November 16, 2021

JF2632: The Key to Low-Stress, Passive Income with Randy Smith


When Randy Smith started his investing journey, he thought single-family, turnkey homes would help him reach his goals of passive income. That’s until a year ago when he realized multifamily and limited partnerships were the key to low-stress income. Today, Randy is talking about the main questions he asks during his due diligence process, what surprised him about passive investing, and the biggest reason he decided to make the switch.


Randy Smith Real Estate Background:


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of the fluffy stuff. With us today, Randy Smith.

How are you doing, Randy?

Randy Smith: I’m doing really well, Joe. Thank you so much for having me on the podcast today.

Joe Fairless: Well, I’m glad to hear that and it’s my pleasure. A little bit about Randy—he’s the Manager of Business Development for a Fortune 100 financial services company. He currently passively invests as an LP in six different syndications, including multifamily and a mobile home fund. He’s based in Phoenix, Arizona.

So with that being said, Randy, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Randy Smith: Yeah, absolutely, Joe. Thank you so much. So I got into the real estate investing space just a few years ago, and I started in single-family, like a lot of your listeners do. I did a couple of turnkey properties through an operator in Kansas City, and then I actually moved over to the BRRRR strategy in Atlanta, Georgia, and then about a year ago, I decided to take the jump over to passive investing, which I actually thought the single families were going to be passive… But moved over into passive investing last year, the goal there being to really get a peek behind the curtain and see what this is all about and see what I can learn about it, in hopes of maybe someday JV-ing or getting into syndication game myself.

Joe Fairless: Got it. Well, let’s unpack that. You started with single-family homes, then turnkey properties in Kansas City, then the BRRRR method in Atlanta, and then an LP. Let’s go deal by deal. Single-family homes – where did you buy? How many did you buy?

Randy Smith: Yeah, I started out with turnkey in Kansas City, Missouri.

Joe Fairless: Okay.

Randy Smith: I kind of sat on the sidelines for probably two or three years while I was focusing on my career, but listening to podcasts and books, and finally just got inspired by an operator I heard on another podcast, and pulled the trigger on a couple of turnkeys in Kansas City.

Joe Fairless: Okay. What was your experience?

Randy Smith: The experience was not very positive. I probably did not do as good of a job with the due diligence piece on the operator, and I ended up getting a couple of properties that were not rehabbed to the level that I would want any tenants that I’m landlording for.

Joe Fairless: Right.

Randy Smith: So I ended up with really really heavy CapEx expense. I had a lot of tenant issues, property manager was built in place with the operator as well, and had a lot of struggles with that as well… And that’s what really led me into moving into BRRRR strategy in a different market after about 6-9 months of that.

Joe Fairless: Knowing what you know now, if you had to invest in turnkey properties and that’s the only thing you could invest in, what questions would you ask, that you weren’t asking initially with this operator?

Randy Smith: That’s a great question. So I think probably the biggest mistake that I made with that process is that my due diligence basically was doing a Google search, checking them out online, looking at their website, and then asking for some references from him. And anybody who’s got half their wits to them, they’re going to just give you references that are only going to speak good things about you.

So I think asking for references really not a good way to do any due diligence on that. I probably would have dug in more to try to get a good understanding of the operations, personnel, longevity of their personnel, turnover, how long they had been in the space, how long have they been doing construction… Those types of things. And that would have been to vet the operator, and actually, to vet the deal itself. I should have spent more time on the due diligence of the actual property. I didn’t even get an inspection on that first property, which would haunt me later, because there was just a ton of missing CapEx stuff. It was terrible.

Joe Fairless: You had purchased a house before in your life, I’m assuming.

Randy Smith: Mm-hm.

Joe Fairless:  And you had gotten inspections on that house or homes that you’ve purchased previously, I’m assuming.

Randy Smith: Uh-huh.

Joe Fairless: So what gave you the confidence to not have an inspection on this house?

Randy Smith: I think I was kind of a victim of a strong personality, that — I heard him on a podcast, so I assumed he had high integrity, and it’s certainly a lesson well learned and will never make again, that’s for sure.

