December 2, 2021
Joe Fairless

JF2648: Why You Should Reevaluate What It Means to Be Rich | Actively Passive Investing Show with Travis Watts


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What does “rich” mean to you? When you picture a rich person, do you imagine yachts, tropical vacations, or a lavish collection of sports cars? In this episode, Travis Watts provides a different perspective on what being rich really means in terms of having to work vs. choosing to work, freedom of time, and freedom of location.

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TRANSCRIPTION

Travis Watts: Welcome everybody to another episode of the Actively Passive Investing Show. I’m your host, Travis Watts. As always, I truly appreciate you guys being here every week to tune in, learn more, and hopefully get a unique perspective. Today, this is just top of mind because I was listening here recently. I was out in Miami at a real estate conference, I was listening to a conversation between a couple of gentlemen there and they were talking about the term rich. There’s a lot of confusion around it. I know I’ve highlighted some of this in previous episodes, but I really want to make a full episode about what it means to be rich.

Today in this episode, we’re talking about having the freedom to choose to work. You want to work because you enjoy whatever it is, not because you have the obligation, or because you have to work, or you have to go put in another 30 to 40 years climbing the corporate ladder, whatever it may be in your case. Additionally, we’re just talking about, in a general sense, waking up each morning without having financial worries because you know that your finances are in order, there’s nothing that you physically need to do. Last is just about having that general feeling that the money that you’ve already made, that you’ve already paid taxes on, that money is out there making you richer whether or not you choose to work. We’re going to dive a lot deeper. I know that was pretty high level, but let’s take it step by step.

I want to start by asking you a simple question. I want you to imagine, right now, a rich person. What does that look like? Some of you might see somebody sipping champagne on a yacht. Some you might envision he or she with their spouse, a bunch of kids, and close family around them. Maybe they’re all wearing that picturesque white clothing and those Tommy Bahama hats. Only joking. There’s a lot of marketing out there to portray and maybe what rich looks like. One image that probably didn’t come to mind when I said think of a rich person is someone working 80 hours per week where they have no free time to do anything other than going to bed, wake up, and go back to work. But unfortunately, in our culture, the hustle, the grind, and the work harder is a common theme.

Let’s break rich down in three different ways. I want to talk about financial, that’s the most obvious, I also want to talk about time, and then I want to talk about location. Alright, so let’s kick it off with financial. Money isn’t everything but it is a key component to the topic of being rich, it obviously plays a role. Like Robert Kiyosaki always points out in Rich Dad Poor Dad and other books and podcasts, rich has more to do with income than it does net worth. Here’s what I mean. In an example purpose, let’s say you or I, we have a two-million-dollar home and a one-million-dollar exotic sports car, just to use kind of a silly example. Let’s say that we financed or we leased these, we leased the vehicle and we finance the property. So we have $2 million in bad debt. It’s bad debt because these are liabilities depending on your definition of those at least. I think it’d be tough to argue that the car is not a liability. But in any case, $3 million was the purchase price of the car and the home, two million is what we owe in debt.

What this means is I have to have more assets other than this house and this car in order to have a positive net worth. If I had a couple of million bucks in cash in the bank and I still had that scenario with the home and car finance, I would be positive. So 101 is not to have bad debt, not to be sinking in liability debt, and to have an actual positive net worth regardless if you define rich as income or net worth. My point is that you still need to have a positive net worth overall either way. Ask yourself this question. This is kind of question number two. Would you rather have $5 million in cash sitting in the bank free and clear after paying taxes or would you rather have $400,000 per year in passive income for the rest of your life? Of course, assuming that this isn’t like a heavily taxed kind of income, so much like real estate where you’ve got some tax advantages to hopefully offset the 400k.

But still, that passive income is what actually, in my opinion, creates financial independence. By the way, if I had $5 million in the bank and I went to go make some investments that yield passive income, and I could get an 8% a year cash flow yield, that would be 400,000 per year. That’s kind of how I came up with that example. In one scenario, you’re not invested, in the other, you are. But when you’re invested, you may not have liquidity. Even though you have five million in investments, you may not be able to pull that out and go use it for whatever, buy a house in cash, go buy a sports car, and do exotic travel. You may not have big chunks of liquidity but you would have 400,000 rolling in per year. Again, for me, it’s about the lifestyle so we’re going to talk about that more here in a minute. Now, one thing I want to point out here is building financial independence and financial freedom if you’re a single individual is much easier than perhaps if you have 10 kids.

