Travis, thank you for introducing me to the term FIRE. I'd never heard that before, you brought it up. But I think it's important to identify and define what financial independence means and define what retire early means. For me, if I'm retired or not, I'm still taking down deals. I don't care how old I am, if I still have the ability to take deals down, I'm doing it. So I think it's important to know what financial independence means to you and what retiring early means to you.

Travis Watts: 100%. One last thing to caveat on something else that you said earlier is I think you had it spot-on in terms of - my wife and I, we like to travel a ton. We don't like to be tied down to one area. We've moved, historically speaking, quite a bit just to experience new ways of living. We've lived downtown in the suburbs in different states. Having an active business to run in one particular place would limit our ability to do that kind of stuff. So for us, it's very much about a lifestyle. But if you're not someone that's interested in those kinds of things, then that really doesn't do much for you, so that's an excellent point. I appreciate you guys bringing that up.

Let's transition into some best and worst experiences, or just any stories, just to help the audience, with things you've seen or things you've done. Feel free to flaunt on your strategy and why you think it's best, or to say you've tried some other things that didn't work out well and here's why. Whatever you want to take it. Slocomb, do you want to kick us off?

Slocomb Reed: Sure. Most of my investing is summarized in the BRRRR strategy, the term popularized by BiggerPockets. The acronym Buy, Rehab, Rent, Refinance, Repeat. Also, back to Kiyosaki again, he was the first person I ever heard or read who said that you make money when you buy. That's absolutely the case. I don't have properties that I've purchased that I regret. There are some things that, hindsight being 20/20 of course, I should have bought, but I didn't. I would say that buying right has been one of the best things that I've done, putting myself in a position to force appreciation, get my capital back, sometimes extra, and have the cash flow and the equity.

Travis Watts: Love that. Ash?

Ash Patel: Real estate people, for whatever reason, always have some sort of blinders on. Now, whether that's multifamily people not looking at other asset classes, or real estate people in general not looking at alternative investing. So I invest in a lot of start-up companies and some of them go to zero, some of them have huge returns. When the stock market crashed, the COVID crash, put a bunch of money in stock. So keep your eyes open for opportunities all around you. It doesn't have to be real estate-centric. Granted, that might be hard to do, because we've been on such a long run for real estate assets, but at some point, that might not be the case. So educate yourself, expose yourself to different types of investments, not just real estate.

Travis Watts: I love that advice. And what I talk about on the podcast, the Actively Passive Show all the time, is not to suggest necessarily anybody follow what I do specifically. But I do this 80/20 thing where I'm investing 80% in things that I know and understand best. Fundamentally, they make a lot of sense to me. I tend to just know what I'm doing with those investments.

I also allocate 20% into totally experimenting, to your point. Start-up ventures, cryptocurrency, other asset types, note lending, publicly-traded REITs... Because, to your point, there probably will come a time - and I say this too, all the time - if multifamily LP returns, get to the point in 10, 15 years where we're clipping a 2% annualized coupon or something crazy like that, well, that may not make sense anymore. If I can go put my money in the bank and get 6% or buy a U.S. Treasury bond or something like that and have a higher yield, it may not make a lot of sense. So yeah, you don't want to chase things off a cliff, you don't want to be a one-trick pony.

One of the first things I had done when I left the oil field, when I first hit that initial FI number, is I went to go work for a huge brokerage firm. I got licensed and I wanted to learn stocks, bonds, and mutual funds for this reason. I thought real estate's great, I've already seen the power of it, but I don't want to be a one-trick pony. I've got to be able to pivot and understand other things.

So back to everybody's point I think is that you do you, and you may want to work forever and even with financial independence, and I think a lot of people fall in that category. Great stuff, you guys. I truly appreciate you sharing your opinions. Do you guys have any closing thoughts before we wrap up this episode?

Ash Patel: Yes. Slocomb, we have to do a deep dive on Travis. He seems like the most disciplined investor I've ever come across.

Slocomb Reed: Right. For sure.

Ash Patel: We've got to get inside your head.

Travis Watts: I don't know about that. If you guys haven't watched the new documentary that came out about Carl Icahn, I would say that guy beats me by a long shot.

Ash Patel: Yeah, fun episode, man. Great talking to you, guys.

Slocomb Reed: Absolutely.

Travis Watts: Yeah, great catching up. Thank you, guys, for your input. Best Ever listeners, thanks so much for tuning in to this week's Round Table. We will see you next time. I don't know who's hosting next time but it's going to be a great episode, so we'll see you then. Have a Best Ever week.

 

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