67. The Beauty Of Passive Investing With Travis Watts

PILF 67 | Passive Investing

 

Often new passive investors start with a shotgun approach when it comes to sponsors – invest with a lot of different sponsors at the minimum and you do your best to vet each one. That is how Travis Watts, the Director of Investor Relations at Ashcroft Capital, started his passive investing journey. Now that he has a stable of sponsors he knows, likes and trusts – he is investing larger amounts with fewer sponsors. Join Jim Pfeifer as he and Travis talk about investing strategies, sponsor selection, the importance of setting goals and paying attention to the most critical metric in the proforma, Net Operating Income. Tune in for great tips and tricks from a very experience passive investor!

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The Beauty Of Passive Investing With Travis Watts

I’m happy to have Travis Watts with us. He is a full-time passive investor and has been investing in real estate since 2009 and multifamily, single-family, and vacation rentals. Travis is also the Director of Investor Relations at Ashcroft Capital. He dedicates his time to educating others who are looking to be more hands-off in real estate. Travis was, in May 2020, the first ever guest for our monthly meetings at Left Field Investors. Before we had a brand, before we were called Left Field Investors, he was the first one that came on to our little Zoom meeting with 10 or 12 people. We are so grateful. That kicked it all off and helped us realize what Left Field Investors could be. Travis, it’s about time we had you on the show. We’re super happy to have you. Welcome to the show.

Thank you so much, Jim, for the invite. I’m very grateful for helping you open up the whole segment. You guys have truly evolved into something else. I love your mission and what you do. We chat at conferences. We speak on stage together. This is good stuff. I’m thrilled to be here.

I appreciate the way you give back. We were talking about the number of podcasts you’ve been on and they help you. You give investors. Tell us about your journey into passive investing, how you got to where you are, and what your financial journey was.

I dove into real estate in 2009. It was a very scary time to get started. A lot of people look at that the opposite and say, “What great timing you had,” but you got to remember the markets are melting down. The headlines are, “Get out of real estate.” I was talking to friends and families, “Should I rent or should I buy?” I was coming out of college and they’re like, “You’d be crazy to buy because we lost half our home’s value. That would be the stupidest thing you could do.” I had to go against the grain. I had to take the noise, set it aside, and look at the fundamentals. When I say fundamentals, I was pretty naive, but I knew this, the house I was buying had previously sold for about $170,000 and was on the market for $95,000.

I thought, “If nothing else, I’m buying it at some kind of discount.” What I ended up doing with it is house hacking it, which means that I had a roommate. It was in a college town. I had just come out of college. I knew there was a big demand for people needing specifically a furnished bedroom for about $600 a month. That’s what I did with it. It was a little 2-bed, 1-bath, and a shared bathroom. I don’t recommend that with a stranger. That got the wheels turning about passive investing. At the time, I wasn’t making much money actively at my W-2 job. I thought, “This is pretty cool because each month someone’s handing me a check for $600.”

I didn’t have to work for that money. It was the real estate that allowed that to happen. From there, it’s like, “How can I scale this up? How can I get 50 of these checks for $600 instead of just the one without owning a 100-unit house and a little mansion?” I did fix and flips, vacation rentals, the house hacking thing. I did a lot of things hands-on and actively. Unfortunately, I was working a W-2 job all of this time where I was working almost 100 hours a week. It was about 98 hours per week in the oil industry. It wasn’t sustainable for me. I burned out is what happened. Six and a half years in, it imploded on me.

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It was too stressful. I couldn’t allocate enough time to manage something like that. That’s where I learned about passive investing the real way or in a bigger way than having a roommate. It was two mentors that were in their 60s. They had sold their businesses in the mid-1990s and ever since became full-time LP, Limited Partner, investors in these things called multifamily syndications or multifamily private placements. I had no clue what that meant. It was these two guys giving me their time, and not a tremendous amount of time. I’m talking about 15 minutes here, 30 minutes there ongoing for a few months to where I opened my context.