Joe Fairless: Okay. And thank you for sharing this by the way, because it will help others; and that’s why you’re sharing – it’ll help others learn from your experiences.

Randy Smith: Sure.

Joe Fairless: So you got two of those homes… What do you buy them for? And if you still own them, then never mind about what you sold them for. But if you did sell them, what did you sell them for?

Randy Smith: Yes, so I still own both of those properties; we’ve shifted them over to another property manager. We’ve incurred heavy CapEx for the last 2.5 years with these. The good news is, is that the real estate mentor is very forgiving, and even though we’ve had a lot of out-of-pocket expenses, the net of these two properties, when you look at all the benefits done in real estate, it’s still positive. We’ve created 80 to 100 grand in equity in these, and we’re probably on the upside of 70% of that; that would be net positive, should we sell those. And we’re actually considering selling those to shift over into some other investments.

Joe Fairless: What did you buy them for, how much have you put into them, and what could you sell them for?

Randy Smith: So they both were sub $100,000. I think we were like $90,000 for one. Estimate is probably $160,000 and we’ve put about $20,000 into it. The other one, I think we paid $120,000 and that one is in the $170,000 range, and that was supposed to be a full turnkey. So if we were to sell today, we’d probably walk away with over $100,000, and probably $50,000 of that came out of the pocket.

Break: [06:23] to [07:56]

Joe Fairless: You live in Phoenix, so you first invested in Kansas City.

Randy Smith: Yeah.

Joe Fairless: And then I heard you earlier say, you invested in Atlanta to do the BRRRR strategy. Will you tell us how it came about?

Randy Smith: Yeah, so through this turnkey process, my wife and I made the decision that we wanted to be more involved with the renovation of these properties. We were pretty confident that we wanted to stay in the single-family space; I had the plan of ramping up to 100 units, and did the math on that, that would create the passive income that I was looking for. So we decided, after listening to podcasts, reading books, that BRRRR strategy would be a good strategy to pursue.

So we did some analysis, we landed on Atlanta. I was fortunate in that my wife was able to leave her W-2, so she focused a lot on the due diligence piece here, and due diligence with contractors, property managers, the market, realtors, those types of things… And she was able to devote the time to it. Whereas me and my W-2 was full-time, very high stress and didn’t have the bandwidth to support that. So she really took the weight of that. And we jumped in and we bought a $50,000 property that had been vacant. There were squatters in it when we got our realtor in there.

Joe Fairless: Wow.

Randy Smith: Yeah, we had all of the challenges that you hear about people that are doing full gut rehabs from long distance, and it was definitely a learning experience, but much more positive than the last one.

Joe Fairless: What are a couple things you learned, and where’s the property at in its current state?

Randy Smith: The property is in Atlanta, we’ve gone full cycle on it, we’ve been able to pull our funds out of it, and then some. So we were able to actually pull out some additional cash. And we’ve created probably about 80 grand in equity on that. And it ended up being a full gut rehab; it wasn’t initially going to be that, but to our surprise, when we flew out to meet our contractor for, I think it was the second time, one of his workers had actually taken it down to the studs, even though that was not the plan… [laughter]

So yeah, it was wild. We showed up, and first we went and checked out the property the day before we were supposed to meet the contractor, and it was gutted down to the two-by-fours, which to our surprise, we weren’t expecting that. And then we showed up the next day and the contractor said, “Hey, I’ve got some really great news for you. We’re going to take this thing down to the studs and completely rehab it with no additional cost’, and as it turned out, he had no control over his subs and they tore this thing down to the studs. So it was quite the ride, I will just say that.

Joe Fairless: Well, that’s great that he owned up to what happened.

Randy Smith: Yeah, it was interesting. It was a contractor that had worked in commercial, he was trying to break into the residential side. It just was not a strength of his to be there on site, watching the day-to-day and working with these types of 1099 guys, I’m guessing.

Joe Fairless: But my assumption is — maybe it’s wrong when I just made my last comment… My assumption was since he said, “We’re going to do this whole gut rehab down to the studs, and I’ll cover the difference”, my assumption is that’s a good thing, because you’re getting all new stuff, versus if they’d done it the original way.

