January 19, 2023

JF3059: What Kind of Investor Are You? | 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 shares a fresh perspective on how to determine whether you should be an active investor, a passive investor, or a combination of the two.

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Travis Watts: Welcome back, Best Ever listeners, to Passive Investor Tips. I'm your host, Travis Watts. In today's episode we are discussing what kind of investor are you, and how to know. And what we're talking about more specifically is being an active investor or a passive investor, which - yes, we've talked about before on the segment; I've got a couple new perspectives to share with you on this topic.

Disclaimers as always - not financial advice, not telling you or anyone what to do; educational purposes only. And I want to begin by defining these two in my own definition, off the top of my head. So an active investor to me means that you have a material participation in the actual business; you are working in the business, you are trading your time, effort and energy to make that business thrive or be successful.

Being a passive investor means that you do not have material participation in the business. So there's lots of types of passive investing examples. For example, holding stocks in a brokerage account or an IRA - technically, you're a passive investor, because you're not working in those particular companies. You're just an investor in those companies. Or obviously, being a limited partner, like I am, in multifamily syndications primarily, where I'm not the general partner; I'm not finding the deals, underwriting the deals, raising capital for the deals, managing the business plan... I'm just a guy saying "Here's some money, and I want to partner in that deal. Just send me the checks when there's some revenue."

So in either case, if you want to be active or passive when it comes to investing, you need to understand why. That's the very first step. So let's say you do want to be active, or you think that you want to be an active investor - is it because you enjoy being hands-on? Is it because you come from a construction or a handyman background, or you get fulfillment out of doing renovations yourself? Or is it because you love dealing with people and building teams and building networks? Is it because you've seen other people do deals and you say "I could do that better", or "I have some kind of unique skill set or competitive edge that may set me apart from the competition", or is it just because you want to build your foundation for real estate in a hands-on manner, with the expectation that one day you'll inevitably move to more of a passive role in the business.

So you could think of it like going to a restaurant - you can either go to a restaurant as a passive consumer, where you just pay some money and someone else cooks for you, and you enjoy the food, and walk out the door, or you could go to a restaurant and say "This food sucks. I think I could do way better. The atmosphere is bad, the service is bad, the location is poor... I'm gonna launch my own restaurant, because I think I can do it better, and I think I can be successful at doing it."

So alternatively, if you're looking to be a hands-off investor, or what I refer to as a passive investor - is it because you just don't have the time or the skill set to allocate towards doing your own real estate deals? Is it because you're simply just looking to diversify part of your holdings, maybe away from the stock market in tangible real real estate? Or is it because you feel like a general partner could perhaps have better connections and do a better job at acquiring and value-adding properties and executing a business plan than what you could otherwise do?

A lot of passive investors are simply high net worth, high income individuals who are focused on their own active activities outside of real estate. They can be an engineer, a doctor, a dentist, a lawyer, an attorney, a professional athlete; they have a highest and best skill set, if you will, or something that they enjoy doing with their time that generates income, and they're simply looking to diversify, maybe out of the stock market.

Break: [00:05:35.14]

Travis Watts: So by being a limited partner in a syndication or by just holding an index fund with stocks in it, or by being a hard money lender, for example, this allows them to spend more time on what they do best actively, and to have some additional passive income on the side through their investments.

One of my mentors years ago gave me some really good advice. He said, "What you don't want to do is get really good at something you don't enjoy." So if we take the example of someone who goes to school, goes to college to become an engineer, and when they graduate and start working in that field, maybe they feel unfulfilled. It's not what they hoped that was going to be. But after all, it pays okay, and they have college debt that they have to pay off, and they don't want to go back to school and switch degrees, so they just keep working. Well, after a decade of working, let's say now their salary is $200,000 a year, and they're looking around saying "There's really not much else I could do to generate this kind of income, so I might as well just keep working." This the classic example of the golden handcuffs. And before you know it, you wake up, you're 60 years old, and that was it. That was your working life. That was, in fact the majority of your life, spent on something that was unfulfilling, that wasn't your passion.

One of my favorite quotes comes from Thoreau, and he says "The mass of men lead lives of quiet desperation." And I don't particularly like that quote, in terms of what it's saying, I just think it's very true.

So here's some parting thoughts for you in this episode: whether you're an active investor, a passive investor, or perhaps even a combination of the two, which many people are, I believe that passive income is something that everyone can benefit from. If you're a house flipper, or a wholesaler, you could allocate a portion of your income towards building passive income streams; whether you're an engineer working full-time or overtime hours in your early career, you may find that 10, 20, 30 years down the road you would prefer to switch to part time work, or maybe just retire early, or have the freedom to pivot and try other careers. And passive income can allow you that freedom, but only if you start building passive income streams along the way.

So I'm not suggesting that everybody needs to be a full-time passive investor. I'm not suggesting everyone needs to be a part-time worker, I'm not suggesting everyone needs to retire early. My whole thing is passive income allows you to focus on the things that you love the most in life, and to outsource the rest. So something to think about here for the week.

Thank you guys for tuning in. It's been a short episode of Passive Investor Tips. I'm Travis Watts. I hope you've found some value. If we haven't connected, I'd love to. If you guys have any questions about passive income investing, multifamily investing, what's going on in the world and economy - I'm not an economist, but I'm happy to share what I'm up to and what I'm doing, so we can connect on Bigger Pockets, LinkedIn, Facebook, Instagram, at Passive Investor Tips or Travis Watts. Thank you guys so much for tuning in. Have a best ever week and we'll see you in the next episode.

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