Air Date: 09.30.2020
Achieving Time Freedom Through Multifamily Investing
There’s always a deal to be made. And in uncertain times, conservative underwriting can help you land a deal that will make you money, even in the worst-case scenario. Today, we speak with Ashcroft Capital Director of Investor Relations, Travis Watts about the value of conservative underwriting and what it takes to achieve time freedom. We open our conversation by exploring Travis’s journey into real estate. After talking about how your free time builds up in direct proportion to the increase to your income stream, we touch on the challenges of scaling your investments. We then dive into how Travis overcame these obstacles through self-educating and discovering multifamily syndication — an ideal investment path for his portfolio. On the topic of his portfolio, Travis opens up about the returns he’s had during the pandemic and why he’s making deals in different states. A significant theme this episode, Travis provides his perspective on why he makes deals during times of economic uncertainty. Following this, Travis unpacks what he looks for in deals while highlighting the value of conservative underwriting. Another insight, Travis emphasizes the importance of finding the right sponsorship team. As he explains, you don’t bet on a deal. You bet on the people making the deal. Near the end of the episode, we chat about why education has been Travis’s key to success. Tune in to hear more of Travis’s top investing tips, with specifics on how he became a full-time passive investor.
Key Points From This Episode:
- Travis shares details about his background and how he got into real estate.
- How Travis went from full-time active investing to passive investing.
- Building up your free time alongside your income stream increases.
- The challenges of scaling your investing and how property problems always arise.
- Self-education as Travis’s chief tool for getting into passive investing.
- Hear why Travis mainly invests in class B and C multifamily assets.
- The importance of delegation and relying on experts to do what they do best.
- Travis unpacks what his returns currently look like and why he’s making deals across the US.
- Why there’s “always a deal to be had,” despite the state of the economy.
- What Travis looks for in deals and how this is informed by his investing philosophy.
- The value of conservative underwriting and the metrics and levers that Travis uses.
- Tips on picking your sponsors; “At the end of the day, you’re placing your bet on people.”
- Simplifying your investment process by knowing what deals suit you.
- Travis’s top red flags that he avoids in potential sponsors.
- What you can do to give your investor’s confidence when landing your first deal.
- Travis discusses why self-education is the key to his success.
Links Mentioned in Today’s Episode:
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—Full Transcript Below—
“TW: How can I be in real estate without putting my time into real estate? And that’s what I’ve done ever since. I went from one extreme to the other, full-time active, full-time passive.”
[00:00:11] KR: Welcome to Ritter on Real Estate, the show about how to passively invest like a pro. On each episode, I interview real estate experts who give their top investing advice, strategies, and tools that break down the insights and the practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter on Real Estate, and I’m your host, Kent Ritter.
[00:00:34] KR: Hello, fellow investors. Welcome to Ritter on Real Estate, where we teach you how to passively invest like a pro. Today, we’ve got a guest, Travis Watts. He’s a full-time past investor. He’s been investing in real estate since 2009 in multifamily, single-family, and vacation rentals. Travis is also the Director of Investor Relations at Ashcroft Capital, and he dedicates his time educating others who are looking to be more hands-off in real estate.
So, Travis, thanks for joining today. Happy to have you here, man.
[00:01:03] TW: Thanks so much for having me. Sounds like we got the perfect audience for today’s topic.
00:01:08] KR: Absolutely, and that’s why I think it’s exciting to have you on. I mean, there’s not a lot of people that can say that they are full-time or professional passive investors. I think that’s what a lot of us aspire to be, and so I think hearing your journey of like how you got there, tips to help others get there, I think will be really powerful today.
[00:01:26] TW: Awesome. Looking forward to it.
[00:01:28] KR: Yes. So let’s start at the top. Why don’t you just tell folks a little bit more about yourself and maybe why don’t you give us some insight and what led you into real estate investing in the first place?
[00:01:38] TW: True, yeah. I think a couple things. Way back when, well, my whole childhood, I was raised by two very frugal parents. So money actually was a topic of discussion my whole childhood, except for investing was not. Neither of my parents were real estate investors in the beginning. My dad and stepmom eventually got into real estate in their late 50s, but most of my childhood was all about penny-pinching and using coupons, living below your means, that kind of stuff. How to save, save, save. So thankful that I had that experience and that upbringing. However, I had to really get into some self-education to learn the investing side.
That started with books. For me, that started with Rich Dad Prophecy, which is not a common book you hear a lot. Most people talk about Rich Dad Poor Dad as their gateway book into this industry. Rich Dad Prophecy is really, I think it was written around the year 2000 by Robert Kiyosaki, and he talks about how we’re going to have this major stock market, specifically stock market meltdown, and basically just don’t be in stocks. I mean, that’s all I really took from it. I was reading that in like high school, and this was all beyond me and anyhow. But that was really my only practical take away.
So I really took that advice. That’s the only advice that I had literally. I did have a little bit of stock holdings and that was supposed to go to college — which I ended up getting a scholarship and not needing that, so I saved it. That’s what ended up being my first down payment in real estate. So I think I knew I wanted to one day be in real estate. I just didn’t know how or when or what or why and all that kind of stuff. But what happened was I got started in 2009, as you pointed out. So right after the big collapse, maybe that was the one Robert was talking about in the book. I don’t know. He never gives any specific dates.
