May 23, 2022

JF2820: How to Set Investing Goals | Round Table

In this episode of Round Table, Ash, Slocomb, and Travis share how they discuss goals with new investors that come to them for advice. 


1. Take Control of Your Financial Future

Ash points out that before you can set investing goals, you need to figure out where you stand today. Who is watching your money? Who is helping you grow it? Conduct some due diligence so that you can put the time and effort into taking control of your financial future.


2. Think Beyond Financial Goals

If your goal is to have a $1M net worth, Travis encourages you to ask yourself why you would want a million dollars — you should have an emotional reason rather than simply financial. What would you want that amount of money to help you achieve? Once you’ve established your true goals, then you can explore what the appropriate investment would be to best help you meet them. 


3. From X to Y, by When? 

This is Slocomb’s formula for determining investing goals. 

  • The investment strategies you choose to use depend first on your “when” — are you investing for a future event that is two years from now, or 20? 
  • Next, establish your “why” — are you looking to change professions, retire early, or save up to pay your children’s college tuition? 
  • Between now and when you achieve your goal, how aggressive of a return are you expecting? How much risk are you willing to take? 

The answer to these questions will help you find the right investing strategies to get you from X to Y by your “when.”



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Slocomb Reed: Best Ever listeners, welcome to The Round Table. I'm Slocomb Reed, an apartment owner-operator and investor-focused real estate agent in Cincinnati, Ohio. Today, I'm joined by Ash Patel and Travis Watts. The hosts of the Best Ever Show come together every week for a deep dive into a commercial real estate investing topic. Today, our topic is Investor’s Goals. Each of us, Ash, Travis, and I are in positions where a lot of investors come to us for advice. And while I'm not talking about giving direct financial advice, people ask us, “Should I do this deal? What investing should I be doing?” and each of us has a version of the response. The first response we give is, “It depends on your goals, your strategies, what deals you should be doing.”

No one is in a position to advise you until they know what it is your objectives are for investing, and really, you can't know what deals are right for you until you know your goals as well. So we're going to talk for this episode about how it is that we discuss goals with newer investors.

Travis Watts, we're recording on a day that an episode of your Actively Passive Show aired, and the first thing you talk about is making sure that investors know their goals before they get into a syndication. So when you tell people, “You need to know what your goals are”, how does that conversation typically go?

Travis Watts: Sure. Great question. For anyone not familiar, Travis Watts, I'm a full-time passive investor. I do a lot of multifamily investing, but I'm also in self-storage, mobile home parks, and anything that's got a passive income focus and potentially some equity upside to it as well. So with that - yeah, interestingly enough, anything I ever say on my show or to anybody is just advice to myself. I always like to just say, “You do you.” I'm not out to tell people what to do or necessarily to give them advice. That's not what I'm trying to do. But to your point, I fully support and agree, it has to start with your goal; it just has to. Not just a financial goal, "I I want to $1 million net worth. I want $10,000 a month passive income." You've got to look beyond that. What are you trying to do with your life? What's the purpose? Why would you want a million now? Why would you want $10,000 passive income?

I try to always make it emotional. When I set a five-year goal or a 10-year goal, it's not just a number. It's… Whatever. Just to make up some examples, I'm going to retire my wife so that she can stay home with our child, and have all that time and get that kind of support. Just this one example. So then, I look at, “Okay, if that's the goal, then what investment would be appropriate perhaps to get me to that goal?” In other words, is it income-focused, passive income? Or is it more growth-focused, and I'm trying to buy low and sell high and build a net worth? Or maybe it's a hybrid of the two like I alluded to.

Number three is just get educated. My favorite way to get educated is to find somebody out there in the world doing what it is you want to do successfully, and just picking their brain, either on a paid basis or an unpaid basis. There's, of course, podcasts like these, there are books, there are seminars, there are all kinds of ways. You've got to get the fundamentals down of your education.

Then the last part is to get into the weeds a bit with how to vet a deal, how to vet a sponsor, how to vet a market, assuming you're going to do let's say a syndication, stuff like that. That's actually the very last thing. You've got to put all the others in place before you get there. That's the high level of how I see it.

Slocomb Reed: Ash, I know a big thing for you right now is demonstrating to real estate investors who focus on residential investing the opportunities made available to them if they move into non-residential commercial asset classes. How do investors’ goals shape the way that you talk to them about switching asset classes?

