January 27, 2022

JF2704: 4 Millionaire Investing Tips for Real Estate Investors | Actively Passive Investing Show with Travis Watts


How can you achieve the same success as a millionaire through passive investing? In this episode, Travis shares four practices that lucrative investors use to generate more passive income and navigate the market.

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Travis Watts:  Hey, everybody. Welcome back to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. In today’s episode, I’ve got a very special episode for you called Four Millionaire Investing Tips for Real Estate Investors. A little context and background for this episode. Basically, over the last 12 plus years or so, I’ve done a lot of research on millionaires, I’ve bought a lot of reports, I’ve watched a lot of documentaries, I’ve interviewed hundreds of people, I’ve networked and been able to meet thousands of accredited investors at this point. But this episode is really just to break down kind of the mindset when it comes to investing in real estate. I want to share what’s worked for them and what can potentially help you along your journey.

The first thing that I want to point out is that investing is not just for the rich. This is definitely a tool that anyone can utilize, whether you’re accredited or non-accredited, whether you’re a millionaire, or a millionaire in the making. Hopefully this episode adds some value, as you just get to see some insights to the mindset that it takes to be a multi-millionaire real estate investor. Like I always say investing can be simple, but it’s not easy. Most people make mistakes when they begin investing, because they go in without a plan and without setting goals. We’ve talked about that a lot on the show, is how important it is to reverse engineer, to look 5, 10, 15 years down the road and say, “Where is it I want to be? What is it I want to do? Why is it that I want these things?” And then to start reverse-engineering to figure out what kinds of investments can get you there. Some people need mentorship, which I try to be on a non-paid basis, but I also have limited capacity to do that. It might be on a paid basis, with some consulting; it also might just be somebody that you know, or would like to get to know that’s doing what it is you want to do successfully. So it’s kind of picking their brain, so to speak. I applaud you for listening to this episode, because this is kind of the first step in that direction.

Alright, with that, let’s go ahead and dive into the four tips that I want to share with you today. Number one is millionaires and/or multimillionaires – they don’t save, they invest. This is a huge, huge, huge differentiator. I know that sounds probably pretty simple and basic and 101. But I was the kind of kid who was raised by parents that just said “Save your money.” That’s the whole game, is saving. It’s to use a coupon, and it’s to make $2,000, to try to save $500 of that, and then put that in your bank account for a rainy day. There was nothing taught about investing. But I’m telling you, it is so hard, unless you’re an extremely high-income earner, to get to a stage of being wealthy or being rich or whatever you want to call it, simply by saving and putting money in the bank. Generally speaking, of all those I’ve interviewed and been around, you basically want to save enough to have emergency funds and to have a liquid operating account for your lifestyle, but you don’t want to have hundreds of thousands of dollars potentially just sitting in the bank, earning nothing.

You may have also heard folks like Robert Kiyosaki, author of Rich Dad Poor Dad, I know he’s been quoted as saying “Savers are losers”, which is a bit extreme. I don’t think I would coin it quite that way. But what he’s saying is you’re losing money if you’re saving in a bank. It used to not be that way back when the banks would be paying you five, six, seven, eight, 9% on your money if you just deposited. Well, in today’s environment, as you well know, you’re making basically 0%. You might be making up to maybe 1%, but the government stats show that inflation is running it 4%, 5% and 6% annualized. In other words, you’re actually losing purchasing power if you’re not making at least the inflation amount that the government says exists. Again, that’s why you don’t want to have large sums of money sitting there losing purchasing power.

On this topic of save versus invest, I want to kind of verbally go over something that I’ve had a hard time articulating in the past, so hopefully this makes a little bit of sense to you… The way I Look at it as in the world of finance, there’s two sides of the coin. There’s the personal finance and budgeting side. That’s saving money, not spending more than what you make, understanding how to be a little bit frugal when needed, and all of this. It’s just keeping control over your finances no matter what your finances are. The other side of the coin is investing. The reason I think this is so important is because A, it’s not widely taught, B, it’s how you’re going to become a millionaire, a multimillionaire or beyond. Also, because it’s tragic to me to see celebrities, professional athletes, and high-income earners that make literally millions of dollars in income, but they don’t have the personal finance side of the coin down so they go bankrupt. It’s absolutely insane because you’ve got folks on the other side here that are in the FIRE community, the financial independence retire early, who quite frankly, could live forever off a million dollars invested. That’s the difference, invested. Invested for cash flow, passive income, things like that.