I would say for a lot of people, the focus isn’t necessarily to build up lots of passive income to offset lifestyle expenses when they have five kids. I totally understand if you’re a working individual or couple, that’s extremely difficult. So instead, what some people might think about is building up some assets that will later become what I would refer to as generational wealth. These are just assets you would pass down to your children over time. So we’ll use the example of real estate, maybe you’re buying some single-family homes, or some multifamily properties, or some vacation rentals, or whatever they are, you may hold those long term, pass away one day, and then your children inherit those homes. Actually, the other day, one of our neighbors has been evidently buying up the block. This guy owned four or five homes real close to where we live. I think he has three kids, so three of them are allocated to his children.

They’re going to basically inherit those homes and be able to use them however they wish. The other couple that he owns is going to be rentals, and then I think there might actually be a sixth. But in either case, he’s thinking about generational wealth. He’s building up the assets now, he’s paying them off over time, or I should say his tenants are paying off the mortgage when they pay the rent, then one day, hopefully, they’re all free and clear and as children get the step-up basis, come in and get to enjoy that. So different ways to approach it, just saying that when I was a single individual, I wasn’t even dating, and I didn’t have any pets, I had zero obligations, I was able to quickly build up passive income through single-family investing to where I had more passive income than I had lifestyle expenses. Technically, you could say that was financial freedom or independence, even though the numbers weren’t huge.

What I wasn’t factoring in in my early 20s or mid-20s was one day I will have kids and a family, theoretically or hopefully, and those numbers are drastically going to change. Alright, moving on to number two. I want to talk a little bit about time. This is a current theme to my mission, my purpose, what I speak out about at events. Freedom over your time is another element to perhaps being rich or one way you might define it. It has more to do with lifestyle. A lot of people, especially in the United States –I was one of these people years ago– get caught up in the success cycle is what I call it. I wrote a really long blog post about this, how do you climb the corporate ladder, you get all the skill sets, then you pivot, you launch your own business –just using these as examples– and then maybe you take that business public. The bottom line is you’ve made a ton of money, but you’re locked into the success cycle where it’s more, it’s more, it’s more, my cars are depreciating, I need new ones, my house isn’t big enough, I need a bigger one. Once you get the house and the cars then it’s “I need a second home.” Then once you get the second home, you need a yacht. Once you get a yacht, you need a jet. Once you get a jet, it just never ends.

You’re just trapped in this success loop. Statistically speaking, a lot of folks that have a lot of these luxuries, or what some might say liabilities, aren’t actually any happier than some people that are just dirt poor in other countries, or even here in the United States. Statistically, it’s really crazy how that works. You don’t want to get caught up and just make money, make money, money like I used to do in the oil industry because I burned out, and I burned out pretty fast over a series of just several years. I can’t imagine doing something like that for 30 to 40 years. I think you’d have some serious mental and health concerns at that point. The path to riches can’t involve nonstop work seven days a week.

Break: [00:09:51][00:11:24]

Travis Watts: Another thing to think about is all the richest people in the world, they all leverage and utilize some form of passive investing. Whether it means that they own companies that they don’t actually run, maybe they’re a board member, or not even that, or it’s real estate, it’s hands-off, and it’s passive like we’re going to talk about. But the bottom line is we all have the same amount of time, every day, every week, every month, every year. So how is it that some people can make $10 million per year in income while others struggle and make 30,000 per year working minimum wage jobs plus overtime? Some of the most hardworking people I know, friends, acquaintances, within my own family, they are harder working than I am, guaranteed hands down. I give them that any day of the week. But they are not getting ahead financially. Why? It took me about six years to fully grasp the concept and the benefit of leveraging other people’s time, expertise, resources. There are always going to be people out there that want to do it themselves. They want to be the person, they want to be the decision-maker, they want to find the deal, they want to do the underwriting, they want to manage the business, and that is excellent.

These could be CEOs of companies, these could be general partners or sponsors in the syndication space. But there’s also a lot of folks that say, “You know what? I like what you’re doing. I think you’re doing it great. I just want to piggyback off your success. I just want to share in your profits.” These are investors. These are passive investors, whether we’re talking about, again, the CEO at the fortune 500 company running one of the big-name brands. You and I can choose to buy into that stock, and we can share in their dividends, their profit-sharing, and their earnings. Whether we’re talking about syndications where the general partners are doing all the work, in leverage, putting professional property management and contractors on-site, and renovating. You and I can choose, if we wish, to just partner in that deal. Not have to manage the tenants, not have to do any of the hands-on labor, so that we can scale, so that we can build up our passive income streams, our portfolio, and our wealth without taking additional time to the theme of time.

