Announcer: The Limited Partner shares in the potential outsized returns of a well-planned and executed investment. But as a passive investor with no day-to-day operating requirements, whose liability is limited to the extent of their share of ownership, the limited partner has the maximum leverage on their most precious asset – their time. Now, they say you're the average of the people you surround yourself with. Are you looking to elevate your network, connect with individuals that bring your average up? The Limited Partner is more than just a podcast. It's a community to learn, to participate to connect. There's no other community out there like this for limited partners. So, subscribe to the podcast. But most importantly, join the community at thelimitedpartner.com. Welcome to the podcast with your host, Jake Wiley.
Jake Wiley (JW): Welcome partners, this is your host, Jake Wiley. This week, I'm joined by Travis Watts. Travis is a full-timee investor, and has a great story. Travis, welcome to the show. And thanks for being here.
Travis Watts (TW): Thanks so much, Jake. Thrilled to be here.
JW: Well, as I just alluded to, you've got a really cool background and you've done a bunch of different things. So, one, I guess, why don't you start off by telling us a little bit about your background, where you started and how you ended up where you are today?
TW: Well, it's a wild ride, I'll tell you that, in many different ways. But I started out actually on a musical pursuit. So, from actually Junior High, High School, College and post-college, I was in bands, I was the drummer, I went to college for the only thing I knew and loved, which was music. So, I wanted to be, you know, launch a recording studio and tour with bands and be a drummer and do all these crazy things. When I actually got into the industry firsthand, I was actually out in New York City in Manhattan, and I was quickly realizing kind of the who's who and how things work and what the reality was for me specifically, which was like, hey, go work in a shop, you know, for 10 bucks an hour and go repair lights. And yeah, keep dreaming about going on tour, I kind of got shut down right out of the gate. And I thought oh man, that's nothing like what I thought that was gonna be. So, this was in an interesting time in the economy. This was in 2009 and I'm out there looking for work at the worst possible time. It's a complete 180 of where we are today where we can't get enough workers at this point. You know, I was beat out by people with 30, 40, 50-year work histories and resumes and here I am fresh out of college with no real skill set. So anyway, long story short real estate is always in the back of my mind from early on. I had read the Rich Dad Poor Dad books and things like that and just kind of planted the seed that yeah, you know, that makes sense. One day, you know when the timing’s right, maybe that's something for me, I don't know. And so I went back to Colorado, it's where I was raised. And in that particular market, this was about an hour outside Denver, real estate was about 40% down at this point, and I had to make one immediate decision. Am I going to rent or am I going to own moving forward, right, I need a place to live. And I decided to start with house hacking. So I bought a little two bed, one bath at a depressed price like $95,000-unit rented out the spare bedroom for 600 bucks a month, and figured it out pretty quickly. I'm getting my mortgage paid by a renter. That's what started the whole cash flow and passive income and how could I take 600 and scale that up to 60k. And then, you know, take that from 60k to 600k. You know, this started the trajectory so to speak. So long story short, I did a bunch of fix and flips, did vacation rentals, did house hacking, did a lot of active real estate. But you know, like a lot of your listeners probably I was a W-2 worker also I had a job. I was working in the oil industry most of this time. And that was a lot of hours. It was a lot of commitment and what little spare time I had, it was all going to the real estate and trying to do it all myself and I burned myself out after about six years of this and that's what turned me on to being a hands-off investor and a passive investor. And so around 2015 I started shifting my portfolio from the single-family homes and these do-it-yourself projects and partnering up with people who are doing syndications. You know general partners who are experts at what they do. They're their best in business and quite frankly, I wasn't, can't beat them join them, right? But it just seemed like a lot better path that made logical sense that I could scale up fairly quickly and easily. So that's what I do today is share with people kind of a similar tone of story that if you're a busy professional, you know, if you're career-driven and focused on other things, that's awesome. You can still be in real estate and not have to worry about tenants, toilets, and termites.