But anyway, I’m looking at this house out in Colorado where I’m wanting to kind of plant some roots there, and it was previously like a $165,000 home and it was on the market for 95,000, so I thought, “Well, if nothing else, a significant discount from what it recently was.” And the government was handing out a $8,000 tax credit that year that you could actually keep. You didn’t have to repay it, like the previous years. So I was combining those two facts with the fact that it was next to a college campus as well, Colorado State University, and so I thought, “Hey, I just got out of college. I know how many people need a place to rent, right? I could at least house hack this thing, right?” Then that makes it a pretty conservative approach to getting into real estate.
So that’s what I did. I did end up house hacking it, and I think that was my first eye-opener to passive income — was somebody handing me a $600 check and then knowing that my mortgage was 640 was a pretty cool feeling. I was basically living for free right out of college. So I just wanted to scale that up. I just want to make that so much bigger. I was so inspired. I wasn’t making a lot of money at my W-2 at the time. So from there, I dedicated to real estate, and the first thing I knew — well, the first thing I wanted to do was make more W-2 income so that I could put more into real estate. So I ended up working in the oilfield. I did 14-hour days, 98-hour work weeks out of state, away from home, Saudi Arabia, Middle East. I did a lot of crazy stuff that just took all my time, and that’s really where I started learning the value of my time because I didn’t have any. I couldn’t vacation. I couldn’t really date. I couldn’t — I just didn’t have time for anything. I could barely do my laundry.
So by 2015, I had done a whole bunch of hands-on single-family. I did fix and flips. I did vacation rentals, as you pointed out. I did house hacks. I did owner-occupied two-year flips, renovations, whatever you want to call them. Yeah, so five, six years in. It’s 2015 now, and I’ve just burned myself out. Too much W-2 work, not enough time to dedicate to it, lots of hands-on self-managed stuff going on, and I thought, “Man, I love real estate. I love it. I love it. I love the cash flow. I love the tax advantages but I just can’t do it. I can’t scale it up. How am I ever going to get 50 or 100 of these houses?” And so that’s where I discovered passive investing. I had to go back to the drawing board, so to speak. I started leveraging other people, finding mentors and coaches, and listening to podcasts, and attending seminars to learn what syndications were, private placements. How can I be in real estate without putting my time into real estate?
That’s what I’ve done ever since. I went from one extreme to the other, full-time active, full-time passive. Now, I just help educate people in the realm of passive investing. Mostly real-estate-based but just this concept of what I call “Time freedom” and having more flexibility over your time, more options as you build your cash flow income streams up.
[00:06:39] KR: That’s really interesting. So you got to the point I think where a lot of people do is single-families, right, where you start to look out and say, “Okay, I’m going to need 50, 100, 200 of these houses,” to get where you actually want to be and tuned into your financial goals, right? And you start to realize, well, that’s unattainable. I mean, I’m already managing what I have, let alone 100 more, right? It’s not a scalable model.
[00:07:02] TW: Right, exactly. And I think that — a couple things there. A lot of folks really don’t get past, say, 10 properties in the first place, so that’s kind of where it really starts getting tough. Yeah, I mean it’s just — and you don’t know what you don’t know, so you assume. You always think, well, I do anyway, best-case scenario like, “Oh, I’m just going to put a tenant in there, they’re going to hand me a check, and it’s going to go great for 24 months, and I won’t have any problems.” But inevitably, there’s always problems. There’s roofs, and there’s water heaters, and there’s HOAs, and there’s all kinds of stuff you gotta deal with. And it just can’t be 100% passive. It just can’t be.
The last thing I did was get a property manager, and now I’m dealing with two sides of it, right? The property managers asking, “What do you want to do about this? What about this? How do you want to —” Then the tenants are still coming to me anyway because they knew me. Now, I just made it worse and I’m paying more of my cash flow out because of it. That’s crazy, so yeah.
[00:07:58] KR: Like you said, that wasn’t the model for you. You decided though that you wanted to take a step back. What led you to what you’re doing now? Tell the folks what you are doing now. What are you investing in?
[00:08:09] TW: Yeah, exactly. I really — I attribute self-education to the culprit here. So in 2015, I knew I had to make this shift. I knew I had to make a change for two reasons. One, I didn’t like the oilfield job. And two, I didn’t think it would last anyway because oil is so boom and bust. I just figured one day I’m going to be sitting on my butt unemployed, so I need to be thinking ahead right now. And two, I couldn’t see scaling that single-family portfolio as we discussed. So I knew I had to do something different there. So 2015, I said, “Look, this is a self-education year.” I read 52 books that year, so a book a week. It sounds cool but it really wasn’t cool. It was information overload. It’s like —
[00:08:52] KR: It does sound cool.
[00:08:54] TW: A fire hose in your face. You can’t possibly obtain that much information but I did do it. Like I said, podcasts and mentors and blah, blah, blah. The biggest thing that helped was finding real people that actually exist, that actually invest in multifamily and private placements and syndications and networking with them. And saying, “What’s your experience been, and would you mind sharing kind of that past performance, and why did you get into this?” Just learning from actual human beings made the biggest impact. So I did a lot of back testing. I thought, “Hey. If I’m going to invest my time, energy, and money into something, this seriously, like, nearly 100% of my net worth, then I better know what I’m doing to an extent. And I better find an asset class that’s going to last, right?” I don’t want to be chasing the shiny object, and today I’m into crypto currency, and next year I’m into who knows what’s next, the next app — TikTok or something.