Ash Patel: Yeah, good question. Best Ever listeners, glad to be here. Glad you're listening. Slocomb, a couple of long-winded answers to your question... One, I don't think I've ever specifically set out to educate investors, but what I have done is try to educate anybody around me that I feel would benefit from a conversation. A lot of high-net-worth friends, doctors, lawyers, business owners - it's amazing, even tenants... Literally some of my high-net-worth tenants in commercial buildings - it's amazing how they've become so successful, they've put so much time and effort into their education or their business, or their medical practice, or their legal partnership that they don't spend any time or effort in building or managing their financial future, their own money. A lot of these guys and girls are giving their money to somebody else. It's like, “Hey, how do you invest your money?” “Oh, I've got a guy.” “Really? How's your guy doing?” Yeah, I think he does pretty well.” “How well?” “Well, I don't know. I have no idea.”

Really, people, a lot of these high earners, they're making a lot of money, and they give it to a financial advisor, planner, etc, and they have no idea how their money's doing. Even when they open up their college savings plans for their kids, you can easily monitor that online, but nobody ever has a clue. So really, my education to people around me has always been to spend some time and effort into taking control of your financial future. The goal is great, but at least start today in figuring out where you are, who's watching your money, and who's helping you grow it. Have some due diligence behind that.

Now, the second part of your question is, “How do I get residential investors to look at commercial?” It's the same thing, man, it's just education. There's the fear of the retail apocalypse, commercial’s too hard, commercial’s too much money. I try to encourage everybody, not just investors, but operators, people getting into real estate, realtors, brokers, everybody, to look at commercial. It's just a lot less competition, lot higher returns. Anybody that I've ever met who has done residential and graduated to commercial has never gone back to residential. There are a lot of pros to becoming a commercial investor, broker, operator, or all the above.

Slocomb Reed: All good. A follow-up question there... Bringing this to the topic of investor goals, fill in the blanks on this statement. If you're a real estate investor and your goal is X, then you should consider moving from residential to non-residential commercial investing. What is the X? What are the goals there that you see people are able to hit faster or more easily with those other asset classes?

Ash Patel: If your goal is much higher returns, that's it. It's that simple. Right now, the multifamily realm is all the same. It's 7% or 8% pref, 15% to 17% IRR, five-year hold. Boring. Five years ago, it was 26% IRR, and now everyone's settling for 15%. Our last deal, we did an 18% pref. That's unheard of with residential. Commercial deals, the returns are just way higher.

Slocomb Reed: You're saying that there's more cash flow in commercial deals at present, especially. In large part, I believe, because there are fewer high-caliber operators in the space, so it's easier to get a hold of better deals. Let's talk specifically about the velocity of money. I want to know that I can force appreciation, turn around and sell a building, or cash-out refinance quickly, because that is what is going to be best for my goals. Either because I need to be selling things and using those proceeds to cover my lifestyle, or because I don't have that much capital to invest, so I'm looking to get it back quickly to move into other deals. Are you seeing that you can get your money in and out of deals in non-residential commercial as quickly as you can with residential, given that residential financing is so much more streamlined?

Ash Patel: Yeah, way faster. Our holds are two to three years. I don't want to hold anything for five years. It just gets boring. I have a short attention span. Our value-add, with residential multifamily, the value-add is renovations, dog park, covered parking, washer and dryer, gym, nice amenities, common area. That's it. It’s cookie-cutter, and it takes a long time to renovate hundreds of apartments. With commercial, if we have a vacancy, we can fill that. Let's say we have a strip mall, 10 tenants, two are vacant. We fill that with a Dollar General and a Domino's Pizza; you've now added over a million dollars in value the day that those leases were signed.

Slocomb Reed: Compared to apartment financing, I know looking at an apartment building - because I'm an apartment investor, but also because there are not necessarily fewer variables, but it's such a large asset class and the assets are so similar... I have a really solid idea if I'm going to refinance this in two years. Outside of maybe the interest rate and moving the LTV by 5% depending on the appetite of lenders and the current economic climate, I know what my cash-out refi loan is going to look like in two years. In commercial, assuming it's someone's goal to get their capital back in two, three years, if you want to keep the asset and keep the cash flow, are you as able in non-residential asset classes to predict what financing terms are going to look like two, three years from now?