JW: That's a great story. You know, it's it kind of reminds me I think back to my days we talked about it being a musician, I think at one point in time I wanted to own a restaurant, right like that was going to be my thing like you know, I'd be like the “it” restaurant and then I worked in a restaurant and you know, consistently got home at two o'clock in the morning and you know, from closing up and making sure everything was ready to go and I realized, yeah, I don't think so, not necessarily the life that I want to live. Right? It took a left in my career, but I totally feel the pain that you saw, like, when you were doing it all yourself as a W-2 worker, you know, but also being really active in real estate, you were just totally limited, right? There's only so much you can do and you will find that cap relatively soon and then you'll you'll probably be bumping against that I know I was for a while where I was like, well, why can't I scale this thing? And it was like really, it was like I was out of bandwidth. And it was like the idea of taking on like another property and another tenant you know, like I read the Rich Dad Poor Dad books before, and I probably, my listeners have probably heard this before, but I didn't catch the memo on going bigger, right multifamily. It was like, just get out there, buy some real estate, you know, get a single-family get the rental income and it's small dollars, it's not life-changing. And then, two, what's also interesting is when you do the really small stuff, you are still personally behind every single one of those loans, right? So, then you reach a cap too, right there it’s like, sure, maybe I'd love to have 50 of these. But you know, you get to a point where your banker is looking at you be like, I don't think this is gonna work.
TW: That's exactly what happened in my story. You know, and I think that you know, and rightfully so I was very naive when I dove in, I didn't know what I didn't know. But I think that it seems rosy in the beginning, right? Real simple. I'll just buy this house over here, I rent it out for this much per month, I'm always, you know, when you start running the math home and to get, you know, 1500 a month times 12 times, what 20 years, I'll just pay off the mortgage. Yeah, you start thinking, you know, best-case scenarios, but then things pop up and roofs leak and tornadoes happen and you get a bad tenant, and people don't pay rent and all these different things. And you think God, this really is a lot of work. And then on top of it to your point, a lot of liability potentially, when you're signing all these loans, and then those hurdles of look, you know, the bank's like, you know, you got five, seven properties, it's like, we're gonna stop loaning to you. And there's ways around it, it's just, it just seemed like an uphill battle the whole way. And anyway, that was my experience, too.
JW: I think I jokingly told somebody that I have bought more air conditioners than most people have bought in their entire lifetime, right? Like, I probably bought more than most of the guys that are selling them have sold. Those are the things that like you, you don't really know, nobody ever, like runs their model being like, hey, I've got to put a 6000 $7,000 air conditioning system. And because as soon as you do that, like none of the numbers work. And I have done those multiple times. And I can tell you that is so painful. That's like a punch in the stomach. So yeah, those are the things that probably get in, you look at it, it's rosy, there's these projections, and this is how your life is gonna look in five years if you just keep doing this. And it's like reality sets in. It's like one air conditioner, or a roof or a leak or something like that can set you back for years.
TW: And I think it also has to do a lot with the amount of capital you have to work with. I was listening to Charlie Munger and Warren Buffett at their Berkshire Hathaway meeting, speak about this. And he was like back then, you know, I forget what it was, the 60s, 70s, whatever. They were getting these crazy returns with their portfolio like these 30 and 40% annualized returns. But he said it's because we had a small amount of capital that we were deploying, and were able to work with. And the amount of opportunity for that amount of capital was plentiful, right, he said, but today, we have billions of dollars that we have to go put to work. And he's like, there's no such thing as you know, 30 and 40% returns right now, you know, they're happy with five, six or seven, that's pretty solid. So, it matters, right? And to your point of it's not life-changing. I remember running the ROI on some of those house hacking. And I was like, if I furnished the unit, and I spend $1,000, and I get 100 more and rent, blah, blah, blah, right? It's an infinite return in one year. But at the end of the year, what happened? I made $1,000 I mean, after a whole year, so yeah, that's a great percentage. But I wish I could do that with $2 million, you know.