Multifamily’s been around obviously forever. We all need a place to live. I invest mostly, to your question, in value-add multifamily, say 200 to 600-unit, mostly class B properties. Sometimes, some Cs nationwide, but I definitely have my preferred states that I like to invest in. Yeah, I enjoy being a limited partner. I enjoy vetting out a team and a sponsorship group and then making that decision for myself, visiting the property sometimes to walk through it, touch it, feel it, see it. I like real estate for those reasons. It’s a tangible asset.
Then just here’s 50k, and now I’m off the hook and passive for three, five, seven years. It just depends, and I like that model for myself. And I come to find a lot of busy professionals out there that this is a great model for, whether it’s a doctor, a dentist, a lawyer, attorney, an athlete, a business owner, an entrepreneur. The list goes on and on. Highly paid individuals that are career-focused because they’re passionate about what they do. Is it realistic that a dentist or a doctor should be taking their weekends off and flipping houses? Sometimes, it just doesn’t make sense for everyone to be active in the space, and so for that reason these LP deals exist, and I love them.
[00:11:09] KR: That’s great. So going back to something you said, you said you invest mainly in B and C class multifamily. Why is that?
[00:11:19] TW: Yeah. It came from a combination of a couple things. A couple mentors in my network that have been kind of mostly in that space for like 10, 15, 20 years, so I really got a lot of like feel for that. That was kind of a coincidence that those were the folks that allowed me to be their mentee, so that was nice. And that just happened to be what they invested in. They were totally independent of one another or didn’t even know each other, but that was cool. So I got kind of that firsthand inside look at that niche.
Then, two, I just started doing a lot of research. I started — obviously, we all know what happened to real estate and stocks and all of this and the Great Recession in ’08, ’09. I use the example of the house I bought, right? So I saw single-family and what happened and I thought, “Man, how did multifamily holdup? Was it any better? Was it worse?” Statistically speaking, it outperformed single-family. It outperformed the stock market. It’s not recession-proof, by any means. It’s recession-resistant, more so than other asset classes.
So that’s kind of what led me to that niche, plus I just — for some reason, not everything clicks with me. But real estate and the single-family value-add and the multifamily value-add, it just clicks with me. It just makes perfect sense to me why I would be in that asset class, how it functions. I mean, it’s not rocket science obviously, but like I don’t know. I can’t really explain. It’s kind of an abstract thing. But when I was a kid, I really wanted to play guitar. That was like my passion. But, man, I took like two lessons and I couldn’t play one cord. I mean, I was so uncoordinated. I just couldn’t do it. I picked up drumming and it just snapped. I took like maybe six months of lessons and just branched out on my own. I formed different bands. I mean, it just clicked, and that’s how I feel about real estate. That’s why it takes so much self-reflection to know what’s right for you.
What I’m saying right now, it may not be right for everybody, and quite frankly it’s just not right for everybody. But there are a lot of folks that it can add a lot of value to, and I just want to help widen that exposure of education around the topic.
[00:13:26] KR: Yeah, and I think this is extremely helpful. I mean, and that’s the asset in the class that I choose to invest in as well. But I like to hear other people give their reasoning too, because it may be different. But for many of the same reasons that you said and as you — you’ve experienced with your own personal investments. I mean, we talked about the benefits of passive and active from a time standpoint. But just as you’re making these alternative investments different from the stocks and bonds you can buy, what are the benefits of this type of investment? What have you experienced through your own investing?
[00:14:04] TW: Yeah. I think that it’s funny. I always laugh when I think about some of the first, like, flips that I did on my own. Not having a network, not having connections, not having mentors, not having read books on this. It’s just really winging it, like really in a sketchy way, winging it. The first flip I was doing, I had to leverage my parents for some help. I was trying to save money on contractors for some of the easier tasks and I just remember my mom was in the house, and she goes, “Where’s your drill?” I said, “I don’t have a drill.” I said, “I have some screwdrivers.” Just the realization I didn’t even own an electric drill and I’m flipping a house. You know what I mean? It was such a misfit. It was ridiculous.
[00:14:52] KR: It wasn’t your skill set, right?
[00:14:54] TW: Oh, my gosh. Man, yeah. It’s just embarrassing and crazy to think about. But my point is, because it was me. Again, this was my individual realization here. I wasn’t a handy person. I’m not a contractor. I didn’t come from a construction background. I didn’t have great connections there. So I’m having to outsource all of this stuff which is eating away my profit margins. And some of those deals I did, you look at the work and time you put in, and it’s like, “Wow, I made 16K or something,” and it just wasn’t worth it. Man, it just wasn’t worth it.
Anybody who was a true professional in that same market could’ve had a 70,000 profit margin. I guess 17 or whatever. So just a self-reflection, and I like the idea that — let me do what I enjoy, what I’m good at, what I’m passionate about. Then let the true professionals do what they do, and I’m all about leveraging other people’s expertise and skills and knowledge. And so that’s kind of what led me to it, pros and cons.