I thought, “I could truly be a hands-off investor. I can still get cashflow. I can still participate in equity upside. I can still have tax advantages. I can still get the monthly checks. I don’t have to be the person who’s actively doing everything.” That was my light bulb moment and my saving grace. That’s what changed my life. That was in 2015. Ever since, I do a few different things now in the space. I’m a full-time passive investor. All my investments, 100% of them, I have no material participation in the business. I’m just the passive investor partnering with other people. I try to be that mentor that I was seeking and then I eventually found in 2015 for other people. Somebody saying, “This is what I do. It’s one option out there. If you want to learn about it, I’ll give you my time.”

That brings us up through now. I should add too, I worked with Joe Fairless, Ashcroft Capital. They’re a multifamily syndication firm. They’re a group I’ve partnered with on a lot of deals. I can support them because I put my money where my mouth is. That allows me to get access to a lot of different conferences and events where I can reach more people is what that mission is all about at the end of the day. That’s me and my journey in a nutshell. I’m happy to answer any questions for your audience.

The mentor thing, there’s a lot of talk about that. That certainly is helpful. In our community, we act like mentors to everybody. You’re a mentor and a mentee at different times, but how did you find mentors in 2015? How did you find someone that lit the light bulb and said, “Here’s what I’m going to do?”

I was going to these very small real estate meetup groups in person around the Denver, Colorado area. I eventually found a much more substantial group that I became part of in Boulder, Colorado. It’s a little bit of a commute. This was before all the Zoom stuff and things like that. That’s where I found these two mentors. What it was is about 400 accredited investors getting together once per month to talk about investing. There’s usually someone who would present a deal. That person would be pre-vetted through someone in the group that said, “I’ve done 10, 15 deals with this operator. This has been my experience.”

That’s how they got the opportunity to speak. What’s wonderful about what you’re creating for people, not only is it much like that group and what changed my life, but you’re doing it on this national scale, you’re doing this virtually where people can not have to live in Boulder, Colorado to join it. That’s what made all the difference and how it happened.

PILF 67 | Passive Investing
Passive Investing: Putting your money where your mouth is allows you to get access to a lot of different conferences and events where you can reach more people.

 

I was researching for this. We had twelve people that showed up and you were kind enough to come to a seminar. It was the height of the pandemic. No one had anything to do anyways. That opened our eyes to what we could do with this community is that if you’re online, now instead of having 12 people having dinner at a restaurant, we can have 50 people on a Zoom and get someone from anywhere. We can get experts from anywhere to contribute to our community. It’s one big mentorship. I liked how you talked about mentoring.

You started in real estate in 2009 and then in 2015, you started getting into syndication. For syndication investing, that’s a long time. This is a relatively new thing, investing in syndications. It only goes back to 2012 in the current state. Can you talk a little bit about what you’ve seen that’s changed in the seven years that you’ve been doing this? I feel like seven years isn’t a super long time, but in the world of syndications, it’s ancient.

Like anything these days, technology-wise especially. The biggest difference is there was to me, with my naive perspective, a huge lack of communication around this topic. There were not a lot of seminars, conferences, mentorships, and training programs. Now, as you and everybody reading probably know, it’s completely exploded. This message has gotten out there. Frankly, that’s a great thing. Part of my mission is to spread the word, to make sure that people realize it doesn’t have to be an index fund in your 401(k) and that’s what investing is all about until the day you die. There’s a lot more to learn. There are a lot of reasons, in my opinion, to consider passive income, cashflow, real estate in general, and things like that.

That’s been the biggest change. The other obvious change is a lot of money has been pumped into the system, not just through stimulus and money printing from the fed, but a lot of people’s money has actually come into the space, which has made it a lot harder to find deals. It’s a competitive environment. At this point, it’s becoming more of a who’s who, and you got to know brokers. You need relationships with them and prove you’ve got a track record to close a deal. Say I was going to become a brand new general partner now if I had that ambition. That’s going to be so hard to compete against the Ashcroft Capital and other groups out there that have been doing this for so long. Those are some of the major changes.

Everyone’s got to start somewhere. I don’t know that I want to invest with somebody when it’s their first deal, but I don’t want to also not invest with them because it’s their first deal. When you see these groups that are training other syndicators, then they’re partnering on those deals and they have a bunch of deals coming out, are you treating those differently when there’s a large number of GPs, one guy’s experienced and the rest maybe not? How do you analyze those or deal with those kinds of groups?