The average US household income is what, or I should say individual income, is around 50 to 60,000 per year or something like that. Quite frankly, someone that had a million bucks invested, that 8% is 80 grand a year, that would be a-okay. Most people would be a-okay with a million bucks invested. Something of the think about and put in perspective. Hopefully don’t need to make $100 million and go bankrupt to figure that lesson out. To circle back, the point is that you can’t just save, you need to invest as well.

Tip number two is that millionaires don’t tend to speculate, they don’t tend to gamble. Again, they tend to invest and there’s a big difference. It’s something that’s not talked about and some that gets confused all the time. I watch a lot of YouTube financial folks and people getting into the crypto space thinking that they’re professional investors because they think or they predict the market’s going to do A, B or C. In fact, I have a really good friend –I’ve talked about him before here on the show– who’s a day trader in the stock market. He’s also now in the crypto space, these NFTs, and all of this kind of digital stuff. It’s funny because he’s always talking to me about 50% and 100% returns. I think this stock is going to double, if you buy this crypto, there’s a good chance you’re going to have a 50% upside here in the next two weeks, and all this kind of stuff. But the reality is, if you look at his portfolio, unfortunately, he loses 50%, if not 100% of his investments all the time. He’ll go put two grand out, speculative, and then something will go bust. It’ll be some kind of rug pools, sham thing, or whatever on some new crypto.

The thing is, risk isn’t talked about enough. I’ve made a full episode on risk and why that’s important and how to evaluate it. You’ve got to understand that if you’re looking at an investment that potentially can go 50 to 100% up in a matter of a very short amount of time, you’re probably taking an awful large amount of risk. It’s like playing the roulette table in Vegas. Is it black or is it red? I don’t know. But you could either boom or you could bust and you got about a 50% chance, actually statistically a little bit lower if you’re playing in Vegas. But anyway, the odds are not in your favor is the bottom line. As a long-term strategy, that’s a losing strategy. That’s what you want to try to avoid is to not be a speculator or gambler.

Break: [00:08:36][00:10:15]

Travis Watts:  A lot of people who invest they subscribe to this buy low and sell high investing mentality. There’s nothing inherently wrong with that. But ask yourself this question, “What if things don’t go up in the future?” You’re buying a piece of real estate because why? Well, I want to flip it, I’m going to buy it for 200 I’m going to sell for 300. What if the market stops going up? What if it starts going down? Then what? The same thing can be said with the stock. I think I’m buying the stock at 10 but it’s going to go to 15. What if the stock market crashes right after you buy it? You’ve got to think about the risk profile associated with these things.

The biggest net losers of the Great Recession in 2008 and 2009 were speculators and gamblers. They were the folk’s flipping homes in 2007, 2008 as the market is falling apart and going down. They were people gambling on high growth companies that are projected to do so great, but yet the market is falling apart. That’s speculative. The best example probably was from the dotcom era in the year 2000 where we’ve got this big internet boom, everybody’s a whatever.com, and everyone’s speculating and throwing money at all these companies that aren’t even generating any revenue. It’s purely high growth speculation. Look what happened, we had a huge bust and a collapse of the whole dotcom market. It might seem like a good way to get rich, and of course, you’re always going to hear about the stories where people did just like you hear about people who win the lottery every day. That sounds great but statistically, that’s a really bad strategy to subscribe to. It’s not something that a lot of multimillionaires embrace, at least not long term. It could have been a multi-millionaire or one kind of gambler speculation on some dumb luck. But if you continue that over and over, you’ll end up losing the portfolio.