[00:15:56] KR: So you’re using other people’s skills and knowledge. Then what type of — I mean, what are the returns that you expect from an investment? What type of returns have you experienced? What can people expect to get back? They give $50,000 in an investment like this. What do people expect?
[00:16:12] TW: Yeah. Obviously, since 2015 it’s changed, and now we’re in COVID, so people are being a lot more conservative, and some deals just quite frankly aren’t that good of deals. So cash flows come down. Returns have come down. But in general, my whole portfolio, I’ve invested with over 14 different groups. I’m not talking about any specific operator, anything like that. But 80% of that portfolio is value-add multifamily, private placement, syndications. I’d say rough numbers here. Like 50% of the profits are coming out of cash flow. I like stabilized assets that are 85% plus occupancy upon takeover and hopefully remain that for the whole period of hold so that you have that cash flow. So I’d say 50% over, say, a five-year period is coming from that. It might be in the range of, I don’t know, 6 to 10 percent cash flow, somewhere or something like that, paid out either monthly or quarterly as people obviously pay their rent and other income-generating items on the property.
The second half would come from potential equity upside through force depreciation. You’re renovating units and landscaping and the amenities and rebranding the asset sometimes. You’re just making the community a better place literally on both sides from investor and resident. So hopefully, as you move five years down the road, rents have come up. The community is a better place. Occupancies increase. So now you can sell and hopefully get some long-term capital gains, some equity there. That would be the other half of the coin. So if you take 50%, 50%, and that means if you’re 6 to 10 percent cash flow, then you might be 12 to 20 percent IRR, internal rate of return, kind of a total averaged out annualized return. But, of course, no guarantees in any of that. I’m just saying that’s kind of been my experience in the portfolio. Some deals outperform those by a decent margin and some underperformed, and so that’s why I believe in diversifying.
Another great thing about being a passive is I’ve got properties all over the United States with all different sponsorship groups, and that’s a beautiful thing because I got a little uncomfortable having 100% of my portfolio on the front range of Colorado in a 30 to 40-mile radius, almost 100% of my net worth, and that really freaked me out at one point when I really started thinking about risk. Yes, some to consider.
[00:18:37] KR: I think that diversification is a huge benefit. So now, we’re in COVID. As you said, things are a little bit different. What returns are you expecting at this point? What would make you invest in a deal?
[00:18:50] TW: I think, yeah, that’s a good question. So I’m of the mindset — so different people will have different philosophies, both on the sponsorship side and the LP side as to — I speak with people week to week being, A, investor relations, B, just — I like networking with people in the real estate space. I hear everything from, “Hey, this is a crazy time. And more or less I’m careful and I’m going to sit on the sidelines. I’m going to let this thing blow over and I might start investing next year, 2022. We’ll see after the election.” There’s always something to wait on, right? So there’s that mindset.
I’m of the mindset that the current deals that we’re seeing today are a direct reflection of what’s happening today, economically. So if COVID has caused a 5% occupancy drop and a collections drop, you should probably expect at least maybe a 5% discount on that property, possibly more. It just kind of depends. But my point is that, to me, there’s always a deal to be had, whether we’re in a booming market, a declining market, a stable market.
So I’ve continued investing. I’ve done about four deals since March as an LP, and that’s just my mentality. I know some very, very, very smart people with super crazy track records that told me in 2015. One guy in particular, a pretty well-known sponsor out there. I won’t name him, of course, but he tells — I’m on the phone. I said, “Please put me on your list. I really want to do a deal with you.” Blah, blah, blah. “I’ve done my due diligence to a point.” He says, “Travis,” He said, “I don’t think we’re going to be doing any deals this year or next year.” He said, “Because 2016 is going to be the biggest market collapse that you and I have seen probably in our whole lifetimes.” I thought, “Wow, that is some scary stuff.”
Well fast-forward through today, he has been on the sidelines since 2015. Meanwhile, I’ve doubled my portfolio. So I’m not saying I’m better or smarter. It’s just a different philosophy, and that’s not one that I buy into.
[00:20:46] KR: Sure. So as you’re investing, I mean, at this point, is there a cash-on-cash return that you’re looking for, an IRR that you’re looking for? I mean, are there certain — what are your metrics that you’re looking for as you’re evaluating? I mean, there’s a lot. But just from a return standpoint, what are you looking for?
[00:21:04] TW: Yeah, and something — part of my whole philosophy is more about passive income and cash flow. But that doesn’t have to even mean real estate, just to kind of zoom out a little higher level. I have invested in other asset classes, and I’m in self-storage and ATM machines and first lien notes and distressed debt funds and all of these things that cash flow. So what I’m always doing is and I’ve always said this, if, real estate for whatever reason gets too compressed to where the numbers stop making sense, in other words, I feel like I’m taking too much risk right now for the type of return that I’m getting, I stop investing in that asset. And I move to something else.
So, like, in a traditional sense, what that might mean is let’s say your cash flow on real estate came down in general to 4% a year. Well, I could buy a Muni Bond, at least historically a few years ago at 4% tax-free, with a lot more certainty and a lot less risk, possibly even insured. So why would I be taking on risk in real estate when I can do muni bonds? Just as a general idea.