I’m glad that you brought this up because I was on a presentation for a deal and I discovered it was this model. To your point, it’s a struggle because I’ve done student deals and first and second deals with operators. I’ve done the co-sponsor stuff and all of this in the beginning, especially because I wanted to throw money out there in a diversified way, learn who’s who and figure out which groups I want to double down with, who’s going to truly under-promise and over-deliver. I got to level with you. In the last few years, I have not done any student deals or any of these co-sponsor deals. I’m not bashing any of those business models.

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I’m just saying for myself, my personal experience has been that they didn’t execute the business plan as well as they perhaps could have if they had been through the wringer 40 times. It’s pretty obvious. The more you do something, the better you get, hopefully. Sometimes you get bailed out because the market is good. You bought a property at a good price at the right time, but a huge portion of what the overall return can become is about the operator’s ability to actually execute the business plan according to what they’re telling you.

It’s interesting because I didn’t know that I had a strategy when I started, but my strategy is similar to yours. It’s like a shotgun approach. I find as many sponsors as I can. I qualify them. I’m not investing with people I don’t think are going to do a good job, but I’m trying to invest in a lot of different deals and sponsors so that a few years from now, when I’ve proven out those best sponsors, I can go heavy into them. It sounds like that’s similar to your approach. Now you’re dealing with the class A sponsors perhaps, but how do you vet a sponsor then? You’re probably investing with a lot of the same sponsors now that you’ve been doing this for a while, but with a new sponsor, maybe it’s experienced and isn’t one of these partners that we’re talking about. How do you vet that sponsor and make sure that, “This is someone I want to wire $50,000 or $100,000 to?”

I had it all backwards in 2015. It was like, “Show me the deal and the numbers. What are the returns?” That’s what I was looking at. It was like, “If this deal is 20% and this one’s 18%, I’m going to do the 20.” Pretty common sense or so I thought. Until you realize to my point earlier that if they can actually execute their business plan, that 20% can quickly go to a 10% return. Now you’re underperforming what you thought it was. Here’s how I do it. I’m not giving any kind of financial advice to anybody. I’m just saying this is my personal process. I start first with my own goals and where I’m trying to get in 5 years, 10 years, 20 years. I’m looking at what kind of investment vehicle would be appropriate for getting me to that goal.

Some people quite frankly have net worth goals. I’m starting at whatever today and I want to have $3 million net worth and that’s it. It’s like a money goal. You don’t necessarily need to be in cashflow stuff if you’re trying to get your net worth up, for example. Other people are like, “I’m overworked. I’m stressed out. I’m a doctor. I can’t do these 60-hour weeks anymore. I need to go 30 hours a week. I need to retire.” They might be more inclined to look at passive income investing. That’s where you got to start. Is it passive income? Is it equity and growth? Is it a combination of the two, which is more or less where I lie, is somewhere in the middle, like a value-add business model that you’re getting cashflow coupons monthly, but then you’re also getting some equity upside hopefully upon the sale? Hybrid mix.

Secondly, you got to have some kind of fundamental understanding of what you’re investing into your point. You got to do these podcasts, have mentors, and read books. You don’t have to do a tremendous amount of that, but you need to understand multifamily versus self-storage versus mobile home parks, cashflow versus growth, private placements, and how they work. You can identify the risks and you can read through a PPM and know what’s going on or hire an attorney to do so. At least have the know-how to do that. All of this is happening before you even look at a deal. What I’m doing is I’m looking at the reputation of the operator.

I’m googling, YouTubing, listening, and getting on the phone with them. If I can, I’m trying to meet them in person like you and I had done at conferences and events. That’s all part of my due diligence. I’m looking at what’s their philosophy and strategy. Do they specialize in doing one thing and they do it well and they’ve done it a lot, or is it like, “We do everything, a little short-term rental, new development, self-storage, house flipping?” That’s a red flag to me these days because you can’t be an expert in everything. I like groups who specialize and have a track record. From there, you got to look at markets. Again, you need a macro level about markets.