Instead, if you’re looking to produce income over a lifetime, if you’re looking to produce generational wealth to pass down to your kids, family, or charity, you’ve got to look at cash flow, you’ve got to look at passive income, you’ve got to look at interest, you’ve got to look at dividends, you’ve got to look at royalties, you’ve got to look at being paid on a monthly or quarterly basis through the types of investments that you choose. Again, I don’t want to beat a dead horse. I’ve talked about the lost decade a lot on the show. It was a 10-year period in the stock market that if you went with the buy low sell high mentality, you really walked away with $0 in your pocket, additional from what you invested over a 10-year period because there really wasn’t a cash flow or dividend strategy. You were buying the stock market in general saying “I think it’s going to go up, I hope it goes up.” It did go up and it did go down, and it did go up and it did go down, and it did go up, but you ultimately hit a flat spot for about 10 years. That’s what you don’t want to do. You want to constantly have money coming into your pocket. I find that that’s a very common theme among millionaires and multimillionaires.

The biggest reason I think this isn’t taught to many people, the reason I think this isn’t widely marketed is because it does, in some sense, take money to make money. That’s not always true in every situation. But think about this. If I had $5,000 to invest and that’s all I had, that’s where I’m starting, I invested in something that produce passive income or cash flow or whatever, and it paid me 8% a year, that’s $33 per month. Not very exciting, I can’t even pay my cell phone bill with that amount of passive income. However, once I build up a nest egg because I’ve got the financial side of my coin, my personal budgeting down, and I figured out how to be frugal where necessary, now I have $500,000 to go invest at 8%, now I’m talking about $3,333 per month. That starts to make a big difference, that could now be a mortgage payment, that could be a luxury vacation every single month, it could be so many things. That’s really kind of the turning point is when you start to build a nest egg and now it’s “What do I do with this?” Hopefully it’s not just “put it under my mattress for a rainy day,” it’s “start investing.” Cash flow investing is playing the long game and the long game, quite frankly, is how you win.

Third tip, multimillionaires and or billionaires invest in assets that appreciate in price and have cash flow components typically. I’ve referred to this in previous episodes as what I call the holy grail, it’s the best of both worlds. When I go out and I invest in real estate, what I’m ultimate looking to do is invest in real estate that’s at a discount today or below market value. Then I want that either me or the group I’m investing with will add value or renovate it to make it more valuable so that we can justify raising rents. That’s what gives us the equity upside, it’s also called forced appreciation. But while we hold the property, even if we failed on that execution plan and we didn’t end up renovating it at all, we just bought it and sat on it, in either case, it’s a cash flowing asset as well. It’s putting money in our pocket every single month and I’m not having to do anything to produce that. It’s just people living there and paying their rent. Of course, this being a real estate show and me being a bit biased towards real estate in general, that would be to me a holy grail kind of asset to invest in. Now, I don’t always just invest in real estate, I invest in some things that only produce passive income. That’s it, there is no equity upside.

An example of that might be note lending or hard money lending where I am making a high yield interest return, say eight or 10% of my money. But there’s no upside, there’s no actual asset that I’m participating in the growth of. I’m just using that for passive income to live on. There are other investments I’ve made that are more equity focused and a lot less cashflow focused where sometimes, to diversify, I do use a little bit of the buy low sell high. If you know you’re getting, for example, a really good discount on a piece of real estate that you think can turn around and get better, you might sacrifice a bit on the cash flow. You might only be getting three, four, or 5% cash flow for a while, but once it’s stabilized and occupied hopefully, then your cash flow might jump into the double digits, you never know. I do have some investments like that as well.

The last thing that I want to point out for a tip is a huge one and something I underestimated when I got into real estate 12 plus years ago. Millionaires and multimillionaires are definitely looking to invest in something that gives them a tax break or a tax advantage. Again, the reason I don’t think this is so widely marketed is because you have to really be a high-income earner to recognize how much you’re really spending and tax money. I’ll give you an example of that. Imagine that you’re a supervisor at a company, you’re a W2 active income earner, and you make $50,000 per year as a salary. Well, your federal tax bracket, I’m going to leave state out on the side because every state is different, but your federal bracket is probably going to be 10 to 12% that you owe in tax. If you break that down, just to use rough numbers, that’s about $5,000 per year that you’re paying in tax, not a huge bill.

