March 2, 2023

JF3101: How to Get Started with Passive Income | Passive Investor Tips ft. Travis Watts


Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

Every passive investor begins their journey from a different starting point. Some start with limited capital and very little education — these are the newbies who are true beginners. Others have a lot of capital because they’re a doctor or had a liquidity event, like the sale of a business or an inheritance, and want to make that money work for them. The third most common starting point is the investor who is pivoting from the buy-low, sell-high mindset and looking to build wealth through passive investing.

In this episode, Travis discusses how to get started with passive investing, regardless of which of the three common situations you’re starting from.

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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode, we are talking about how to get started with passive income. Disclaimers as always, never financial advice. I'm not a financial advisor or a CPA or an attorney, so please always seek licensed advice when it comes to your own investing.

This episode, my friends - I've gotta say upfront, it should have probably been episode number two of Passive Investor Tips, after mindset, goals, philosophy, then we move into how to actually get started. But humbling, as always; I was on the phone with an investor last week. He says "Travis, I listened to a lot of your podcasts a lot of your content, I follow your YouTube channel. I love it. I learned a lot. But here's my question. How do I actually get started? What do I do? I'm new to the syndication stuff." So I had to laugh at myself a little bit for that one, because I had failed the most obvious episode that should have been part of this series.

So without further ado, whatever, let's dive in. We're here. And I want to start by letting you know that every investor is going to be coming from a different situation. First of all, you've got investors that literally are starting with very limited capital, very little education, understanding, they're truly beginners in the real estate space; you've got other people who maybe have a lot of capital because either they've been a doctor, or a dentist, or they had a liquidity event, or exiting the stock market, they sold a business, or they sold a piece of real estate, or they got some inheritance... So it's not necessarily that they don't have any experience, and maybe they have large amount of capital to go put to work, but they're just trying to learn how to diversify and build passive income.

The third type of investor is someone simply making a pivot change. Most of us were taught, as we talk a lot on the show, buy low, sell high. And a lot of people have been doing that for decades upon decades... So maybe they're just tuning into the message of passive income, or "Hey, now I'v finally built up some equity. What do I do with it?" Or "Hey, I need to start thinking about retirement. How do I start building that?" So those are the three types of investors we're going to talk about, and I'm going to share with you many different ways of how you can get started, regardless of which bucket you fall under. Or maybe you're a combination of two or three.

And I just want to first reiterate quickly the why of passive income. Why are we even talking about this? Why is this such a passion of mine, and it's really the core essence of what this show is. So to me, passive income is the ultimate way to build financial independence. Yes, you can build it in other ways, with active income and active businesses, and flipping homes, and just having a big net worth... But to me, it's about creating monthly passive income that you can use to either elevate and expand your lifestyle, to do more in life or to have more options, or to get you to actually be able to live off of passive income, which is what I do, and which is what my passion is for helping other people do that. But in either case, whether you're one, or the other, or a hybrid of the two, it can't hurt to have a little extra income in your pocket every month.

Alright, so getting started with the newbie investor - we'll start there, somebody with limited capital, limited experience, limited knowledge. Of course, one more time, never financial advice; not telling you or anyone what to do. But you should always have some foundational level of knowledge before you start investing in anything. If you don't understand what you're doing with your money, where you're putting it, then it's frankly a bad investment. So just don't do that.

So the first thing on the list I want to bring up are dividend-paying stocks, ETFs and REITs. And a REIT stands for a real estate Eight investment trust. A REIT can be public or private, but I'm talking about publicly-traded REITs in this category. And an ETF is an exchange-traded fund, which is kind of like a mutual fund; they usually have lower fees, but it's basically a diversified type of investment that would be publicly-traded. And when I say dividend-paying stocks, this could be basically any stock out there that pays you on a monthly or quarterly basis.

And all of these are access to the stock market, whether you're using a brokerage account, an IRA, traditional or Roth, a 401k in some cases... This is how you gain access to be able to invest in these products. And I do own all of these. I have dividend-paying stocks, ETFs and REITs. It's not a huge allocation of my portfolio, but it's worth mentioning here, because it may be the right fit for you or somebody listening. And what I like about my brokerage account - I do it primarily just through a regular individual brokerage account - is every month (I mostly just invest in things that pay me monthly) I log in, at the end of the month, and I've got a cash position built, because all these different things that I own have distributed throughout the month, and now I'm just sitting on several thousand dollars there of cash. Now, what I can do with that is either build a brand new position in some new stock ETF or REIT that I want to own, or I can build upon a pre-existing position that I already have, that I think is going to do well in the future.