PILF 67 | Passive Investing
Passive Investing: You don’t have to be an expert. That’s the beauty of being a passive investor. You’re letting the experts do their job.

 

Why are people moving to certain areas? Looking at tax implications to where you’re investing. What companies are there? Is the population growing or declining? There are many things. We could sit here for an hour and talk about each line item of criteria, but you need to have a macro level as a passive investor. You don’t have to be the expert. That’s the beauty of being a passive investor. You’re letting the experts do their job. It’s like investing in a public company. If I’m going to go invest in Microsoft, Apple, or something as a company, I’m going to leave it to the team to figure it out. They’re the engineers, the designers, the marketers. I’m trusting that they know what they’re doing.

I just want to invest in their business. I don’t have to be smarter than them. Anyway, it all gets down to doing your due diligence that way. The last thing is the deal. Does the deal match your criteria? Monthly distributions, quarterly, no distributions, you got to look at this stuff. Potential returns and how conservative are they underwriting that deal? What’s the age of that property? What’s around the surrounding areas of that property? This is all where it gets technical at the very end, but you got to get to the point where you’re looking at the right deals, because otherwise, it’s easy to get caught in analysis by paralysis.

I joke about it. I’m in the business of unsubscribing these days because I’m on everybody’s list. My email has been circulated out there to the whole planet. I’m sitting here and when I see a new development in San Francisco that’s 40 units, I’m out. I don’t invest in 40 units, do new development, and invest in San Francisco. I’m in the business of finding operators doing what I’m looking for.

You have to get there though. You mentioned that you have to start somewhere. My first deal, none of them are things I would do now. One of them is horrible. I wouldn’t look at those and go, “Those are terrible deals,” but I certainly wouldn’t seek them out or even invest in them again, because I’ve learned so much. Like you, I’m sponsor first, deal last kind of approach. I don’t even know what to call them, sponsor accumulators, sponsor consolidators, the person who goes out and isn’t an expert in anything.

You don’t want a sponsor doing ten different things, but there are some of these groups that go and vet a sponsor in 3 or 4 different asset classes and then their capital raising for those specific sponsors. You can go to them and they vetted the sponsor, they vetted the deals. You can jump on with them if you need a new asset class. How do you feel about those kinds of operations, where you’re not investing directly with the sponsor, but through a capital raiser who might know a lot about the asset class, but isn’t the operator?

Your readers might know the term fund of funds. This has been around a long time, especially in the publicly traded world. When you think about hedge funds, a lot of them are basically the same thing. You’re vetting whoever the person is behind the scenes. I don’t even think it’s a hedge fund, but we’ll use the example of Carl Icahn, famous investor. He has this master limited partnership. It’s publicly traded. You’re investing with Carl, he’s investing himself. Most of his net worth in this fund, he’s going out and buying and investing in individual businesses. Maybe another example would be a Berkshire Hathaway and Warren Buffett and Charlie Munger, same thing. Investing is a people business at the end of the day.

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If you know, like, and trust who you’re investing with, there’s nothing wrong with that kind of model. It certainly brings benefits like diversification and obvious things like that, but you better be working with someone competent. I’m always the guy that’s like, “I like, know, and trust you, but how long have you been doing this? What’s your background? Why do you think you have a competitive edge here?” We know that Icahn and Buffett have track records and experience, but a lot of people are starting funds of funds from scratch. I would be asking about their personal background and experience.

You said you want to make sure they’re competent. How do you gauge that? It’s hard to evaluate. Because these deals are long-term and illiquid, how do you know if someone’s competent? Is it just their experience or is there something else you look at?”

I would look at experience in general. It doesn’t have to be doing this specific thing, but what makes them feel like they have a competitive edge? I’m trying to read between the lines. Is this person naive? It’d be the same question you might ask someone opening a new restaurant. “Have you opened a restaurant before? What were the results? Did it do well? Did it fail? I’m curious. If it failed, that’s not always a terrible thing. What did you learn from that experience? What are you doing differently?” This goes around to ensure that something like that doesn’t happen. A lot of people come into the syndication space from various backgrounds. Maybe it’s engineering, military, whatever it may be. They may have great fundamental skillsets of discipline, they’re workaholics, they’re going to make it happen, and they’re moral people.

