November 3, 2022

JF2982: How to Spot Good Investment Opportunities | 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.


In this episode, Travis gives three tips on how to find investment opportunities, along with four ways to know if a particular opportunity is right for you.

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Travis Watts: Welcome back, Best Ever listeners. This is another episode of Passive Investor Tips. I'm your host, Travis Watts, and today what we're talking about is how to spot good investment opportunities. Disclaimers, as always, not a financial advisor, not an attorney, not a CPA, not telling you or anyone what to do. Please seek your own licensed advice. This is for educational purposes only.

And it's funny, you guys, when I first started investing in real estate private placements, I only knew a couple operators at the time, so the only deal flow that I was being exposed to were those two operators' deals. So when an email would come through and say, "Here's a new opportunity closing fast, you better get in", I had a frantic sense of urgency that if I didn't get in this deal, I might have to sit on the sidelines for months and months before I see another opportunity... And that's a little bit laughable now, because I'm literally on so many deal lists that I see -- I'm sure there's hundreds of deals a year that I look at. I could probably place $100 million a year if I just did minimum investments in every single deal that I looked at. But as you know, that's not a great strategy. We don't just want to throw money at the wall and see what sticks, so let's talk about how to actually spot a good investment opportunity.

So diving right in, number one is - it starts with your goals in your criteria. You have to know this first before you even start looking at deals. So I'll give you a couple examples. Are you investing your personal cash in order to build up diversified cash flow income streams, or are you trying to build up your net worth to a particular point, so therefore you're maybe more equity-focused, or you're investing in a self-directed IRA that you're not going to be touching for many, many years, so you don't need the passive income? Those are two completely different goals, two completely different strategies and approaches, so you at least need to know that part of your foundation.

If you're cashflow-focused, then it may not make sense for you to invest in a new development opportunity, for example, that doesn't produce cash flow for three to five years. But on the flip side, if you're building your equity, that same development deal could be a good opportunity for you if you don't need the cash flow, and you're looking at a 10 to 20-year timeframe before you're even touching this money.

And as far as your goals are concerned, I always recommend not focusing solely on financials. For example, I hear this all the time; it's either someone says "I want $10,000 a month passive income" or "I'm looking to build my net worth to $5 million", for example. The reason you don't want to place goals solely like this is because there's no emotional attachment to them. They're just arbitrary numbers out there, and they're easy to let slide or let go, and it may not be motivating to get towards them, because at the end of the day, it's just a number. So instead, what I recommend doing is setting lifestyle goals. Tie a little bit of emotional attachment to them.

For example, maybe you want to travel abroad twice per year, because that's what your passion is. And if that's your passion, you're gonna be more inclined to work towards that goal of traveling, instead of that goal towards $10,000 a month passive income. Or you don't want your son or daughter to have to incur college student loan debt, and you want to be able to pay their way through school. Again, tying that attachment to a son or daughter is going to make you much more motivated, and it's going to clarify with the mission and what the goal is, and it's going to be an awfully hard pain pill to swallow if you don't end up doing that, because you're essentially maybe in your own mind letting down your kids, and nobody ever wants to do that.

So another example could be you want to retire early, so you can spend more time with your son or daughter or family or whatever. So again, making it as specific as possible, and tying a little bit of emotional attachment to your goals can really go a long way and help keep you on track.

Now with that, I will say this - it's okay to still have financial goals as part of your overall goals and strategy, but here's how I look at it. If I were to set a goal, like $5 million net worth, I would then have to ask myself several questions, and the most important being, "Why 5 million?" What am I going to do if I had $5 million sitting in the bank? Because on the last episode we talked about how money in itself doesn't actually make you happy. It's what you convert it to and use it for that can potentially bring extra happiness into your life. Money in itself is just simply paper or digits on a screen, so if all you did is have 5 million in the bank and then pass away, it really has no value.

Break: [00:05:50.16] to [00:07:44.02]

Travis Watts: Okay, moving on to number two. Once you know your goals and criteria, it's important to start learning and networking and getting on operators' distribution list ahead of time. Start familiarizing yourself with what these deals look like, what the numbers are, ask your hard questions... Just simply get educated and get to know, like and trust the people who inevitably you're going to be handing your hard-earned money over to help be an asset manager for a private placement, or a syndication, if that's what you're looking to invest in.