So to answer your question, I always look for preferred returns. That’s something I really like. I like the alignment of interest and putting the LPs first. I’m not looking for deals that are pushing the numbers, trying to say, “Look how great and high these numbers are right now during COVID.” I would rather group half of them or something and just say, “Look, year one might be pretty low. Maybe, maybe not. But we’re going to underwrite for that just in case. We think we might get seven or eight percent cash flow. We’re going to put six, something like that.
So what I’m looking for more than ever is being conservative in the underwriting, right? So the entry cap rate versus the reversion cap rate or exit cap rate, the break-even occupancy, the type of debt structure. I’m just looking for conservative underwriting, and what I’m seeing right now is a lot of year-one cash flow looking really, really low. But that’s not necessarily performance-based. That’s projection-based, right? That’s just theoretical that things could get worse or could take a turn or whatever. So I’m okay with that. Right now, I just take that as it is what it is. That’s the times that we’re living in, and I don’t think that’s going to be a long-term thing. So for me, it still makes sense to invest in multifamily.
[00:23:29] KR: Gotcha. You talked a little bit about vetting and things you’re looking for in conservatism. So you mentioned some terms for folks. Can you expand on those a little bit on what are those things, those conservative levers that you’re looking at, and what are the metrics that you consider conservative?
[00:23:47] TW: Sure, yeah. So I do my best verbally with these descriptions here. But by the way, we can point this out later. But there is a passive investor guide that I have that goes into, like, the exact terminology and how the ins and outs work of all this stuff. But I’ll butcher through it right now and do my best. When I talked about a cap rate, so let’s say — so a cap rate would be, if you’re going to pay all cash for a property based on the current occupancy performance, rent collections, let’s say it’s a five cap, so you might expect roughly a 5% a year return on your money without any debt or leverage.
So when I’m looking at — let’s say we are buying in a five-cap today in 2020, what I’m looking for in the underwriting is that five years down the road, let’s say it’s a 5.5 cap or a 6 cap or something like that, meaning that the market conditions have softened. The economy has gotten slightly worse. And even with that factored in, you still can look at the projected returns and say, “Am I okay with this or not?” So what you’re wanting is obviously not the cap rate to be higher in the future. It’s just a form of being conservative to say, “Well, it might be. We might be in a recession in five years,” and the fact is that nobody knows.
And so it’s good to know that even with things kind of declining, you can still make money in that type of environment. That would be something I look at there. The break-even occupancy, I mentioned would be a simple example. If you had a 100-unit apartment building and a 70% break-even occupancy, at any given time 30 residents could either, A, not pay their rent or, B, move out, and you could have vacancy and you could still operate that property without having to take a loss to the investors. So that’s a good metric.
Something to think about too, with single-family and duplexes and quads is, you’ve got more risk there, right? With one tenant and one home. They move out and you’re 0% occupied, so there’s a — now, you get all the mortgage and the debt. I mean, you just go from winning to losing overnight. So I kind of like the wiggle room. It’s a little bit slower moving there.
And last, when I talked about the debt structure, what I like to see is obviously interest rates are at historic lows right now, so that’s kind of a given that you’re probably going to get a decent interest rate. But more importantly, let’s say I’m investing in a five-year business plan. We’re going to go in. We’re going to renovate, add value, sell, in five years. I like to see, for example, agency debt from, like, Fannie, Freddie, something like that. It doesn’t have to be, but I like agency debt as an investor. We’ll say anywhere from three to five years of interest-only payments that helps with the cash flow and whatnot. You’re not having to pay down the principal on it.
Then, two, would be a longer term to the debt than what the business plan actually is. So maybe you have a 10-year term on a five-year business plan, and the importance of that is, as we talked about with the exit cap rate, in five years, if we’re in the next Great Depression, well, what if you can’t get out of the deal profitably? What if you’re kind of underwater temporarily on the value? You don’t want to be forced to sell or forced to refi and take a hit, so it gives you a five-year period where you can still figure it out. You’ve got some hopefully fixed rate debt. That’s the other thing. And a little bit of wiggle room for the business plan, rather than doing short-term loans or bridge loans or something. There’s a time and place for that stuff. But in general, with the types of things I do, it doesn’t really make sense to have that type of debt structure.
[00:27:24] KR: Gotcha. Thanks. So looking at the reversion cap rates, break-even occupancy, debt structure, right? Those are all great things to look at always to build conservatism in. So I think that’s awesome.
[00:27:36] TW: Absolutely.
[00:27:38] KR: How about from — you’ve mentioned that you’ve invested what — I think it was 14 different sponsors. Is that right?
[00:27:43] TW: Right, yeah.
[00:27:44] KR: So how do you go about picking your sponsors or picking your investments, let’s say?
[00:27:50] TW: It is a little bit messy in the beginning. I won’t lie there. 2015, I knew enough to be dangerous. I didn’t know enough to be successful. So what I did, it was kind of funny. Again, you look back, and it’s always laughable stuff. But I started looking locally for sponsorship groups in my own backyard, so to speak, which was a mistake because most of the key players out there, come to find later, didn’t exist in that market. I found some kind of mom-and-pop syndicators, which is cool and nothing wrong with that. But what I learned was I put way too much emphasis on the deal, like the pro forma. I’m thinking, “Wow, look at these potential returns. This looks great,” and I like the people as people. But the fact was they didn’t have experience. They didn’t have a track record. They hadn’t really done this before. I think one group had done maybe two deals and I don’t know. The other may have been their first deal.