There’s nothing wrong with investing with somebody who’s got a lot of experience in other things and now has done the research or found a mentor, joined a program where they’ve learned this business, and now they’re going to apply that skillset to this business. Let me simplify it for your readers. How likely is it that the person you’re investing with can actually pull off the business plan? That’s the question I’m asking as an investor. At the end of the day, it’s simply that question.

That’s a great way to look at it. You are an investor relations person. I’m assuming you get a lot of questions when people are trying to vet a sponsor, they’re talking to you. What is one question you always would ask a sponsor as you’re vetting them if you can think of one main question? Also, I don’t know if this might be a harder question, but what is the question people ask, but it isn’t necessary, from your viewpoint as an investor relations person?

I would say the first one in my personal opinion is show me the track record. Again, I’m not saying if they don’t have a track record, never invest with them. That’s not the point. Let’s use a public stock example. Look at the track record of the stock. Has it been going up year after year, decade after decade? That tells you something. Is it a brand-new company just IPO-ing now? You don’t know if they’re going to flop tomorrow and go bankrupt. The number one thing I ask for and look at is the experience and track record.

PILF 67 | Passive Investing
Passive Investing: A lot of people come into the syndication space from various backgrounds whatever it may be. They may have great fundamental skill sets of discipline and they’re going to make it happen.

 

I am of the philosophy that there’s no stupid questions. You should ask every question you have. It’s going to give you peace of mind at the end of the day. That being said, I have had people get lost in the weeds. I won’t invest in that property because it has a flat roof. I want to invest in that property because it’s a 1979 property and I only do 1980 and newer. It is beside the point. It’s good to have criteria, but it’s like if that group has bought a dozen 1979 properties and done exceptionally well, I’m not going to hold them back and say, “I only do 1980 or newer. Sorry.” Don’t get lost in the weeds, the little stuff. Try to be a little more macro level as a passive investor. That’s my advice.

In your role also, because you’re active in the community, you get exposed to a ton of different syndicators and asset classes. How do you avoid what we call the shiny object syndrome, like running after the next cool thing and only choosing asset classes that match your investment strategy? How do you deal with that? I know I struggled because I see something new and I’m like, “I got to go get that,” but it might not fit my strategy. Finally, after a couple of years, I decide I needed a strategy, but I often veer off of it because there’s something shiny and new. How do you deal with that?

First of all, it’s a valid question and it’s a tough question. It’s different for each person. For me, it’s knowing yourself and your goals, where you’re trying to get in 5 years, 20 years. Let’s use this example. My goal, for example purposes only, is $15,000 a month passive income or something like that upon retiring. Here comes the shiny object, right? It’s a cryptocurrency that doesn’t pay any cash flow. Does that help me? It doesn’t. If you can stay true to your goals and your criteria, it makes it a lot easier. Number two is I use the 80/20 rule. That’s been said a million times in different ways. People take that with different meetings.

To me, it means invest 80% of what you know and understand the best, what makes logical sense or what you have personal experience in, or what you’ve done the most research on. You want to be 80% because you’re taking less risk is what’s happening. The more you know in something, the less risk you’re taking. 20%, I diversify. I do the crypto, let’s say. I’m going to play around with it. I’m going to go stick $20,000 there and see what happens. Self-storage, mobile home parks, ATM machines, first lien notes, publicly traded REITs. I don’t want to be a one-trick pony because the 80% I’m focused on primarily might change in the future. You fast forward twenty years and it’s like, “Multifamily doesn’t make any sense. It’s cashflowing 1%. There’s no equity upside in it. I need to know other things. I can’t just know that.” That’s where I might make a pivot to some other asset class.