Ash Patel: Great question. I think the fundamental difference here is, I'm going to say you people... You people in the residential world and the multifamily people, a lot of you guys use lenders as commodities. You shop out loans, you try to get a quarter-point off here... In our world, man, our lenders are our partners. I've had the same lenders for 15 years on one, three years on another, and I've never strayed from the two of them. The benefit there is I know any deal that I bring them, I know exactly what the terms are. One does 15% down, one does 20% down, both of which I had to earn over years of doing deals with them. We know what the rates are, we know what the amortization is, we know what the down payment is. If we want to do a cash-out refi, we know what their thresholds are.

These are the same lenders that we always use. We don't have a reason to stray. I can get a half-point off, quarter-point off here and there on deals, but I would rather continue to nurture that relationship so that I know when I bring them a deal that's 50% vacant, it's no questions asked. They're going to get it done. If I were to shop this out with big banks, none of them would touch half the deals that I do. Big banks want stable, class A, whole foods strip mall; they don't want a Dollar General strip mall with three vacancies. So our lenders in our world are very important, and they're our strategic partners, not just commodities.

Slocomb Reed: Your ability to forecast into the future and your ability to hit your goals for returns in refinances and sales in the future depends a lot on the relationships that you build with lenders.

Ash Patel: Yes, even with big banks. I've had two big banks approach me and say, “Hey, we want to refi all of your properties,” and I thought, “Awesome. I'll probably get a half-point lower on the interest." These banks literally nitpicked everything that was stable for three or more years and fully leased. They didn't want anything newer or value-add. That's not fair to the lenders that were there for the whole ride with me. They were lenders that took a chance on me in the beginning, I can't just take that away from them. Yeah, man, again, this is how important our lenders are.

Break: [00:13:37] – [00:15:25]

Slocomb Reed: Speaking about goals and making sure that the investment strategies that you go after are meeting your personal goals, Ash, the people I talked to about their goals tend to be in a different category. Not that they're not white-collar, high-income earning professionals, but they've already decided they want to be an active investor in some regard. They have some money saved, they want to get it deployed, and they've heard about the advantages of real estate. What I almost always encourage people to have when it comes to a goal is that rubric of "From X to Y by when." And I explained that the kinds of investment strategies that you should be involved in depend on, first of all, what is your when, or your event horizon? Are you investing for a future that is two years from now, 20 years from now? Are you in a profession that you're looking to get out of, or a profession that you want to have less control over your life and your finances in the coming year? Or is this more about retirement while you're currently in your 30s or 40s? Or is this about knowing that you're going to be able to pay for your kids’ college no matter what college they get into, and your kids are five and seven? And then from X to Y, how aggressive of a return are you looking to get, and how much risk should you expect to take on, but also what types of investing strategies should you be looking at? When it comes to the "from X to Y by when" model, generally speaking, without giving any particular financial advice of course, when you know that an investor wants to be more aggressive, they have larger cashflow and growth goals in a shorter timeframe, what investment strategies do you tend to recommend they look into? Let's go with Travis.

Travis Watts: Sure. You guys have been bringing up some awesome points. That's what I love about these roundtables, too. We've got active and we've got very hands-on, or we've got smaller retail creative deals. The demographic I'm dealing with on a daily basis are mostly accredited investors of medical professionals, engineers, VPs, professional athletes, and folks who genuinely like what they do as a career. They are completely involved and focused on what they do for their active income. They do not want to necessarily branch away from that and do any active real estate investing. That's a whole different conversation, because I'm dealing with a lot of folks who traditionally are in the stock market, for example. They've got their IRAs and 401Ks and these kinds of programs; they're not necessarily looking to retire early because they do enjoy what they're doing, in most cases. So we're still looking at a normal time horizon like say, at 60 years old maybe, or late 50s, or something like that because those accounts are themed that way.

What a lot of people get uncomfortable with - Ash brought this up earlier and I love this point - if you're looking for potentially higher returns, or what I always look at as compared to the stock market and what I invest in, stability, consistency. So are the markets very consistent this year in the stocks? If your portfolio is sitting right now at 20% down or something like that, are you comfortable with that, knowing that on average, let's say the stock market goes up 8% a year over the last 100 years, or whatever the stats are? But if you're looking for potentially, like Ash pointed out, maybe more like a 15% overall return that pays out monthly, quarterly, whatever it is --half of that roughly being cashflow or whatever-- then maybe that makes some sense from a diversification perspective. That's just completely different.