Randy Smith: Yeah, one would think… And I think it’s still too early to say when we look at the overall project, yes, we’ve got a fully refinished house, new everything. And we’ve got a tenant in there, it’s cash flowing now. But yeah, we had a number of challenges. We had an HVAC unit that was still in way before we were about to put a renter in it. COVID hit through this process… Just tons and tons of challenges through it. It actually took about a year to do the rehab, and we thought it’d take 90 days or so.

But again, with real estate being forgiving, this is probably my best deal, oddly enough, up to this point, in the single-family space, because we’ve created some great equity, we’ve got a cash-flowing property, and we’ve created a great rental for our tenants to live. It’s a C Class, maybe at best, neighborhood. It’s a great, safe home for our tenants and their family. So all in all, it’s been very good.

Joe Fairless: What’s it worth? Around $130,000?

Randy Smith: No, we paid $50,000.

Joe Fairless: $50,000.

Randy Smith: We put $50,000 into it, and it’s worth $180,000.

Joe Fairless: You put $50,000 into it, that’s the part I missed. Okay. So it’s worth about $180,000.

Randy Smith: Yeah.

Joe Fairless: You bought it cash?

Randy Smith: $50,000 cash.

Joe Fairless: Okay.

Randy Smith: Yeah. $50,000 cash.

Joe Fairless: Alright. So do you have a loan on it? And are you planning on doing anything with that loan?

Randy Smith: We did the BRRRR strategy, so we waited till we had a tenant in place, and then did the cash-out refi and pulled all our money out, and now we’ve got a cash-flowing property. Yeah.

Joe Fairless: Got it. Okay. So now, in this timeline, you have that under your belt. Did you do another?

Randy Smith: Yeah, we ended up doing two more; it was not full gut rehab, but $30,000 to $40,000 rehabs. We continued to have challenges with contractors; we moved on to a new contractor with the next one, and had challenges with that contractor as well.

And then in the third property—the whole time, our property manager was sitting on the side saying, “Hey, we do construction as well. We’d love to help you with these properties.” But we thought we could go find a better contractor than our property manager. And the fact is we couldn’t, so our third one, we had our property manager do it, and it was as seamless as possible. They met the time deadline, they met the dollar deadline, they got a tenant in place, they did great work… But again, just lessons learned, that if you find a good property management partner and they have in-house construction, then if it’s a good partner, that can be a very good move and a good partnership to build the portfolio. But all that to be said, we’re about two years into this, and we’ve got five properties, and to figure, $100 a door, that’s $500 a month, there’s a lot of time and energy that’s gone into those to create very, very little passive income. And actually, there’s probably hours of other details that I can share with you about other challenges, but that’s what brought multifamily and passive investing onto my radar as a more logical solution to trying to create passive income.

Joe Fairless: How much in total cash do you have in those five properties currently?

Randy Smith: In those five, I probably only have 25 grand, when you consider the cash-out refi’s on the other properties.

Joe Fairless: Got it. I’m doing a quick math, which is 24% return on your $25,000. And that’s good.

Randy Smith: Absolutely. Absolutely.

Joe Fairless: That’s good.

Randy Smith: Yeah. And there’s been some equity growth there as well. So if I were to sell them all today, I’d probably walk away, after-sales expenses, 250k-300k. So there’s been some wealth generation, which is great.

Joe Fairless:  And obviously – hey, I’ve got a syndication business.

Randy Smith: Sure. Sure.

Joe Fairless: So I’m a proponent of passive investing as an LP. But I just want to play the other side a little bit. We just concluded that you’re making 24% return on the 25k that you have currently invested in those five properties, and you just said, cherry on top, there’s additional equity should I sell those properties. So why not continue to do that, versus being an LP in deals?

Randy Smith: Good question, and this has been the struggle. There was about a year where I was looking for properties to continue going down that path, because the argument obviously, like you said, it can be made, that the wealth generation out of those has been fantastic. But it’s very, very difficult to find those properties today. And if I was able to find those properties and have similar results, I might still go down that path, but the market has exploded in Atlanta. The market has exploded in Kansas City as well, and obviously here in Phoenix, it’s crazy. So that’s pushed me into other avenues to try to continue the path.