The bottom line is that passive investments require very little of your hands-on time and commitment. Most often they can be managed, so to speak, “managed actively passive” from anywhere on the globe. I am invested in all these different syndications and all these different passive deals, I could be in Thailand right now, it wouldn’t make any difference. I don’t need to see these properties, I don’t need to be on the properties, I don’t have to show up for board meetings, I’m just an investor, and I have the choice to live how I want to live and where I want to live. It doesn’t matter, I know I keep using real estate as an example. This could be, again, stocks, dividends, interest, royalties, you could be a hard money lender, you could be all these different things. The point is, whatever investment we’re talking about, it needs to be truly passive. I’m not talking about buying a turnkey single-family property where some management company is already on-site and there’s already a tenant. That’s still active because you’re still going to have to make a lot of decisions and you’re still basically running the show.

You’re going to have to decide if you want to sell the property, refinance the property, repair the roof, patch the roof, replace the roof, there’s a lot of decisions that have to go into all this so you are still actively involved in the business. You’re more like a CEO. You’ve got folks below you kind of running the day-to-day, but you’re the high-level decision-maker, you are still active. So don’t confuse the two, I’m talking about truly passive investments. So what’s the big overarching benefit here? To me, you get to spend more time on the things you love –that’s different for all of us, friends, family, charity, church, whatever– and you get to outsource or focus less of your time on the things you don’t love. Here recently, my wife and I were doing a little bit of gardening stuff. I just realized I hate it. I mean, I hate it, like every element. Like trying to understand the different types of plants, get the right feed, and the right potting soil, plant it right, and water it all the time. I hate it.

There are some things I just want to outsource. I just want to say, “Hey, look. I’ve got the passive income, let me hire a landscaper.” I’ll say, “Hey, here’s the big picture. I want a bunch of greenery here, a little bit of mix of color over there. Alright, take it away. Thanks.” That’s where I want to be as far as landscaping is concerned. Then, in turn, I want to spend more time with my family and with my wife. As I’ve mentioned before, we’re expecting our firstborn here just around the corner. I want to be home with our firstborn, I want to actually have one on one time, be able to help out my wife, and be able to help out family members. That’s just me, though, we’re all different. But think about the things that bring the most fulfillment and joy to you in your life and think about being able to spend more time doing that. Maybe you hate doing the dishes or cleaning your house, or whatever it is, you can outsource that through passive income. That’s the only thing, it’s about time. That was number two, time.

Now I want to talk about location. With location, I mentioned that when you have these passive investments, you can live anywhere. You could travel all the time if you want to take two, three, four weeks off a month off, whatever. You have the choice to be able to do that. Unlike having the nine to five jobs with the two weeks of vacation per year, unlike having 25 single-family homes in a 10-mile radius where you’re trying to run around like a chicken with your head cut off like I used to do. It was crazy. It was crazy, you guys. It was just crazy. Of course, in my opinion, obviously, one of the best ways to passively invest and free up your time is through real estate. That is my preference, that is what I do, of course, that’s my bias because that’s where I’ve found success. But that doesn’t mean that’s right for you or that that’s the path you should take. That’s just the path I’ve found most lucrative.

Another quote that I absolutely love and I know I’ve shared it before here on the show. It’s Robert Helms from the Real Estate Guys podcast. I remember so many years ago, listening to that show. Robert says “Live where you want to live, but invest where the numbers make sense.” Here’s the deal, you might live in an outstanding market today, you might live in –I don’t know– Tampa, Florida, Jacksonville, Florida. These markets are seeing 12% to 13% rent increases right now. Single-family homes are just out of this world, everyone from New York, New Jersey is moving down there, it’s just insane, it’s blowing up. That’s fantastic in 2021, assuming that you own or invest in these assets. Hear me out though, 10 years from now, there could be a big political change, there could be a new government.