Now, I usually try to build new positions from my distributions. To me, it limits risk, because yes, you can have your brokerage automatically invest dividends back into the same stock over and over, but to me that's pretty risky, because if I've got a REIT that's doing really, really well really, really well and all sudden it's got a 50% crash one year, I've essentially taken all those dividends and put it back into something that just fell 50%. So what I like to do instead is just build new positions and have many different income streams working for me.

Now, you can also choose, if it's a brokerage account especially, this can be useful - you can have your brokerage sweep, is what they call it. To sweep -- they sweep all the cash at the end of the month into your bank account via ACH. So electronic transfer. So that would be for somebody who needs the income, or is living on the income, or if you want to put that income into other things.

And that brings me to number two, which is private investments, or private equity; you can call it whatever you want to call it. I'm talking about buying single family homes, or having short-term rentals on Airbnb, or buying an actual ATM machine or a vending machine, and working with a local vendor to set up shop on their property. And as long as you can make this passive, where you're not having to actually work as a job in this business, that can be deemed passive income in my mind.

In addition to this, you could be a hard money lender, or you could do note lending, which is just lending money at high interest rates to other people that are working on other projects, whether it's building a business or flipping a home, or something like that; you can get paid passively that way. Tax lien investing, crowdfunding... The list just goes on and on on everything you can do in the private sector.

Number three, nowadays getting more and more popular by the day, are all these eCommerce type of businesses that you can do, whether it's some form of affiliate marketing, or whether it's building some kind of product or service that people subscribe to on a monthly basis, that gives you passive income that way... And a simple idea here, for people who do dropshipping or something like that, is that you're going to use a different company to actually manufacture a product, to store that product, and to ship that product, and maybe as far as even doing customer service for people who are buying your product. So you are just a business owner, and let's say you create a website that people come to, and they buy a product for $40, let's say, and then you're gonna have that fulfilled by another company, and maybe you're gonna pay that other company $20 to have all of that done. So you're playing the arbitrage game here, where you just pocketed $40 and you had to pay $20 to make that money. And with proper automation, this really can be a passive approach. It's going to be front-loaded, where you have to think and build the business in the first place and probably monitor that from time to time. But mostly, it can be passive, or you can hire an assistant or an employee to run that for you.

Break: [00:09:27.14]

Travis Watts: There's a lot of really unique, fun things that you can do out there that generate passive income with limited amounts of capital. Two that come to mind off top my head. One, my wife and I, we used to rent out our car using an app service. And this particular app service would basically -- when we weren't using our car, when we were traveling or away, we had a couple places that we were living from time to time, they would take care of our car completely. They would store the car, they would wash the car, they would maintenance the car, they would make sure the car always had fuel, and they would vacuum it... They would do all of that, and they would rent it out to other people. And then we had kind of a profit share going on, where they would get paid 50% of the rental fee, and we would get the other 50%. So we made many thousands of dollars by just renting out a car that otherwise was just going to sit around, collect dust and become a liability for us as we continued to pay the maintenance ourselves and continued to pay the insurance and we weren't actually using it. So that was one thing.

I was on the phone with an investor about a month ago, and he told me that he bought a blog. And this was a new concept to me. So he didn't create the blog, and he doesn't actually blog or post anything. He has other people and writers that create content for this particular blog that already has a ton of viewers and subscribers, and then he gets sponsorships for the blog. So it becomes a passive income business for him. There's endless examples of businesses that can be hands off and passive. That was just one that I thought was creative.

And of course, there's a lot of products in the traditional world of finance that exist, of insurance products, or Treasuries, or high-yield savings accounts, or CDs, which are certificates of deposit, or bonds... But we've got to remember, because of the risk profile associated to these, meaning there's very little, limited risk to those, you're going to have a very limited to moderate yield. So think maybe 1% to 5% per year.

And finally, there's real estate private placements, aka syndications. This is mostly what I invest in myself. I'd give it a 70% to 80% category of my portfolio. But we're talking first about this individual that has limited capital and resources to get started, and many of the minimum investments to enter into these in the first place is $25,000, $50,000, $75,000. So let's move to the next type of investor.

So this type of investor is the person who had the liquidity event. Either they exited the stock market, got inheritance, sold a business, sold a piece of real estate, whatever it may be; they may or may not have experience... But private placements are nice, because you're relying on other people to actually execute the business plan. So in the case of a multifamily private placement, I'm relying on a team's expertise to go find good deals, to underwrite them conservatively, to make sure that the tenants are managed, to make sure the marketing gets done efficiently and effectively, to make sure that contractors and any construction that's happening goes according to plan, stays on budget... I'm just the hands-off investor in the process. I'm just the guy that says "Here's $50,000. I'd like to partner with you." And this could be nice; we'll say this person in this hypothetical example has a million dollars to go deploy. Well, you could do five different syndications, let's say, in different asset classes, at $200,000 apiece, and you can get a wider array of diversification. That's a heck of a lot easier than saying "I've got a million dollars. I'm gonna go buy 25 single family homes. I'm gonna have to go underwrite all those deals, win those deals, turn over those deals, market those deals, put tenants in those deals, put property managers on there..." That's a full-time job. So the key here is about scalability for someone in this position.