JW: Exactly. Let's flip the script, right? Because I think this is where it gets really interesting. And I really do like the the first part of the story is that, for my limited partners out there that are thinking about it and there's this opportunity to maybe get into a deal and be active or buy our own property, not saying you shouldn't I think that there's a lot of lessons that you can learn when you do these things. You know, the real objective is not to create another job and like, sounds like you did that I did that for myself created another job, right? So you're working two jobs trying to make this thing work. If your objective is really and truly to be a passive investor, you've got to flip the script and look into this different model, which is really what we're talking about here on the show is what does it mean to be a limited partner? What does it mean to be a passive investor? And then how do you do that well? Right? Because there are a lot of people out there that are just hacking into this thing. And you know, pulling money together and throwing it at the wall and hoping it sticks. And you know, honestly, in this current market, that probably works. And that's a really scary thing, because there's so much money moving around. Let's talk about your transition into limited partnerships, bigger deals. What did that look like?
TW: Well, first of all, it wasn't easy. And I don't want to make it sound like it was easy. I was very skeptical. I was very nervous. It was a big change for me. It was as big of a move if not bigger than when I first started and said I'm going to take nearly all my money and I'm going to go into single-family. I'm gonna try this out. Right? That was a bold move at the time, but in perspective, I was young, and had it all gone wrong, I could have recovered and come back. Right? You always got to keep that in mind too. You know it's age-dependent, you should have 70-year-old start deploying 100% of their capital in something brand new, like crypto. I mean, you know, it matters how old you are. So here's how it worked. I was at a local real estate meetup group. This was out in Boulder, Colorado introduced two gentlemen that had sold their companies in the mid-1990s, and made millions of dollars never anticipated that that was going to be their plan, or, you know, they kind of saw themselves as long term CEOs. And it just didn't pan out that way. So, they became investors more or less overnight in the mid-1990s. And they went into private equity primarily, and the number one piece to their portfolios, they're like, really like best friends, by the way. So they kind of mirrored off each other. They did value add multifamily syndication investments, as limited partners. This is at a time when I had that was 100% jargon right there. Value-add, what's that? Multifamily? What do you mean? And so, these two gentlemen, I was at this real estate meetup and I'm telling them all about my single-family, you know, experience and how it's really tough and I don't know how to scale it. And they're like, have you considered at least, you know, doing these more passive deals, and this was the eye-opener for me. And that was finding somebody local and real that I could, you know, look in their eyes and speak to about this. And for them to open up to me and share this information was literally life-changing. And I didn't just take that one meeting, and then go take action, right, I started reading books and doing podcasts and go into more conferences and stuff like that. But over time, I decided I need to try this, I need to at least toe-dip into this concept. And so I was selling a single-family home anyway, that was just had, I think it was a flip of mine. And I had a decent margin of profit. And I said, I said I'm gonna take 50% of my profits on that deal and I'm gonna put it into one syndication, one value-add multifamily syndication, and I'm just gonna see if it's legit or if it's a scam, or just what happens. I'm gonna be okay either way. And I'm not putting a house up. And so, I did that, and I gave myself roughly six months. And during those six months, I continued training and educating in all of these but I wanted to make sure distributions came through, reporting came through that someone wasn't just going to take my money, all these different things. And it was legit. It was a real thing. I was actually getting, actually, about the same cash flow I was getting on other buy and hold properties that I was having to do all the work on. And I thought, man, this is a magical moment. And I was just so ready to quit my job in the oil industry and all these different things. And I said I'm going all-in with this. And it took about 18 months but I just kept selling my single-family homes and offloading them and diversifying into mostly real estate, private placements in the multifamily space, some self-storage and mobile home parks, ATM machines, note lending. I did some diversifying, but mostly it was multifamily. So, that was kind of how that worked, though, over about almost a two-year period from the time of learning what this stuff is to positioning my portfolio over to it.
JW: That's a great story, right? And I think what, you really hit the nail on the head, as you think about think that there's such, there's a lot more value in doing it yourself. So, like you said in that conversation that at one point in time, you're getting similar returns to what you're getting on your single-family. And the reality is like but you didn't have to do any of the work. And there's so much power there. That's the ultimate leverage right, on your time. So, what you know, I guess in terms of how do you do this right? How would you suggest to our limited partners out there to find the right investments, the people that they can work with? Because it's not as simple as just being like, here's an opportunity, let's throw some money into it.