The state of Florida could say, “Hey, we’re a zero-tax state. We’re going to start rolling out a 10% state tax.” All of a sudden, everyone in Florida is going to pack up, they’re going to head out to maybe Texas who’s still a zero-tax state, and everyone’s going to be moving that way. Markets change, and markets evolve. I was fortunate to be investing from 2009 to about 2015 out in the front range of Colorado, kind of between Denver and Fort Collins. It was a great time, the market was booming, we were getting double-digit appreciation, it was just fantastic. But it’s hitting a slowdown much like you’re seeing in say, San Francisco or Santa Clara. Different markets out in California, they’re stagnant, some are even in decline right now. Just because you live in San Francisco and there was the golden era there where you were getting 15% appreciation per year.

That’s not always sustainable long-term. So if you’re in one of those markets, fantastic, and that could really work to your advantage. But if you’re starting to stagnate or decline, or you think “Hey, this market’s too hot,” this is what the beauty is to investing in real estate syndications, or even REITs –which I’ll share with you in just a minute– where you could be invested in properties all over the United States, for that matter, all over the world, even get some international diversification also. So let’s take a look at a few different ways to invest in real estate publicly and privately for passive income. First, you have crowdfunding. The bottom line here is that throughout history, there have always been investors that have funded business projects. So when you relate that to real estate, this is kind of what crowdfunding is. You put a deal out there either to the public or through a platform, and you say, “Look, we need 20 million bucks to go buy this big apartment deal that we think we’re going do A, B, and C to. We’re going to get these kinds of returns out.” Then you go get 100, 200, 300, 500 people to go invest and give some money to contribute to that deal.

That’s one way that the investors, the limited partners, or whatever the structure is, they are hands-off, they are passive, that’s a way for you and me to generate passive income. Generally speaking, with crowdfunding, there are really two types of ways you can invest. You can invest in the property itself, so you’re an equity holder. If the value of the property goes up, hopefully, you’re sharing in those profits plus collecting some cash flow along the way. Then you can also invest in mortgages on properties. As the mortgage gets paid, you get a percentage of that interest that comes in. There are different ways to invest. There’s debt and there’s equity from a high level.

Break: [00:20:42][00:23:35]

Travis Watts: Another way to participate in the real estate game for passive income is to be a hard money lender or note lender. There are so many fix and flippers out there, there are so many developers out there, there are so many people doing different things in real estate. They need capital usually on a short-term basis so there are things called, for example, like a bridge loan, which would be a shorter-term debt loan to someone. It’s kind of just bridging the gap. It’s like we need the deal today, we plan on getting permanent long-term financing in six months, but in order to actually tie this asset up, we need a hard money loan. Some folks are willing to pay higher yields, maybe they’ll pay you 8%, 9%, 10% for short-term money that you lend to them to get the deal rocking and rolling so to speak. I’ve done this, I usually do this more in a diversified manner.

Of course, not a financial adviser planner so please always seek a licensed advisor. I’m just saying I’ve done this through funds that are professionals at being hard money lenders. I’m investing in a fund or a pool, so to speak, where they’ve got 1000 of these loans –just for example purposes– spread out among all these different developers, flippers, and projects so that if any one of them decides they have to default, that is not going to crush my cash flow or my portfolio and I’m going to see a very marginal change in that. But again, you can do single notes, one deal, one partner, one transaction, here’s 100k, you can do it that way. Or you can invest in funds where you’re a little more diversified. But either way, lending is another way to get involved in real estate.

REITs, real estate investment trusts, they can be public, they can be private. We’ve talked a decent amount on the show about REITs. A REIT’s really just a special type of investment trust that’s dedicated to acquiring property. It’s usually commercial property because this is more or less, it’s Wall Street money, or it’s tens of millions of dollars, hundreds of millions of dollars in some cases. So you’re owning some shares of what, in turn, owns a bunch of these properties. REITs can be comprised of mobile home parks, or self-storage, or multifamily, or mortgages, there are so many different things. You definitely want to read and study into this and decide what asset class best suits you. This can be a liquid auction if it’s publicly traded, which means that there’s a public market to buy and sell so you could invest today. Then if in a week you need your money back, you could place a sell order, theoretically, get out in a matter of seconds, and get your money back. That’s a really nice feature.