I didn’t ask good questions. I didn’t ask enough questions, and so what happened was, thankfully, we are in a nice little market cycle and we bought it at a good price and we bought a good property. And we bought in a good market, which was not the local market, by the way. But the sponsorship team, I can’t give them any credit. They pretty much made every bad decision you could make. And so, we didn’t lose money, thank goodness, because the other two were in play, right? The property and the price and the market, three things. But we pretty much received more or less half of the returns that we probably should’ve because a lot of things are mismanaged. The business plan was supposed to be five years. About a year and a half in, they just cut ties with it and said, “There’s a lot of work, a lot of unknowns, and we’re getting out.” We got some equity in it. Let’s get out while the getting’s good.
That taught me a lot about sponsors and how important the sponsorship team is. Truthfully, to me, at the end of the day, what are you taking a bet on? It’s really the people. It’s the team. It’s their ability to execute the business plan that they’re putting in front of you and saying this is what we think we can do. You’re betting on them and the property management group too. So my hierarchy now is the sponsorship team. The market would be second, to me, and the deal would be last, with the idea that you put the first two in play, that the third, hopefully, kind of falls into place. But you still want to do your due diligence, obviously, on the deal itself. But I just had that so backwards, man, and unfortunately I learned some lessons there, but it led me to invest with some better operators with more experience and track record.
[00:30:24] KR: I think that’s really helpful because I think that’s — I mean, it’s the approach I took for sure. So I’ve done — I’m up to I guess 11 passive investments now. I actively invest as well now. But there’s still a place for, always a place for kind of diversifying passively. So going back though, a really similar experience to you, I knew enough to be dangerous. Part of my passive investing was, I looked at it as that learning experience, as, “Okay, I’m going to invest in some of these deals, and in doing that I’m going to need to see behind the curtain a little bit. Understand how this all works, right?” So a little bit of a different reason for doing it but a very similar approach, where I knew just enough to be dangerous. I knew I wanted to invest in multifamily real estate. I didn’t know a whole lot more outside of that, and luckily I did get with some good sponsors at the beginning.
But like you said, it starts with the deal, right? And you start getting on these people’s lists and you’re just getting these deals and you’re like, you pick the deals apart, like you said. When I look back and like, “Did I even ask the sponsor, like, a question about themselves or what they do?” It was all thinking that I knew the little bit of underwriting that I knew at the time, and I could ask these questions and show that I know what I’m talking about. But really, if you think about it, yeah. I mean, I think you’re exactly right. Start with the sponsor. Understand. I like the way you put that, “Who you’re really betting on,” right? You’re betting on that team and their ability to execute.
I think if you look at it that way, it can really simplify things for you too because sometimes you get on enough of this deal list. You have so many deals coming in and you start to say, “Okay. Well, how do I know if I want to do this or this or this?” Right? I mean, you could have 12 sitting in front of you. Well, if you’ve done the work up front and say, “Okay. Well, these are the teams I like and the teams I believe that can execute,” I think that can simplify things for you too from an investment standpoint.
[00:32:12] TW: Yeah, 100%. Another thing that I always mention too is figuring out what your own criteria is. Again, what makes sense to you? What do you understand? Biggest mistake I ever made in investing was investing in a fund with a structure I really didn’t understand, and it wasn’t real estate. But it came out of an investment group that I’m in, and it was kind of this experimental idea and this thing, and I just didn’t realize how many people were involved in different groups. It got complicated and we lost money. We just lost a lot of money in it. Man, it hit me just right in the face and it’s like, invest in what you know and understand, what makes sense. That one just didn’t.
It made sense enough to where, obviously, I mean, I’m the one being too foolish with it. I did my due diligence and I asked a lot of questions. But at the end of the day, it wasn’t actually the group I invested with. It was somebody else that managed a portion of the fund from a whole other state that wasn’t really even talked about in the business plan. So it’s a little bit out of my control in a sense. But, yeah, it just made me realize how much I love real estate because it just makes logical sense to me.
[00:33:20] KR: Right. Yeah, absolutely. So with everything that you’ve learned now, now when you’re approached by or you seek out a new group and you’re thinking about making an investment, talk us through what that process looks like for you.
[00:33:34] TW: Yeah. Well, now I have my criteria already defined which makes it a thousand times easier because as I’m — I don’t even know how I get on half on this deal list, by the way. Someone’s like throwing my email around. But I get sent like a San Francisco new development deal. Blah, blah, blah. I don’t do that stuff, so I would never put myself on that deal list. But I just know automatically like I flag it out, right? First of all, new development. Don’t do it. Second of all, California. Don’t invest there. Third of all, no cash flow. Boom. So just knowing that.