TW: Sure. A lot of deals out there. And I didn't realize that in the beginning, I thought they were really scarce. And so I was a little antsy at the beginning like boy, if I don't invest in this one I don't know when I'm gonna see another deal. It might be six months from now. Now, I have the opposite problem, way too many deals, and not enough capital, nor do I want to do most of the deals that I see. So yeah, so how do you do it right? So, I can't, you know, obviously give anybody advice, not a financial adviser or anything, but I can tell you kind of my process and hopefully, that helps your listeners think about a few things, which is I always start with the end in mind. I'm always looking five, 10, 15, 20 years out I have different goals set for each of these, you know, points and then I'm thinking what kind of investment, in general, could get me to my goals. Okay, and so I'm the kind of person that lives on passive income, number one, so that eliminates a lot of investments out there that don't produce dividends, interest, passive income or cash flow, right. That's a huge, huge, huge sector. So, I know that. Then I want tax advantages so I can make my money turnover quicker and easier and more efficiently. So that's real estate. You know, I don't like a lot of volatility that generally keeps me out of the public markets and things like say oil and gas, nothing against this stuff. I'm just telling you my criteria, right? It doesn't help that I invest in something and then lose 30% next year. I’m all about my preservation of capital, number one. And so you know, you start breaking it down and I like monthly distributions, and I like certain markets and blah, blah, blah. And I know real estate, to your point earlier, nothing against active real estate, it helped me build a foundation for understanding how things work and what markets are, you know how powerful a market can be, like you said, you know, a lot of people over the last 12 to 24 months, they could have just about bought any deal and made money, regardless of anything, you just had to buy it. So that is scary, you know. Anyway, what I'm getting at is I reverse engineer. I start with my goal, and then what kind of investment is gonna get me there. And then it's finding people that are offering these opportunities. So who's in the B class value add multifamily sector in Texas, Florida, Carolinas, Georgia, you know, like, I'm just spit balling some criteria just for people to think about, not saying that should be yours. And then I'm vetting out the operators from there. And I'm having conversations, and I'm asking questions, and I'm joining webinars, and I'm reading pro formas. And I'm, I'm doing all this kind of stuff, I'm on bigger pockets, and I'm networking locally. And so, I'm just trying to vet out teams that resonate well with me that are great at communication that have a track record, and all this kind of stuff. And then I'm usually pulling the trigger and executing on a deal. And my philosophy is don't get caught up in analysis by paralysis, you're never going to have 100% of what you think you need to know. So if you can have enough, like 70, 80%, of knowing what you think you need to know, you need to make a decision to move forward or not, you know, at that point, because it's that last 10%, people get caught up in this and then they miss out on the deal because they were going over a T-12 with their CPA that knows nothing about a syndication and they just miss out. And so anyway, that's kind of my high-level process that was kind of jumbled, but reverse engineer is how I go about it. And then I look at three risk points, the operator, the market and the deal. And I've made long episodes on each of those and how I vet them. But generally speaking, that's, you know, those are the things that I'm looking at.
JW: Great points. And I think what might be helpful is if you could explain, you mentioned a B property value-add right, and then you might have an opportunity to invest in a property, which sounds better, but there's not really a value-add component, I guess, could you explain that to us?