But do keep in mind, if it’s in the publicly traded market, you’re subject to the volatility, the ups and downs, and swings of the market. If everything crashes like we saw on March of 2020, that could also be your portfolio full of REITs. Even though maybe the REITs are still performing well, they still might be dragged down by the overall market. Keep that in mind kind of as a pro and con. But this is usually great for small amounts of capital. I’ve mentioned before, my nephews have brokerage accounts. They’re between ages 16 and 19. This is how they’re getting involved with real estate with very little money. Even if they’ve got 100 bucks to go invest because they got a check for their birthday or whatever it was, they can go buy 10 shares of a $10 per share REIT or something like that. At least they’re going to get passive income and build the philosophy and the mindset of investing.

Last but not least, my personal favorite and what we talked about all the time on the show is real estate syndications or real estate private placements. Very similar to REITs, just on the private scale, so a little less volatile, a little more stable and consistent, generally speaking. But hey, there are risks and there are cons, such as syndications often they’re not liquid. When I go put 50k into a syndication, I may not see that money for five to seven years sometimes so I need to be okay parting with that. Kind of like we talked about at the beginning of this episode, where I said $5 million in the bank, or 400,000 a year in passive income. The trade-off is if you choose the income, then you don’t have the liquidity. But if you choose the liquidity, then you may not have quite the passive income or any passive income. That’s just the choice you’ll have to make. But syndications are great. You got the sponsor and general partner going out finding the deal, underwriting, managing, they’re being the asset manager, they’re raising the capital, they’re basically active investors.

Then you’ve got the LPs, limited partners like myself. I’m a hands-off investor, I’m a passive investor, along with hundreds of other people to fund the deal. Keeping in mind, as I said earlier, most if not all the richest people in the world have some form of passive investment or passive investing in their portfolio. When it comes to building wealth passively, you’re going to have to figure out what works for you. Listen to some other episodes that I’ve created on picking different asset types, or how to vet a deal, a market, a sponsor, whether to be active, or whether to be passive. There’s a lot of decisions that have to be made. I applaud you for being here to expand your mind and context, hopefully, some new information or new thoughts. To me, the key is to balance the risk and reward ratio. Is it possible I could go make some kind of investment out there and maybe double my money overnight? There are investments like that, but there’s usually a chance that in that same investment, I could lose all my money. It’s kind of like going to the horse races and putting 100k on a horse.

I could get an outstanding almost instant return, but I might lose all my money too. So it’s a balance between that and saying, “I don’t want to take any risk at all. I want the safest thing on the planet.” Okay, products like that generally exist, insured bank deposits and stuff like that. But I might also get 0.1% interest per year on that investment. Is that going to get me to my goals? It’s trying to find that equilibrium to say, “Alright, I’m getting a healthy overall return and I don’t feel like I’m taking too much risk while doing so. That suits me well for my goals, my lifestyle, and what I’m trying to achieve.” That’s what you got to think about for you. What does rich mean to you and what is it you’re really trying to achieve? There is Minority Mindset out on YouTube if you haven’t checked this channel out. It’s great. He goes out and talks to the general public about money, finance, and real estate. He’s asking people, “How much money do you need to feel completely financially secure?” Or whatever, different questions like this. It’s comical, you guys, it’s so funny. “I need five billion dollars in the bank.” Or “I need 10 million a year.”

It’s so goofy because when you sit down and you just think, how much does a house cost either to rent, to buy, mortgage, whatever? How much are two or three cars? Insurance, maintenance, upkeep, purchase price, lease payment, whatever. You can eat so much food in a month, you can only turn on your tap water so much and pay the utility. There are only so much resources that you can practically use. When you really run the numbers, you will probably find out that retirement could be here sooner versus later. It’s usually not such a huge 10 million in the bank. From a perspective, go look at stats and facts. How many people really have 10 million dollars? How many people are actually happy and retired with a whole lot less? I’m just saying, really find out and focus on what brings you happiness and fulfillment. Focus on what you want to spend your time on, the things you love, then write a list of things you hate and don’t like doing, and you’ll find out –like in my case, landscaping or gardening for example– that could be as little as a hundred bucks a month and I can completely outsource it.

I can never have to do that again in my entire life, for a hundred dollars per month. So to me, that is a heck of an ROI because it just brings me down when I have to do it. I digress from the subject. Thank you, guys, for being here, as always. Thank you for tuning in. I’m Travis Watts. This is the Actively Passive Investing Show. We were talking about what does rich mean to you? What’s the definition? Hopefully you guys found some enjoyment. As always, reach out. I’m on social media, joefairless.com, travis@ashcroftcapital.com. Connect, let’s learn, let’s chat. I’ll see you next week at the show. Thank you so much. Bye.

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