So when I sat down, it was like a one-pager, just on a notepad years ago, and I just said, like, being able to speak directly to the principals or the GPs was important to me. Monthly distributions are preferred. Not required but preferred. I just like the frequency because I live on cash flow. Monthly reporting usually goes hand-in-hand, so that kind of couples there. I like Texas. I like Florida. I like — it’s just that. Again, it’s not rocket science. It’s just I did take a little time to work through my criteria. So now, as I get sent deals, I can quickly just look at bullet points and go, “Boom, boom, boom, boom. Nope, nope, nope. Okay. Not going to do that deal.” I don’t have to know anything about the sponsor or anything else.
As you get to the point where like I am, maybe you’re here too but I get — God, I can’t even tell you how many deals I get sent constantly. I mean, it seems like a daily thing. There’s a new deal in my inbox and it’s just nice to be able to filter those out because I can’t do that many deals, right? I only do like a deal a month or every two months or whatever it is. So, yeah, know your criteria. Know yourself.
[00:35:14] KR: Gotcha. So it starts with knowing your criteria. Then say you get a deal and you like the criteria, where does it go from there?
[00:35:21] TW: Yeah. So then, well, hopefully I already know this group because I’ve met them or had conversations with them, which is why I’m on their list, because I know that they’re doing these types of deals. So hopefully, that’s already there. If it’s not, I start doing my due diligence on the team. Who are these people? This deal seems really interesting. It fits my criteria. But what’s their experience and track record? I take a look at their website. I YouTube them. I can Google them, whatever. And they’ll hop on the phone, assuming all that stuff checks out and seems reasonable. Then have some conversations. I ask my questions, yada, yada. And make sure it’s 506(c) or b and just figuring out the different ins and outs of the deal.
Then sometimes, I’ll visit the property. It just depends. I visited a little more than half of my portfolio in person. I don’t always do it. It just depends. I mean, the sponsors I work with over and over and over again like Ashcroft, I usually don’t go to the newest properties that I’m investing in but I did initially. So, yeah, that’s kind of how it works. Due diligence phase. Ask your questions. Look at the docs, the PPMs, and subscription agreements. Make sure that all the ins and outs check out. Then you’re sending in your funds last and that’s it. Then you’re in for the ride three, five, seven years. Make sure you like the people you’re investing with that you get along in philosophy, right? Because that’s a long journey sometimes when you’re not fond of someone that you’re working with as a business partner because that’s really what it is.
[00:36:50] KR: That’s right. It’s like a marriage, you’re kind of stuck together.
[00:36:52] TW: I know, yeah. Like a short-term marriage which I guess a lot of those are, so yeah.
[00:36:57] KR: Awesome. So you’ve seen a lot of deals. You’ve invested in a lot of deals. I mean, what are things that stick out to you as red flags? Are there things that you immediately see that — I mean, outside of your criteria, maybe they meet the initial criteria. But then you see something and you just discount it.
[00:37:12] TW: Yeah. I think professionalism goes a long way. Man, I have seen some like overviews, packages, investment packages that seriously, not even kidding you, look like maybe a fifth-grader created it, and maybe they did. Maybe they had their kid create it, but it’s like such a turnoff of professionalism. Then blurry photos of the property or maybe it’s six pages long. I mean, come on. Like a typical overview might be 20 to 60 pages. It’s going to have enough detail in there to get all your questions answered and to show that they’ve really done the analysis and to show you some visuals in the market and the surrounding employment and the demographics and the jobs. So that’s a red flag, right? If it’s six pages long and I read through that and I end up with five questions, that’s not good.
In rare occasions, there was — I should’ve kept track of this operator but no PPM. I don’t know if that’s really ever a legal thing, but they didn’t have a PPM. So that would be a huge red flag. Always asking about track record and experience, even if the company doesn’t have it, like specifically, the individuals might have the experience. So I was on the phone with a couple the other day. They are forming a company. Well, they each carry about 25, 30 years’ experience individually in the space. But they’re forming a company together. So a lot of people are going to look at that and go, “Wow, this company has only been around for six months. I’m not investing.” Well, maybe give it a shot because there’s something behind the scenes there.
That’s something I tell a lot of new syndicators too. “How do we find investors for our first deal?” It’s like, can you leverage somebody who does have experience, even if they’re a co-GP or they’re like a mentor or a coach or they’re going to look over your shoulder and help walk you through the deal. If you can just leverage that somehow and announce that to people, it gives you a lot more comfort than just, “Hey, we’re 18 years old. We went to a course for two days and we’d like 100 grand please.” That’s a little sketchy.
[00:39:12] KR: Those are some good red flags. Anything else?
[00:39:15] TW: Those are just a few that come to mind. The gut check always goes a long way for me, and that’s why I like — I know we’re in COVID and all this but I used to prefer face-to-face. That’s usually how I would need a new sponsor or syndicator. It would be at a real estate conference or an event or something, and that’s how it would start. Well, today, I mean, leverage Zoom. I mean, everyone should be willing to jump on a quick Zoom call, a “face-to-face.” But if not, at least phone calls, and like I said, YouTube and stuff usually. There will be somebody speaking or something. Just try to feel the person out, what kind of person is this, using your old fashion gut check, and that’s gone a long way for me. So if you can do it, do that.
[00:39:57] KR: Just trust your gut. It does go a long way.
[00:40:00] TW: Yeah.
