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.
“Feed your investments so one day they can feed you.”
In this episode, Travis explains how you can dollar-cost average, compound your investments, and build diversified passive income streams in three steps.
1. Create a new bank account.
This could be in your own individual name, the name of a trust, or an LLC. Check with your financial advisor to see what makes the most sense for you. The purpose of this bank account is to exclusively hold the real estate that you’re going to be investing in.
2. Fund the account.
This can be a lump sum that you place in the account on day one, or perhaps you want to move some cash from one account to another after a liquidity event. You could even begin funding the account through your active income. The goal is to save up enough for either the down payment on real estate you plan to purchase or the minimum investment amount if you plan to invest in syndications or private placements.
3. Make an investment that produces passive income or cash flow.
With most syndications or private placements, you will likely have the option to have your cash deposited directly into your bank account. If you purchased your own real estate, you can use different apps and software to directly deposit rent payments into your account on a regular basis as well.
Because you now have distributions from your first deal sitting in your bank account, you can use them to invest in a second deal. As you continue to repeat this process moving forward, it gets easier and easier to invest as your cash continues to compound.
This process is considered dollar-cost averaging because if you do one deal per year, for example, the market is likely to change from year to year. Each time you do an investment, you will inevitably buy at a slightly higher or slightly lower price than the deal before. This way, you can dollar-cost average similarly to how it is done with stocks.
Click here to know more about our sponsors:
Travis Watts: Welcome back, Best Ever listeners. I'm your host, Travis Watts. In this episode of Passive Investor Tips we're talking about a quick and easy three-step process on how to dollar-cost average using real estate. Disclaimers as always, not financial advice, not telling you what to do, or anybody else. I'm going to share with you what I do, and if that makes sense, that's awesome. If it adds some value, that's great. That's my intent with this episode.
So let's dive right in. So you might be familiar with the term dollar-cost average. A lot of people associate that to the stock market. So if we think of a simple example, like you buy one share of a publicly-traded stock, and let's say it's trading at $10 per share, and then it moves up to $11 per share, and you buy another share at that point. So your average cost then becomes $10.50, because you bought at 10, and you bought it 11, so we're looking at your average price.
So the beauty in this strategy is, statistically speaking, as I'm sure you're aware, it's very difficult to time the market; any kind of market. There's a lot of things out of our control, with the Fed, and the government and policies, and black swan events... So even if you've been able to time a previous market cycle, it's going to be pretty unlikely you can time everything that comes after. So by dollar-cost averaging, it just ensures that your portfolio gets the overall average price over time. Sometimes you're gonna buy high, sometimes you're gonna buy in a dip, or at a discount, and you're just gonna end up with an overall fair basis price, so to speak.
And while we're on the topic of stocks, I'm gonna pull up a quick slide here for you guys, if you're tuning in on YouTube; if not, don't worry about it, if you're listening on audio... But this is AT&T stock before the great 2008-2009 recession. So it was trading somewhere around $32 per share, and then at the bottom of the recession, once everything had fallen out, it was somewhere around $17 per share. So nearly a 50% drop, just using some loose math. So had you bought a share at the top, and then had you bought a share at the bottom, or hundreds of shares, or whatever, but equal amounts, you would have averaged out your price to about $24.50 per share. And what's cool about that is coming out of that nasty recession, you would have recovered your portfolio in about two years, at least in terms of AT&T stock, as compared to seven years, which would have represented it getting back to its all-time high again.
So again, there's a lot of reasons why you might consider dollar-cost averaging, no matter if we're talking about stocks or real estate. I love Warren Buffett's quote on dollar-cost averaging. He says "If you like spending six to eight hours per week on your investments, then do it. But if you don't, then dollar-cost average."
So we know this can be a valuable concept to us as investors, but how do we apply this to illiquid real estate syndications or individual deals that you're buying in the real estate space? So private real estate is illiquid. So whether, again, you're buying individual deals or doing syndications, there's no public market such as with stocks, where you can just click a couple buttons and be in and out of a deal. So your money goes in, it usually gets tied up for years. It's a very slow-moving machine. And in the case of syndications, a lot of these are closed-end deals or funds, meaning you put up let's say 50k to invest, but then once the deal closes, you can't get back in again. So if next year you have another 20,000 you want to go put to work, you usually can't go into the same deal. It kind of depends on the structure. That's not an absolute. But the point is, how do you then dollar-cost average?
So as a passive investor and as someone myself invested in a lot of these illiquid investments of different sorts, I'll share with you what I do. And the first step is I create a new bank account. It could be in your own individual name, the name of a trust, an LLC; you do you, check with your advisor, see what makes the most sense, but you need a bank account that's going to be used exclusively for holding your real estate that you're going to be investing in.