TW: Yeah, so these are classes of different real estate, this could apply to single-family, multifamily, you know, commercial space, whatever. So, A, generally speaking, is your luxury or newer built or higher-end and high-caliber tenants and twin a lot of institutions look to park capital into they, generally speaking, they have a lower yield because they're “safer” or in better locations or whatever, more of a stabilized kind of asset. You move down to B. And this is kind of where you get into value-add. So, you're buying something, say built in the 80s, 90s, early 2000s. It's outdated, it needs improvements, maybe you've got, to your point earlier, H fax systems, going out leaking roofs, bad curb appeal, bad signage, bad management, and so you're going to come in and fix it up. And this really resonates with me from childhood, that I was brought up by two very frugal parents and I can't even tell you how many things we bought used from cars to houses to clothing to whatever. The idea was if we buy a car that needs a, b, and c fixed, and we know a guy or we can do it ourselves, then we add value to the car, we fix the issue and now whatever we paid plus the parts, it's worth more than what we paid, you know. So that's kind of the philosophy that I subscribe to is I do a lot of investing in that niche in that space. And then you drop down, you know, C properties just have less amenities. Usually, they're older properties, they might be on, you know, the outskirts of town, generally speaking, stuff like this, and then D would be even a little bit a step down from that. So, I don't play in that space much. I've invested in a few C properties, generally speaking, had more problems at the property level, just vandalism, crime, graffiti, and just stuff bad complaints of residents. So, I generally stay in the B to A-minus kind of space, but that's just me and some of my criteria, but that's what I mean. And value-add again is just adding value to both the property and to the residents. So, let's say there's not a dog park so you put one in for the residence or packages historically have been stolen off of porches. So you put in a secured package locker system in the clubhouse so that no packages get stolen, you know, different things that help increase you know, the lifestyle of the residents and usually can generate money too in some different ways for the investors like covered car parking, you could maybe charge 50 bucks a month extra for each covered carport, and it only costs you a few 100 bucks to cover them. So things like that.
JW: Yeah, I think that's super important because if you're a limited partner and you're looking at deals you may get you might be attracted to an A property because of the way it looks and the amenities and all of the things that are there whereas like the real value opportunity isn't BS and then probably Cs that could be Bs, if they had a little bit of love. Reason I'm pointing this out is that, you know, if you look at an investment, you're like, oh, that looks just like that beautiful building apartment building, they put up right down the road. I get that, well, the investment is what it is, right, you're not going to be able to add a little bit of value to the property, increase the tenants, and then the rent, and then all those things that come through, because it's the pull-through of these value ads that really are what kind of juice your return. So, what you mentioned at the beginning, and please be honest, if I'm way off here, but institutional investors typically invest in A property, the returns that they get and really looking for are going to be a little bit lower, because there's less risk, but it is kind of like you get what you pay for. And then on the value-add side, you're looking at a property and you're saying, hey, look, I'm buying something, but I have a vision that can be closer to an A and there's value there, I guess, would you help kind of explain maybe what that does to the investment returns not just in setting necessarily cash flow, but maybe the overall especially when the properties are sold?
TW: This is the great thing about multifamily versus single-family like I always point out if you have regardless of what price you paid on a single-family home, right, if you had a single-family home that you purchased to rent out, and you had an amazing tenant and amazing renter, and they're paying above-market rent, and they paid you like clockwork every month and they stayed in that home 10 years, and they're just fantastic. And they repair everything for you and all these things, right? It doesn't matter if you decide to sell the property, what they were paying in rent, or how good the tenant was because it's based off the comps the comparable sales in your neighborhood or market of what a home like that would sell for. So, if we have a pullback or recession or whatever, 2008-09, nobody cares about your renter. And if they quit paying, like we saw in a lot of instances over last year with this virus, you know, you go from 100%, occupancy down to zero. So, with multifamily, it's a lot different. And to your point, the name of the game is net operating income, this is how much income the property is generating and multifamily at a large scale 200-unit 400-unit, this kind of product is treated like a business. So, if a business is producing a million dollars per year, in net operating income, a buyer will come in and pay a multiple of the net operating income. So, the beautiful thing about that is instead of having a single-family home and raising rents 50 bucks a month, that's great, but it's 50 bucks a month, but if you have 100-unit, you know, now you 100 exit, if you have 400-unit, you 400 exit, and then the net operating income has increased exponentially, and so has the multiple of what you can potentially sell that property for. And so, in my opinion not being the active GP or doing any of the heavy legwork, this is much more efficient. And to your point of buying, you know, you say about more, you know H vac systems than the average person has in a lifetime, well think about just little stuff. If I had a single-family home and it needs a new fire extinguisher, what do I do? Run down to Home Depot pay 30-40 bucks for fire extinguisher or whatever. What if I placed an order for 1000 of them, you think I'm gonna get a discount, you bet. And same thing with appliances and countertops and paint and you can buy in such mass quantities. When you're investing in these larger value-add properties. There's a lot of economies of scale, there's a lot of efficiencies built into the business model. So generally speaking, it's about buying a property and cutting expenses where applicable, you know, let's say the previous owner was paying 300,000 a year and landscaping and you can cut that down to 200,000. That's huge. Or you can raise rents, or I should say and or raise rents, because you're adding new amenities, new gyms, new pools, new barbecue areas, etc. And you're making a better community out of it. So the combination of those two, it's all about raising your NOI, and then somebody purchasing that as a multiple of it. And as we all know, in today's world, it's a low yield environment, a lot of people are rushing into things that produce cash flow and yield because you just can't find it in the bank or through treasuries or through bonds. And so that's why we're seeing such a hot market right now in real estate, in my opinion.