How do you approach a sponsor who’s entering a new asset class? I know you have some experience with this when someone’s moving from multifamily to self-storage. I don’t want to be anybody’s guinea pig. If you’re great at multifamily, it doesn’t mean you’re good at storage. It also doesn’t mean you won’t be good at storage. How do you evaluate that? How should a passive investor be looking at that? That’s happening a lot now where established sponsors like Ashcroft are moving into new asset classes. It’s not a bad thing, but how do we evaluate them on a new paradigm?

The critical conversation around this topic is knowing your risk tolerance. Not many people talk about risks in general, and it should be a wider conversation. It is with people I talk to all the time. For example, I mentioned that webinar that had all these co-sponsors and things. They were bringing a brand new property manager from out of state, into a state they’d never managed him, into an asset that they’ve never managed the class of property. To me, that’s a big risk. Your property manager is where it’s at. They’re the boots on the ground. They’re the ones running the day-to-day. If they fail, your business plan fails. That was too big of a risk for me personally, to chance.

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I’m sure some people are going to do that deal. Either they say, “That’s not a risk. I don’t think that’s very risky at all,” or they failed to identify that as a risk, something like that. Know your risk tolerance. There are people with so much higher risk tolerances than I have in this super speculation space or startup companies, venture capital, angel investing. I don’t do any of that stuff. I’m way too risk averse for it. That’s not to say someone reading shouldn’t do it. It just doesn’t match my risk profile. Know your risk is the answer I give.

A couple of topical things here. Interest rates are rising. Inflation is an issue. Rents are rising like crazy. I don’t know how sustainable all this is. How do you factor all of that in when you’re analyzing a deal with bridge debt or adjustable-rate debt, interest-only debt? How do you figure that out? Are you avoiding those deals? Are you still looking at those deals, but you need rate caps? How are you looking at this kind of thing?

Usually in the larger commercial properties, as you’re aware, when someone says we’re putting long-term debt on something, they’re usually talking about ten years. It’s not like your single-family home with a 30-year fixed rate, that kind of thing. Most often, these deals are changing hands every 3 to 5 years on average. At least historically that’s been the case. What I look for is a couple of things. They’re putting a longer debt term on the property than what they intend to hold it for. That’s important to me. You don’t want to run out of time on a bridge loan that expires in two years and all of a sudden you go from a 3% to an 8% loan and now the deal is in trouble, or you might have to sell it at a loss or whatever might happen.

I generally avoid bridge loan. I’m not bashing people’s deals out there who are doing it. There could be reasons why. There could be other precautions that are in place. I tend not to do it. Also, interest rate caps. You mentioned that. It’s like an insurance policy. You lock in today at 4%, let’s say for example. You might get a cap at 5% interest rates. If the fed says, “We’re going to 8% interest rates. You’re capped at 5%.” You can also look at, are they doing an assumable loan? Which means the next buyer can actually keep your loan structure with the lower interest rate in place. That’s a big thing to look at there. In general, the macro level of your question is a lot of people assume that if interest rates go up, the price is going to fall hard on the real estate.

In a lot of ways, that’s generally true, but we also have a severe lack of inventory right now, a huge demand for affordable housing. Inflation’s usually a great thing for real estate in general. Rents are going to rise with inflation. The name of the game with multifamily, sales storage, and mobile home parks is net operating income. If you get that net operating income up or keep it the same, you generally are holding the value on the property. If it costs more to get a more expensive loan, that’s going to hurt net operating income. Simultaneously, if you bump the rent’s $300 a month times 400 units, you’re offsetting that factor. That’s why I invest in value add, because it gives you a little bit of margin for error or cushion that the market might soften 20%, but you’ve also increased the value 20%. Hopefully you’re not losing any money.

I liked the net operating income. That’s the metric to look at. As that’s increasing, you’re adding value. That goes right to the bottom line. What do you think the effect of the reduced bonus depreciation will have on the market or investors? The bonus depreciation for the past, I don’t know how many years has been, 100% mean you can accelerate a bunch of stuff and get a big tax loss in year one. Next year is going to 80%. After that, it’s 60% and then maybe down to 50%. What are your thoughts on that? People are talking about it saying, “It’s happening,” but I haven’t heard a whole lot of conversation on how will this affect everything, the market, the investors. Are people going to behave a lot differently because they’re missing that 20% or is that 20% going to be in a different year so it’s fine maybe that’ll extend the hold period?