[00:40:01] KR: Well, cool. Travis, this is great information. It’s really interesting. I mean, you don’t meet too many people that have been able to take their passive investing professionally and make that into your career, so obviously you’ve had a ton of success. The last part of the show is just that — it’s the keys to success. So I’d like to ask you a couple of questions really to understand some things about you and hope we can help our listeners. The first question is what’s the one question that you would ask a sponsor if you only got one question?
[00:40:33] TW: I think in today’s environment, 2020, it would be how are you being conservative in your underwriting on this current opportunity. That would be number one right now this year.
[00:40:44] KR: I think that’s really good. How about what’s the book that everyone should be reading? Maybe 1 of those 52 that you read the other year?
[00:40:53] TW: One of the ones that I read, well, I read this book a lot, is Tony Robbins’ Awaken the Giant Within. It was one of the first books, maybe the first book that he released. So it’s like the late 80s. But because it’s on your mindset and like the human brain and psychology, it’s timeless. It’s not outdated in that sense. You’re not talking about money or something, and that’s a great book. Also, I’m not promoting this book here but I just did a book review yesterday, The Hands-Off Investor by Brian Burke. That’s like one of the first books I’ve picked up that’s really 100% dedicated to people like myself that do LP investing and syndication investing, so yeah.
[00:41:33] KR: Very cool.
[00:41:34] TW: That’s a good one too.
[00:41:35] KR: Then lastly, what is your number one key to success?
[00:41:40] TW: I want to say the ability, but the willpower or something to self-educate, right? Just stay up with your education, like yourself, education. Whether it’s books or audiobooks or YouTube or podcast or whatever, get a mentor. But you’ve got to keep up with what — I mean, things are changing rapidly right now, especially this year with stimulus and the ban on evictions, and all these — this stuff is important and landlord-tenant laws. A lot of things are just like constantly unemployment benefits matter. Obviously, our tenants and their ability to pay rent. So much but you don’t have to make that a full-time study. You don’t have to be reading every single day for hours. But every week, I would say learn one or two things per week about the industry that are worth reading.
[00:42:30] KR: Yeah. No, that’s a really important point, right? I mean, we call this passive investing, but it’s — there are some parts that aren’t passive, right? You have to own your education, and I think in many ways you have to be just as educated about what’s going on as the folks who are doing the deals, right? Because how else do you know if you’re making a good investment or not? You can 100% get a sense of the person and you have trust in the sponsors but you also have to verify yourself and know what’s going on. So I think that’s extremely important. That’s a great tip.
[00:42:59] TW: Yeah. Markets change. Assets change. We talked about what if real estate one day was a three or four percent cash flow, which it is in some parts of the world too. Another thing to think about, like London real estate, Singapore real estate. Some of those cap rates are like 2%. I don’t think I’d be investing there. So if you don’t keep up with that stuff and you just let that happen, one day you’re just looking at this like it’s just not a good risk-reward ratio anymore. So you got to keep up to a point. Yeah, excellent.
[00:43:28] KR: Awesome. Well, Travis, how can folks get a hold of you?
[00:43:31] TW: Sure. So I’m on Instagram and Facebook and LinkedIn and BiggerPockets and all that good stuff. @passiveinvestortips is Instagram and Facebook. If you don’t want to reach out on social, I do two things. I mentioned that guide earlier, a PDF download. Definitely take advantage of that. It’s 20 pages. It’s got industry terminology and how to vet sponsors and markets and deals in a lot more detail than what we are able to cover here. It’s completely free, no upsell, all that good stuff.
Then, two, I spend my weeks on these complementary 15-minute Q&A calls. Because I do a lot of blogging and videos and reviews and podcasts, people have questions naturally about themselves and, “How does this pertain to me,” or “What about this scenario?” Or, “How do I find this or that?” I just like to be just a reference for people, right? I just point you in the right direction, or “Here’s a great book to read,” or, “Have you checked out that webinar?” Or whatever it is. I’m not affiliated with that stuff. Just to be a resource. So either one of those, the guide and the call, ashcroftcapital.com/connectwithtravis. You can get one or both of those with no upsell, like I said, but free resources for you.
[00:44:36] KR: Very cool. That’s very generous, giving your time like that. I’m sure people will take you up on that.
[00:44:41] TW: They do week to week, a lot of calls
[00:44:44] KR: Awesome. Well, thank you, Travis, so much. Appreciate you being here today. Appreciate you sharing your path to being a professional passive investor and giving us some tips on the way and what to lookout for. I think especially I want folks to take away some those conservatism ideas about what to be looking for in deals today and how to vet out those sponsors. I think the fact that you talked about understanding your criteria and what your goals are out of your investment and understanding that ahead of time to make you efficient as you’re looking through deal flow. I think all of these were fantastic pieces of insights, so I really appreciate you being here today.
[00:45:17] TW: Thank you, Kent. Thanks so much.
[00:45:19] KR: Thanks, Travis.
[END OF INTERVIEW]
[00:45:20] KR: Thanks for listening to another great episode of Ritter on Real Estate. Hit the subscribe button and make sure you don’t miss out on the content that will make you a better investor. Also, visit kentritter.com for articles, videos, and tools curated just for passive investors. Until next time, this is Kent Ritter with Ritter on Real Estate. Now, go out and invest like a pro.