JW: I think those are great points, too. So, like from a passive investing standpoint, when you're looking at deals, you're looking at the cash flow projections and what's coming, right? And then on the flip side, if you've got a great value-add play, and they've done a good job and the rents have increased, you're getting that higher NOI multiple, you're also seeing a nice uptick at the sale of the property. Right? So that's in and above your monthly passive income, which I think is really where the magic kicks in is that one, you can kind of get your cash flow and then two, you get a kicker at the end if the operators have done a great job.
TW: Exactly. And that's back to the reverse engineer. You know, when I'm looking at what kind of investments get me to my goals, I need a combination of cash flow to live on and equity upside to grow generational wealth and to diversify out more and things like that. So, I tend not to invest in things that are only cashflow plays or to your point with A class property. Sometimes it's kind of just about the cash flow, you know, you may not have the equity upside, who knows. But I also tend not to do just the equity plays, because we all know about the last decade from January 2000 to December 2009. If you just bought an S&P 500 index, it went down and went up and went down and went up and over a 10-year span, you're left with where you started. And there was really relatively no cash flow to that play. And so that's the risk of investing the way a lot of us were taught myself included early on, which is buy low and sell high. And that's it, right? Go throw money in your IRA and take a peek at it when you're 70. And hopefully, you're good. I hate that strategy. But, you know, not saying somebody listening shouldn't do that. But I pulled back from that whole thing, a long time ago and just said cash flow and passive income is the name of the game, at least for me.
JW: Travis has been an awesome conversation. And I like to wrap up every show with a little bit of gratitude. None of us got to where we are today without somebody giving us a leg up. Who out there would you like to give a shout out to personally to say thank you for helping you along the way.
TW: Oh, Jake, there's so many people that I could say I feel like I'm like getting an Oscar up here. I thank God and my family and everybody in the audience. Gosh, man. Well, the two gentlemen I mentioned from the real estate meetup that was really life-changing, that they were willing to give me some of their time, and it wasn't a ton of their time, mind you just a couple hours in total over a period of time. That was huge. Of course, you know, encouragement from family and things like that. So but yeah, man, I'm a big proponent of ‘find a mentor’. You know, that's my biggest thing. Find someone doing what it is you want to do successfully and pick their brain, pay for mentoring, do whatever you have to do to jump that hurdle. Because trying to figure it out on your own and reinvent the wheel is crazy and takes 10 times as long. So, don't do that.
JW: Well, Travis. Thanks again. This has been great.
TW: Thanks, Jake. Appreciate you.
Jake Wiley: I hope you've enjoyed this episode of the limited partner podcast. Please subscribe and leave a review. If there's any reason you wouldn't leave us a five-star review, please email me directly at [email protected] Your feedback is always appreciated. Now the show is just the tip of the iceberg in terms of the limited partner community. It's a community where limited partners can come together. Learn about what best in class looks like, opportunities, and most importantly, a place to connect. There is nothing out there like this. So, head over to thelimitedpartner.com and sign up. We'll see you next time.
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