Also, for this type of investor, I would put back on the list and reiterate that the dividend-paying stocks, ETFs, publicly-traded REITs, or privately-traded REITs for that matter, can also help with the scalability, because frankly, it's just as easy to go invest $100 in the stock market as it is a million. You just click a couple buttons, and you're done.

So to recap this type of investor, it's usually about making things simpler, making things scalable, and making things easier, and with larger amounts of capital, you tend to look at different types of asset classes; you could look at triple net investments, whether it's your own individual purchase, or whether you're doing that in a syndication, but that allows you to park something like a million dollars into it, versus having all these little ATM machines that you're running around trying to manage.

And the third type of investor who's changing strategies, maybe they were, like I was up until 2015, where I was self-managing single family homes; it was getting harder and harder, it was getting busier and busier, and I thought, "I just want the passive income here, but I don't want this as a job."

So we'll take an example of someone who has 20 single family homes - well, first of all, what might be appropriate for this person is going to depend on their risk tolerance and how much capital they're needing to deploy. So with someone with 20 single family homes, they may not want to just sell all 20 of them, and go into real estate private placements with all of that capital. They might just want to sell off four or five of their properties, for example, and start experimenting with private placements, and see how it goes. And then they can stack up, if they like it, or they don't like it, while somebody else in this category might be selling one of their luxury fix and flips, and they're going to have a huge liquidity event that's essentially going to be 100% of their capital. They may want to allocate like we talked about earlier, where they're doing 100k here, and 200k there, into some of the assets that we talked about.

And I also want to say this about this type of investor, because I hear it all the time working in investor relations and education, and just being an investor in the industry for almost 15 years at this point - is a lot of people prefer to focus first on Buy low, sell high, building up equity, getting a high income, and then saving and investing, to the point that the money that they have now, the net worth or the investable assets are meaningful in terms of passive income. And this makes sense, if you think about it; if all you had was $10,000 to invest, that was the total amount of money, and you went into some passive income deal that paid you $50 per month, that's not super-exciting. And I know it wouldn't have been that exciting for me when I first got started. So I focused on highest and best earning potential, living frugally for a period of time, investing the difference into real estate, and avoiding bad debt and things like keeping up with the Joneses, until I had a sizable nest egg, where you can ,imagine for example purposes, someone with a million dollars now goes and invests into something that produces passive income; maybe they're getting $70,000 per year, $5,000 per month. That starts to be life-changing at that point. So many will decide to wait. But I encourage you to at least start to study and the learning of passive income before you reach the age of say 65 or 70, and now you're trying to learn a somewhat complicated subject, older in life and you don't want to be making big mistakes when you're that age.

Also, keep in mind that many investors are not like me, where they're a full-time passive income investor; they're probably going to be a hybrid of either active and passive, or buy low, sell high and cashflow. That's where the majority are going to fall. So as I always say, you do you know, and I'll leave you with these three things at the end of the episode.

Number one, it's important to start with your goal and strategy in mind, and you want to reverse-engineer. You want to look at "Where am I trying to get in 5 years, 10 years, 20 years, etc? Why? What is my purpose? Why am I even investing in the first place?" And then work backwards, and say "What kinds of investments can likely get me to that sort of outcome?"
Number two, have a basic, fundamental understanding of what it is you're investing in. It doesn't matter what you're investing in, whether it's stocks, bonds, mutual funds, crypto, etc. You don't want to just take someone's word for something, you don't just want to read a headline and go wire $100,000 to some group in something that you have no idea how it operates. That's the one time I lost really big money as an investor, is investing in something that I didn't really know and understand.

And number three, always do proper due diligence, do your homework, ask the hard questions. The last thing you want to do is get into an investment with a group you don't really like or care for, that has poor communication, or lack of track record, or something like that. If you need help figuring out what questions to ask or what you should be looking at, seek the advice from licensed advisors.

So with all of this, something to think about here for the week; I truly appreciate you being here. I hope you've found some value in this. If you guys ever need someone just to bounce ideas off of, or you want to share some ideas or talk about something that I missed here, leave a comment, reach out to me. I'm all over social. I'm on Instagram, Facebook, Bigger Pockets, LinkedIn, Travis Watts or @passiveinvestortips.

Thank you guys so much for being part of the Best Ever community. Have a best ever week, and we'll see you in the next episode.

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