To answer your question from earlier, I started actively myself, so I'm not at all in any means against active real estate. That's how I built up some net worth and a nest egg so to speak to where I could be more hands-off if I chose to be and, that's what I did choose to be because I was overworked. I was in a W2 job and I was burned out and I just needed some time for myself, quite frankly. That's what led me to become a passive investor. So again, I love it. I love all of our perspectives. They all have so much validity to them. I'm just working with folks that are more... They're not real estate experts per se, they're just folks looking to diversify and try to get a nice, solid return long-term and compound their growth.

Slocomb Reed: Travis, quick follow-up... When it comes to people who have more aggressive goals, being a master of passive investing yourself and the solid understanding you have in passive investing, people with aggressive goals - have you ever recommended that they look into active investing instead of remaining passive?

Travis Watts: Yeah, so the conversation usually centers around -- we looked into being a general partner, for example. Let's flip the coin - I’m the LP and you be a GP. There are so many training programs and mentorship stuff that you can get involved with there. Quite frankly, assuming all things go well on either side of that coin, the returns could be insane; they could be 10x. It could be a big difference. But it's - do you have that skill set? Do you have that interest? Do you have that passion? Do you think you can be competitive in that space? Is it really what you want to do? Because at the end of the day, that's what my message is to everybody, is I would love to see more people pursuing the things they love, and doing less of the things they don't, and we're all different. For me personally, I don't want to be a GP. You could flash a 10X return in front of me, I don't want it, because I wouldn't be good at it, I wouldn't enjoy it, and it's just not for me. But that's not to say anyone listening it's not for you; it's something to look into for sure.

Slocomb Reed: Ash, what about you? When is it that you advise that people be active as opposed to passive based on their goals?

Ash Patel: Man, that's a good question. The only people I've advised to be active are really my tenants, my commercial tenants. They're paying me rent. If they have the ability to buy the building that we're in, or if they have the ability to make their own real estate investments, I'll help them. I've tried this. I have a mastermind where people will want to learn commercial real estate, but I've made the mistake of having a handful of friends in that mastermind, and it's me wanting them to get ahead, it's me wanting them to leave their W2, and it's me thinking real estate is in their best interest. I've learned, man, unless they want to do it unless they're passionate about it, you can't convince somebody to be an active investor.

You can throw it out there, your willingness to help, you could show them a tenant... Just yesterday, I had a tenant... It's a three-unit building. He's paying me rent and this building doesn't do much for me, so I'd rather sell it. So I showed him where if he buys the building at a much higher than market price, it saves him money, versus what he pays rent every month. Somebody like that, I would convince to try to be active... But man, I learned that lesson the hard way. You could try and convince people to get into commercial real estate, invest in this and that, but it's really what their passion is, and you can't make them drink the water.

Slocomb Reed: You can make them drink the water, but you can't make them invest in commercial real estate.

Ash Patel: Yeah. I also want to touch on your other point that Travis talked about, in terms of how do you evaluate the risk-return timing of your investors? My answer to that is very few investors know the number as to what percentage return they're looking for. Everybody wants the highest return possible. It's a few older, retired, high net worth people that I've come across that say I would love to get a 7% or 8% return on my money. Now, they obviously don't know a lot about real estate investing, but everyone wants the highest return they can get. People have a difficult time establishing what level of risk they're willing to incur. Myself and my wife included, when we were young, met with a financial advisor, and we filled out this risk-return questionnaire, 100 questions. At the end of the day, we contradicted ourselves on all the answers. Yeah, we wanted the high-risk high return, but we're not willing to lose money. How does that make any sense? I think a lot of people that are not savvy investors would fall into that same category.

The one thing that I make sure, anybody that I take money from, is that this is money that is expendable, it's money that they don't need. I don't want it to be a large portion of their liquidity. I'll give you some good examples. I had a bunch of doctors and myself that were pitched a marijuana investment in Ohio. The deal was horrible, it didn't make sense at all. It wasn't my job to advise anybody, because it wasn't my deal. I was there in the audience with everybody else. A lot of these docs took out SBA loans and home equity loans to put money into this deal. This was five years ago and that deal went south; they lost a lot of money. So anybody that invests in my deals, you better not be taking a home equity loan out, you better not take money away from your college for your kids; it better be pure discretionary funds that you don't need for some period of time.