Break: [00:05:15.08] to [00:07:06.15]
Travis Watts: Number two, you need to fund that bank account initially; that can be just some lump sum that you put into the account on day one; maybe you just had a liquidity event, or you're moving some cash from one account to another, or maybe you're just going to start funding that account through your active income, putting $5,000 a month over there until you get either the amount that's going to be used for a down payment if you're purchasing your own individual real estate, or the amount of a minimum investment if you're going to be investing in syndications or private placements, like I do. So I'll put a range there, that's typically 25,000 to 100,000, depending on what deals we're talking about. We'll go down the middle here, for simplicity; we'll say 50k. So we want to have a target amount of 50k funded in that account.
So number three is make an investment that produces passive income or cash flow. I don't speak out about this a lot, but 90% of the deals I invest in are going to be monthly cash flow or monthly passive income. And there's a lot of reasons for this. One, I see it as a risk reduction strategy, because I'm receiving capital back quicker than quarterly, or annually, or bi-annually, in some cases.
Number two, it's the velocity of capital. As soon as that capital comes back and I have enough to go put somewhere else to work, even if that's in a brokerage account for 5,000 bucks, I can quickly turn capital that way.
And number three, among many other reasons, it's more convenient to live off monthly income that it is quarterly, or annual income, or bi-annual, like in the case of bonds, and things like that. But I digress... Number three is simply to make a passive income investment.
Now you can structure this - and most indications are private placements, so you have an option to do ACH or direct deposit right into your bank account. If you're buying your own individual real estate, renting it out to someone else, you can set up through apps and different software direct deposit as well, to where you can be paid on a monthly basis right into your bank account. I always recommend doing that.
So here's where this kind of gets to be a beautiful strategy. So we'll say that we made that first investment with $50,000. For simple math purposes, we'll say that the yield or the cash flow or the passive income is 10% a year. That means that we're collecting about $5,000 throughout the year by holding that particular investment. So what that means, and the reason this is kind of cool - we're going to talk about two things real quick, compounding and dollar-cost averaging. So on the compounding front, when we get to do a second deal, let's say it's year number two, we're doing one deal per year... So we have a bank account now with $5,000 sitting in it, because that was our distributions from the first deal we invested in. So now we only need to contribute or put up $45,000 to do deal number two, because we already have those dividends. And as we move forward, and we're going to do deal number three, now we theoretically have $10,000 sitting in the bank account from the first two deals that have been sending out their cash flow throughout the year.
So each year that goes by, it actually gets easier and easier; it's a little bit of a front-loaded snowball model. So that's on the compounding front. Now, on the dollar-cost averaging front, the reason this is dollar-cost averaging, if we're going to do one deal per year, or maybe you're going to do two deals per year, is the market's always changing, whether we're talking about the stock market, or the real estate market. Interest rates are changing, cap rates are changing, different deals are gonna be priced out in different ways, in different markets... So each time we're doing an investment, we are either buying a little bit higher than before, or buying a little bit lower than before. So that's how we're effectively able to dollar-cost average in the same way you can do with stocks.
You could think about it this way - the average home price in America around 2012 was about $250,000. Today, it's over $400,000. So if we had said we're going to buy one single family home per year as an investor, we would have been buying at 250,000, maybe then 260, maybe 300, maybe three and a quarter, maybe 350... And then today, maybe 400. So if you average that out, our average cost might be 325,000 per single family home.
So now if we revert back to our strategy, and we look at this on a decade scale, kind of like that example 2012 through 2022, and you're making one investment per year and you're putting let's call it 50,000 up, whether that's a down payment or syndication deal, and you're able to collect the 10% annualized yield, just obviously, for example, purposes, what that would effectively mean is after 10 years, if you think about it, in that bank account, you now have $50,000 coming in in passive income or cash flow. And what's cooler than just saying I have $50,000 a year in passive income coming in is that if you're not living on that money at that point, you could be using that $50,000 per year to fund your next investment.
So in year number 11, you could just use your self-sustained cash flow to make your next investment and having to put none of your own money into the deal. So again, that's the compounding and the power side of this.
So as I like to say, feed your investments, so one day they can feed you. Never financial advice, not telling anyone what to do; please seek licensed advice, but my friends, that is how you can dollar-cost average. That is how you can compound, and build diversified passive income streams.
Thank you for tuning into this episode of Passive Investor Tips. I'm your host, Travis Watts. Let's connect on social media. Like, subscribe, comment, share these episodes with anyone you think could find value in them. Have a best ever week, and we'll see you on the next episode.
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.