PILF 67 | Passive Investing
Passive Investing: We also have a severe lack of inventory right now and a huge demand for affordable housing. Inflation’s usually a great thing for real estate in general, rents are going to rise with inflation.

 

Here’s my personal take having worked in investor relations for many years, talking to literally thousands of investors. If I had to put a percentage to the amount of investors doing these deals solely on the tax benefits, that’s their number one drive, I would say it’s less than 25% in my personal opinion. Secondly, I would argue that most people, quite frankly, including myself, don’t even understand the tax code anyway, and all the benefits they’re getting or not getting in the first place. The other thing I would say is you’ve got to remember a lot of people are doing these kinds of investments inside of IRA accounts. That’s an irrelevant conversation anyhow. You pull all that together, the lack of understanding and education, and then the fact that it’s slowly reducing over time.

The fact that most people didn’t know what went into play in 2017, I say it’s not going to have a huge impact. That’s my personal opinion. What would make a much more substantial change is something like when they were proposing, we’re going to get rid of 1031 exchanges. That’s a pretty big deal. Some people have been rolling money for decades. If they, all of a sudden, were caught with their pants down and they owe $1 million in taxes, that’s a bad thing. Hopefully that doesn’t come up, but that would be a lot more substantial.

As a multifamily investor, looking at this from the passive side, because you invest passively in deals as well, what are 1 or 2 metrics that you look at? When I’m looking at a deal, I don’t want to reunderwrite it as if I’m an active investor. I’m trusting the sponsor. They did their job. I vetted them. They know what they’re doing. Now I’m looking at their deal. What are a couple of metrics that you focus on for your analysis of the deal?

Here’s my general philosophy. Trust, but verify. I obviously trust everybody I invest with, or I wouldn’t give them a dollar of my money. I also don’t want them to be naive or maybe overlooking something pretty obvious. Here’s what I’ll do. They’ll say, for example, “We’re buying this property, the rent today is $1,000 per month for a two-bedroom.” I’m making that kind of a metric. I’m going to get on Apartments.com and look at other apartment buildings in the area, what they’re renting for, and what condition they’re in. If it’s a market nearby, I’m going to go do that in person. I’m going to see, “Are they being a realist?” If they say we’re going to bump rents from $1,000 a month to $1,400 per month in 2 or 3 years, that’s pretty aggressive.

I need to know that older building comps are in that range, or newer buildings. I’ve seen some deals where, quite frankly, they’re unrealistic. You have a brand new luxury A-class apartment building at $1,500 a month and they’re like, “We’re buying this 1960 property and it’s going to be $1,450 a month.” It’s like, “No, it’s not because no one’s written that thing at that price point.” Trust, but verify. Do the Google drive-by thing if you can’t go visit the property in person. Ask all your questions to the sponsor ahead of time.

I’ve made that mistake early on. I forgot to ask some pretty critical questions. I wired the money. I’m in the deal. It’s like, “This is a quarterly distribution huh?” I should’ve probably asked that. It’s not a huge deal, but part of my criteria, nonetheless. I always look at track record, reputation, and history of the company too.

Try to be a little more macro level as a passive investor. Click To Tweet

The last question I always ask is, what’s a great podcast that you listen to? It can be more than one. Real estate related if you got it. If you got something fun, we’re up for listening to that too.

A few years ago, I was speaking with Joe Fairless. He runs the best ever real estate investing advice podcast. I said, “I want to do a video segment specifically for passive investors, but I want to call it the Actively Passive Investing Show. I want to highlight all of the active components involved in being a passive investor to let people know that it’s not fantasy land out there. It’s not just you click a button and you’re done and one day you wake up and you’re a multimillionaire. There are a lot of active components to this. I’m going to plug my own podcast, the Actively Passive Investing Show. It’s on YouTube. It’s under once a week on Joe’s podcast as well.

Thank you. I didn’t know about that one. I’m definitely going to going to take a look at that. This is the actual last question. That was the second to last. If readers want to get in touch with you, what’s the best way to do that?