Now imagine if you’re the vice president of that same company, you’re also an active income earner, you’re a W2 employee of the company, making $500,000 per year in salary. Well, that all of a sudden puts you in about a 35% tax bracket, it could be higher, and now all of a sudden, you’re paying $175,000 roughly in taxes every year. That’s a huge amount. We just jumped from 5000 in tax to 175,000 in tax. Without a doubt, you’re going to be saying, “Hey, how do I pay less than tax? That’s a lot.” Some homes in America sell for 175,000. You’re forfeiting buying a home or a rental every single year because you’re paying Uncle Sam instead. You guys, just a quick disclaimer, as you know, I’m not a CPA or tax advisor so please always seek licensed advice. I’m just giving you this as an example purpose and something to think about that, again, when we’re talking about millionaires and multimillionaires, we’re generally talking about high income, high net worth individuals, and they’re more inclined to look for tax advantages, quite frankly,

Break: [00:19:06][00:22:03]

Travis Watts:  Again, back to real estate. Real estate is an awesome asset class that has historically always had great tax benefits, it continues to have great tax benefits today. We’re still operating under a tax code, as this episode airs, that Trump put into play in 2017 that even enhanced the real estate tax benefits even further. It’s kind of a golden era right now, quite frankly, for real estate and multifamily.

In one of the earlier episodes here on The Actively Passive Show, I broke down one of my favorite books. It’s called Tax Free Wealth written by Tom Wheelwright, he’s a CPA. I love what he said in his book, though. He says, “The IRS is actually your business partner. You want to partner up with them and you want to find out where they’re going to give you the most money.” I’m paraphrasing what he said, but basically, hear me out on this example. You’re in a 35% tax bracket and there’s an investment you can do. You can take $100,000, you can go place it into this investment, and you’re going to get a 100% write-off or deduction for making that investment. What the IRS is essentially doing in this situation is saying, “We’ll give you 35% off your investment.” That’s an immediate tax savings of 35% or $35,000 in this case, just for making the investment. This is how Tom Wheelwright sees that as a partnership.

They’re saying, “Look, we know that there’s risk in investing. If you take your 100,000, you can go put it in the bank, you can go put it under a mattress, and it is what it is. You’re going to pay all your taxes and we’re not helping you at all. Or you could go place it into real estate, or oil and gas, or some kind of investment over here and we’ll let you take, –for example purposes– 100% deduction. They’re basically just allowing you to pay 35,000 less in tax or they’re just giving you $35,000, in a sense. This is how powerful the tax code is to learn. I highly, highly recommend everybody get a competent CPA that specializes in what it is you’re doing or that you want to do. It’s a pretty sweet deal. I’ve come to recognize now, of all these deals I invest in, all these syndications that have come full cycle and they’ve sold, I’ve worked with my CPA and I’ve asked a lot of questions that it is an amazing tax advantaged asset class. It really is. Of course, everyone’s situation is different and I’m not a tax advisor. But definitely multimillionaires have their eye on the tax code.

Let’s recap the four tips here in the episode. Millionaires and or billionaires don’t save, they invest. They don’t speculate, they invest. They invest in assets that appreciate in value and have cash flow components ideally. They invest assets that give great tax benefits.

I hope you guys found this episode useful. I really enjoy doing these. Look, I’m only sharing my perspective, I’m only sharing my opinion. You might agree, you might disagree, you might have a different take on it, and that is totally cool. We’re all different. But my mission and my goal is to help spread the word on things that I think are worth listening to, things that have helped me, things that have helped a lot of people, that I’ve seen help a lot of people, and I want to share them with you. I just want to bring them to surface and bring them to light and these little short snippet episodes of 15 to 30 minutes long. I hope that you guys really find some fulfillment because I really get a lot of fulfillments from sharing with you guys. It’s great when you reach out and say that something helped or that it puts you on a different trajectory in terms of investing and things like that. Always reach out and connect. I’m on Instagram, I’m on LinkedIn, I’m on Bigger Pockets, I’m on joefairless.com, travis@ashcroftcapital.com. Always happy to be a resource for you guys. Thank you so much. I’m Travis Watts, host of The Actively Passive Show. Thank you for tuning in. Have a Best Ever week and we’ll see you in the next episode.

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