And moving on, number three is build a team of mentors. Tim Ferriss wrote a great book many years ago called Tribe of Mentors, and the concept's very simple - you can gain much more insight, knowledge, you can move much quicker if you surround yourself with like-minded people doing similar things. You can toss ideas around, you can have people look at deals with you, or maybe invest alongside you in these types of syndications... The philosophy is simple - 20 eyes are better than two. I still use mentors today for this reason; if I'm going to make a big investment into something, I may throw that deal past a couple people in my network to say "Check out this deal. What do you see? Am I missing anything? These are kind of the key points and my takeaways. Do you see anything different?" And it really helps. And sometimes I find out that that individual's actually investing in this deal, or has partnered with this group before, so it goes a long way.

It's also how I entered into the passive investing space in the first place. I was at a real estate meetup, found a couple mentors that had been passive investors for over 20 years, and they opened up to me, shared their insights and knowledge, and quite frankly, changed the entire trajectory of my life, my strategy, my investing philosophy... So that all came to be with networking and mentors.

Alright, so finally moving on to the final and last step... Number four is making the decision to invest and finding that good opportunity. And the reason that I saved this for last is because steps one through three I believe are necessary, or you might be making a mistake. You see, a good deal for me personally may not be a good deal for you. And the only way to really know is to know your own goals and criteria, to have a mentor or coach that can help you in the vetting process... And now you can make a better decision and hopefully be looking at a deal that's the right fit for you.

So here's a few quick tips on knowing if the opportunity is good for you. First of all, the deal itself needs to be conservatively underwritten, no matter what we're talking about. When we look at rent bump projections, when we look at below market rent to after-value-add rent, when we look at cap rates, when we look at debt and leverage, when we look at what they're anticipating the insurance costs to go up to, or what they're anticipating the property tax to go up to - all of these need to be conservative in a crazy world like we see today, because these are big-ticket items. And if they've got adjustable rate loans, and no rate caps, and it's just a little teaser rate for a limited amount of time, and we're at 5% interest rates today, and then the Fed takes them to eight, that could completely blow up this deal. Or if they're buying at a five cap today and they're anticipating selling at a three cap, meanwhile interest rates keep going up - that could also ruin the deal. If they're saying the insurance and property tax isn't going to change, it's going to stay the same - that could ruin a deal. So there's a lot of things that can ruin a deal if the operator or GP is not being conservative.

Number two, the deal needs to make logical and simple sense. The more complex, the more third parties, the more middlemen, middlewomen in the mix - that's the only investment I've ever made. It wasn't in real estate, it was a private placement though; it had a lot of moving parts, a lot of people doing different things, and the teams were all relatively new to this big-picture concept. That's the only time I lost significant money in an investment... Because when I got to think about it, after I realized, when this whole thing blew up, I thought, "Could I really articulate this in an analytical way to someone else? Could I describe this investment to a five-year-old?" I couldn't. I could hardly understand it myself. And that was a big mistake, because it wasn't simple, and it wasn't really common sense.

Another thing I look for is that the operator has done this before, ideally numerous times, and that they have results to show for it. You want to make sure that the operator is reputable and known in the space. I would run Google searches, YouTube, social media, make sure that they have a presence out there and see what people are saying about them... And of course, that this opportunity you're looking at meets your goals and criteria to help you accomplish what it is you're trying to do.

At the end of the day, nobody's perfect. There's no perfect investment type, there's no perfect strategy; it just comes down to what works best for you. Remember that there's always risk in investing, no matter what asset type we're talking about. So please keep all of this in mind when you're out there searching for deals; you do not need to be an expert in all areas when you're a passive investor. That's the beauty of it, is that you're relying on people who perhaps are smarter, more knowledgeable, or have more of a track record in doing this particular business plan than you do, so you get to piggyback off of their success... But you do need to have a foundation built which can help you make better investment choices for you.

So I hope you guys found some value in this short episode of Passive Investor Tips. As I like to say, to your success. I'm Travis Watts, I truly appreciate you being here and tuning in. I was thinking about this whole series - this will inevitably become a 100-episode series, and I've given you guys the best of the best. I'm really trying to dissect these things down to simple matters, in short, consolidated timeframes. And I can imagine there could be someone out there in the world who would want to take this content and make a little program and charge people a couple thousand dollars for all of this, but I'm doing it for free. So I hope there's some value in that. Always happy to be a resource or mentor to anybody listening. Share these episodes with someone you think could find value. If we haven't connected on social media, let's do it. LinkedIn, Facebook, Bigger Pockets, Instagram @passiveinvestortips, or Travis Watts. Don't forget, have a Best Ever week. We'll see you on the next episode. Stay tuned.

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