Joe Fairless: And what do you like about passive investing?

Randy Smith: So passive investing, what I can say in the last year – and again, that’s a fairly small-time period to look at this, but in the last year, my energy and effort involved in passive investing had simply been listening to podcasts, reading some books, going to some meetups and meeting some operators, figuring out how to do wire transfers into these funds, dealing with the whole IRA process and investing with self-directed IRAs. But very, very low stress, very low activity required, and the checks have already started to flow in. And even though we’re not hitting the full prefs on any of my six investments yet, they’re ramping up, and I can see some of these other deals that have gone full cycle with just absolutely amazing returns. And it’s — like, a book I read and I’ll suggest later, Lifestyle Investor, there’s very little activity, the returns are great, and if you do the right due diligence on a good operator, you’re making a bet in the operator or operators, and you can really — as a W-2 guy, I can just sit back and focus on my job where I know that if I put X amount of effort into it, it’s going to generate X amount of income, and I don’t have to worry about any of that other stuff. So really, it’s the passivity of passive investing that is really attractive.

Joe Fairless: What’s been something that’s been less than ideal as it relates to your experience passively investing?

Randy Smith: One thing that was a surprise to me that I did not figure out on the frontend was that the initial returns don’t necessarily hit the pref that is on the PPM on the frontend. And it’s just something because I never asked the question and never even thought to ask the question, that maybe you’re one, you’re going to get 1% or 2% or 3% returns on your money; you start to see better returns in year two and three, and depending on how long it takes to go full cycle, that’s when you see the big jump on the backend. So I’ve got a lot of dollars that are tied up with getting less than pref level results in year one, which on the opposite side of that, as these things go full cycle, I think the returns are going to be phenomenal.

Joe Fairless: What is your best real estate investing advice ever?

Randy Smith: Best real estate investing advice, I would say – to your high-income W-2 guys, skip the active investing and jump right into passive investing with multifamily syndication.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Randy Smith: Absolutely.

Joe Fairless: First, a quick word from our Best Ever partners.

Break: [18:12] to [21:00]

Joe Fairless: What’s the best ever book you’ve read? You said it earlier, but I would love for you to repeat it again, and if you know the author, even better.

Randy Smith: Yeah, absolutely. So – a really great book by Justin Donald called The Lifestyle Investor. He goes through the 10 commandments of cash flow investing and passive investing. Just a fantastic book that shows you how to get time freedom, while also generating great returns.

Joe Fairless: What deal have you lost the most amount of money on?

Randy Smith: The deal I lost the most money on was a single-family home that I purchased in Atlanta, that ended up being a teardown, that I again did not take the advice of the inspection. So the inspector said to get a mechanical engineer out there or a foundation guy out there. We did not do that and as it turned out, it was a tear-down property. So we ended up selling that one for a loss.

Joe Fairless: How much did you lose?

Randy Smith: Cash, probably 10 or 15 grand, and probably more so the time that was invested in that, which was 4-5 months of high stress, multiple inspectors, getting all kinds of contractors out there. Just we could not make the number work, had to tear it down. So we were probably out of pocket 10 grand, but more so opportunity loss there.

Joe Fairless: Best ever way you like to give back to the community.

Randy Smith: Yeah, I love this question. So I give back—in my W-2, I mentor quite a bit with new employees. But personally, my wife and I give financially to our family and to a number of nonprofits, and actually, my wife has just been asked to join the board of an amazing organization called Playworks, which is an organization that helps underprivileged children stay active while learning life skills, all through the use of structured play. It’s just a fantastic foundation that really, really helps kids.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Randy Smith: The easiest way to find me is on LinkedIn, Randall M. Smith, or my Instagram handle is @salesguyinvestor.

Joe Fairless: Well, thank you so much for being on the show and sharing your detailed experiences, starting out with single-family homes, the turnkey properties, what you would do differently if you had to do them again, the BRRRR approach multiple times, contractors, and then pros and cons, and ultimately, why you choose to passively invest in syndications.

So thanks for being on the show, I hope you have a best ever day, and talk to you again soon.

Randy Smith: Thanks so much, Joe. Have a great day!

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