Slocomb Reed: Absolutely. A couple of points there, Ash... When there's the possibility of loss, a marijuana farm, I imagine in Ohio - Ohio does not have the most pot-friendly legislation, like some other places. So you have to concede in an investment like that that there’s some speculation, and that there's high risk. So unless you have goals that necessitated a high level of risk because of how aggressive your return goals are - yes, absolutely. Make sure if you're investing passively - this goes for the vast majority of people we talk to, if not every single person that we talk to... Don't invest money that you can't afford to not have, whether it be for, depending on the deal, two years, five years, 10 years. Don't invest money that you can't afford to not have, for sure.

Do either of you have any final thoughts on helping commercial real estate investors understand their goals, so that they can make better investing decisions?

Travis Watts: Sure. Just a couple of quick thoughts. Risk is hugely important, as you pointed out, not talked about enough. It's a critical conversation. It is hard, though, for everybody to be able to articulate that. I have a friend, he trades stocks, and we always have our little debates on the phone about real estate and cashflow versus growth, and the things he does. And his perspective for many years was, "Why would I consider a 15% or 20% return in these deals that you do when I could get a 75% annualized return doing this trading stuff?" But the reality is he's underwater today. It's been six years he's been trading and he's never turned a consistent profit. Overall, he's at a loss. It's a conversation that should be had. It's not just chasing yield and returns. I made that mistake early on as a passive investor. There was one deal that looked so great on the pro forma, but it was a super-naive group that didn't know what they were doing, and we ended up with a really crappy return. We didn't lose money, but it was certainly nowhere near what they thought they could do, because they couldn't do it.

That's why I say, the more your education goes up, the more your risk comes down. For some people, the things that Ash talks about, or maybe any of us would talk about, seem extremely risky, because you hear things like 30% return and you think, “Oh my God, that's a Ponzi scheme or something. I don't know what that is”, because they're used to putting their money in the bank at 1%. They're used to investing in bonds that pay 3%. They’re used to a stock market return at 8% or -20% this year, whatever. Yeah, 30% seems a little too good to be true. But the more you learn, like Ash said, you can't lead somebody or make them drink the water. But you just try to throw it out there, you just try to educate, and it's a numbers game. Maybe 5%, 6% of people that hear the message are really into that thing, and the rest aren't. You got to move on and let it go.

Ash Patel: Slocomb, your question was specific to advice to commercial real estate investors. My advice is, over the last 10 years, we've had a hell of a run. It was hard to not make money in real estate. We had interest rates very low, and cap rates much higher than interest rates. Today, things are changing. We still have people buying deals in the high threes for cap rates, and interest rates have gone up significantly over the last 30 days. So there are going to be a lot of headwinds for these operators. You've got to do your due diligence. Their exit cap rate and their exit plan has to take into account the changing environment with obtaining capital from lenders. It's not going to be as rosy as it's been in the past, where everything was in your favor. Rents were going up, interest rates were going down... Things are changing now, so it's the most important time ever to make sure you do your due diligence on the operators that you're putting your money into. Ask questions. Just because you had a great run with somebody, ask those questions on your future deals.

Slocomb Reed: My last point here... Thank you, Ash and Travis. Ash, you talked about how the vast majority of investors don't actually know what return it is that they want, they just know that they want them to be high. I come across a lot of people like that. And to Travis's point, a lot of people who are coming, in my case not necessarily from savings account and bond returns, but stock market returns and looking for something that's going to have a higher yield than that, my first recommendation is that people have a goal that they can quantify, whether it is an amount of growth or an amount of cashflow per month or per year, and they put a deadline on it, and they figure out from X to Y by when. What is the numerical, quantifiable objective and what is the deadline for that objective?

When you have that clarity, and you have an understanding of the resources available to you, particularly with your capital, but also with your time, that is what gives you the ability to figure out what returns you need. Figuring out what returns you need will help you understand whether or not a deal is too risky, and whether or not you need a deal that has a higher ceiling and a lower floor, as it were.

Ash, Travis, thank you. Great conversation about goals and helping investors determine and hit their goals. Best Ever listeners, thank you as well for tuning in. If we’ve added value to you with this episode, please subscribe to the show. Leave us a five-star review and share this with a friend who's a commercial real estate investor who needs to hear a conversation about goal setting and advice in investing. Thank you and have a Best Ever day.


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