I give my time back to others. I do that through 15 to 30-minute calls for free, anyone and everyone. There’s no agenda. It’s not tied directly to Ashcroft Capital. If you want to talk passive income, real estate investing in general, you have any questions I didn’t clearly address here, it’s on Ashcroft’s website, AshcroftCapital.com/Travis. I’ve got my calendar link on there. Additionally, if you don’t want to take that route, I’m on LinkedIn, BiggerPockets, Instagram, and Facebook. Reach out. I’m always happy to be a resource and connect. Let me know your feedback on this episode and any questions I can help with.

We appreciate that. When someone like you who’s so in this industry is willing to give time, it’s on the investors who want to learn something to take advantage of that. That’s awesome that you do that and that you’re willing to mentor and help people. We all need to give back. One thing I like about this industry is it’s so open and people are so willing to help, like you were taking it all the way back to the Columbus Passive Investing Group. We call ourselves CPIG. You hopped on and did a presentation. It’s still recorded. It’s on our website. It’s our third meeting, but our first with a guest. Now, as then, you’ve been fantastic. We appreciate it. Thank you so much for being on the show.

Thanks, Jim. Thanks, everyone, for tuning in.

I enjoyed my conversation with Travis. This one was fantastic. As usual, there are some similarities. He’s probably a little bit ahead of me in his journey. The shotgun approach to sponsors is what I’ve been doing. When he started, he was investing small amounts with multiple sponsors, trying to test everybody out. See where he got to. Now he’s at the point where I’ll be in a couple of years where he’s had deals go full cycle. He’s tested out the sponsors. Now, instead of going with a bunch of sponsors in smaller amounts, he’s taking bigger swings at the sponsors that he knows, likes, and trusts. Those also happened to be more experienced sponsors because as you get into this, the more you learn, the more you dig deeper, and the more you find the sponsors that you want to deal with.

I thought that was a great approach. He used to start with the deal where he’d analyze it. He wouldn’t even pay much attention to the sponsor. Now, it all starts with the sponsor, which again, that’s how our community is looking at these things as well. You start with the sponsor and then you drill down. Once you’re comfortable with the sponsor, then you start getting deals and start analyzing those. We have like-mind on that. Also, I liked how he commented about starting with your goals and how those determine your strategy and your investments. It makes complete sense. It’s obvious when you say it out loud, but many times, many of us start with the investments and then figure out our goals from there, or come up with some strategy that doesn’t go with their goals.

I know that’s how I started. I started investing for appreciation when I quit my job and needed cashflow, but I wasn’t connecting those two. Travis gives great advice, put your goals down, and then everything can follow from those. It’s not just show me the money. It’s show me the track record. He talked about that numerous times on this show. His track record means a lot. That doesn’t mean you can’t invest with someone who’s newer. If they’ve had success before, they might have success again. You hope that they will. NOI, Net Operating Income, that’s the driver of everything. We talked about financials. We’ve looked into all this stuff, but he’s right, the most important part is if you’re growing your net operating income, then you can deal with things in straight increases and other economic factors that get in the way.

The most powerful thing that Travis said was the mentorship. He found mentors when he was just getting going in this. It was part of a community. As we always talk about here, community is powerful. He found some mentors that were willing to give him time. Now what does he do? He shares his time with anybody who calls him up. If you’re new, experienced, inexperienced, you’ve been doing this forever, or you’re just getting into it, why wouldn’t you spend 15 minutes or 30 minutes on a call with Travis? He offered it. He’s a guy who’s been doing this for a long time. He knows what he’s doing. Connect with him and see what comes of it. It’s free. There’s no reason why all of us shouldn’t be calling up Travis and taking some of his expertise and soaking it in. That’s our recommendation. It’s great talking to Travis as always. We’ll see you next time in the left field.

 

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About Travis Watts

PILF 67 | Passive InvestingTravis Watts is a full-time passive investor. He has been investing in real estate since 2009 in multi-family, single-family and vacation rentals. Travis is also the Director of Investor Relations at Ashcroft Capital. He dedicates his time to educating others who are looking to be more “hand’s off” in real estate.

 

 


 

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