Ep 164: What is Your Investing Framework?

Start with the Next Level Income strategy. Learn how to make more money, keep more of your money, and then focus on how best to grow your money. Welcome to the Next Level Income show, where it's our goal to take your income, your investments and your life to the Next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, NextLevelIncome.com that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. Today we're going to talk about your investing framework. Do you have an investing framework? What is investing framework? What is my investing framework and how did I develop it? We're going to talk about all those things. I'm going to answer those questions today and I'll walk you through the same structure that I use to put together my investing framework. Now, this isn't financial advice. I'm not a financial advisor. But I'm going to walk you through a strategy that's going to allow you to simplify investments when you see them and decide whether or not they really work for you. But before we do that, I want to start with the Next Level Income strategy, which is make, keep and grow. And this is how to make more money, whether that's at your job or in your business. It's how to keep more money through tax strategy and proper legal and entity structures. And ultimately it's how to grow your money through both active and passive investing strategies. And that's where the framework is really going to come in. So if you haven't yet, check out my course@nextlevelincome.com I also have my book for free up there. If you haven't read it yet, it's nextlevelincome.com forward slash book. And if you put your information and we'll even send you a hard copy to your address as well. What you'll find in that course, which you'll find in our blog and our information on our website, is how you create more time. Do you want to create 20 to 40 hours more per week to do what's important to you? This could be making more money. It could also be spending time on your health, which is very important when it comes to your family, your happiness, as well as your career and your business. Because if you have better health, you have more energy and let's face it, life is an energy game. Also, you need to make sure once you're an Accredited investor that you are keeping as much money as possible. Because yeah, it's important how much you make, but really what matters is how much you keep. At the end of the day, you need to protect yourself against the three insidious threats that can rob you of your hard earned wealth. These are death or a serious medical condition. They are lawsuits. Do you have the proper entity structures set up so you protect yourself, your business, your family from lawsuits? And it's also, you know, so insurance structure comes in the first one, the entity structure comes in the second one. And then tax strategy, are you using the proper tax strategy to save as much money as possible when it comes to your taxes? Listen, the tax code, it's really just a set of rules that you can follow. And I use the game of Monopoly, have Monopoly pieces on the COVID of my book to illustrate this. If you and I are playing Monopoly and I know the rules, I'm probably going to do a better job. I'm probably going to win more than you. So learn the rules, learn the tax code, or get a tax strategist that can help you do that. And our course is going to help you do all of those things. And then finally, how do you grow your money? Do you want to have an active strategy? Do you want to have a passive strategy? And my answer here is both. You can do both. Yes. When you have active investments that pop up, that take your time, your credit, your resources, if you're interested in things like that, then yes, you should do that. But ultimately, as you grow your income from your career, your business and your current investments, what are you going to do with that excess capital? You need a passive income strategy that's going to allow you to continue that flywheel of income that's ultimately going to grow not only your freedom, but also your family's wealth that you're going to be able to propagate into the future. So investing frameworks, how did I develop mine? While I was completing my MBA, I started, I was reading, I read about 250 books. I was reading a book a week, starting as an undergrad, continuing through my graduate career on finance, on money, on real estate, on investing, business, the stock market, all of these different things. One of the things that came through in that research was demographics. And demographics are the lifeblood of what we do in the real estate market, which I talk about in my book. But it's also the reason I got into the medical device space. So demographics, for instance, like the baby boomers, the biggest generation in history up to that Point. Now, the millennials, you can argue, are even bigger. They're spread out over a slightly longer time period. But when these demographic groups spend money, you need to pay attention. Where are they living, what are they spending money on? What are they required or what are they, what do they need? What, you know, what requirements do they have? And, and how can you help them in those respects? Can you provide them a good or service or business that can help these demographic groups? And that's one of the reasons I got into Med device, because the largest, most active, most affluent generation in history, the baby boomers in the United States, I knew they wanted to stay active. They would be having more surgery. So choosing a career that I was going to spend couple decades in, I wanted to make sure that I was well equipped with the demographics to help give me some nice tailwinds when it came to that. And then the multifamily space. You know, I've talked about how we need another 4 million units. Actually, in episode 117, I talk about how the United States needs 4.3 million more apartments by 2035. So let's take a look at some charts that I have here. I'm going to share my screen for those of you watching on YouTube and if not, you can just listen. So let's take a look at the first chart here. So this is the US renter population ages 20 to 34. Now, it is important to note that the baby boomers actually surpassed the, this renter demographic, the Millennials, in terms of growth. So it's important to note that this isn't all renters. This is just the population, the key demographic, 20 to 34. And when I saw this graph a decade ago, I said, okay, this isn't, this is an area that I want to get in. You can see the exponential growth from, from a decade ago up until today in the apartment market. And what's interesting is because we still have really good immigration trends, especially when you compare the United States to evolved countries or, you know, big economies around the world, we are still doing very well. Also, the baby boomers, they're selling their homes, they're unlocking the capital in their homes, their equity in their homes, and they are renting and bigger populations as well. So as you can see, not only have we had a massive increase the past decade, but this demand is not decreasing going forward. And with the high interest rates that we have in the residential market, we need about 7 million homes to supply the Millennials that are forming households. So those millennials that can't afford a home or they're mobile, they're moving around, they're going to be renters as well. So that is one of the demographic trends that I Do you wash your car? You're probably shaking your head up and down. Yes. But I mean, do you actually wash your car yourself? Do you fill a bucket with soap and water and go out into the driveway and and physically wash your car yourself? Now, chances are you're shaking your head left and right. No, because 75% of Americans have someone else wash wash their car and increasingly they're going to what's called an express tunnel car wash. Now, what is an express tunnel car wash? There's a lot of different types of car washes out there. I'm Chris Larson with Next Level Income and I'm going to be talking at wealth without Wall Street's Inner Circle Live event next month, August 25th through 27th. Now you're talking about the different types of car washes. I'm going to be talking about why express tunnel car washes can be one of the best investment opportunities over the next five years and how you can take advantage of this trend as well. I'm going to talk about how to find the best locations to own and operate these. I'm going to talk about the keys to maximizing revenue as well as decreasing operating costs. And I'm going to talk about why, when you build a portfolio of these, you can massively increase the value of these locations. Private equity is excited to get into this space. I'm going to tell you why that is as well. So hope you can join me next month at Wealth Without Wall Street's Inner Circle Live event and get a free copy of my book before you come www.nextlevelincome.com just click on the book link and I'll send you a copy as well. Join me next month followed and help get me into the multifamily space. The other market that I think is really interesting, Tom, that I'm going to talk about here in a moment is again comes back to the baby boomers. But if you want to learn more about how I basically predict the future and what I think about the future, I encourage you to check out episode 100 of my podcast and instead of recapping everything, you can take a look at it here on the website. What does the future hold and how are we preparing for it? So I'm going to talk to you in that podcast a little bit about the real estate cycle, the 18 year real estate cycle where we are coming to the final part of this 18 year cycle that can be the most lucrative. So it's really important to check that out and to understand how that works. And a big part of how that cycle works depends on what the baby boomers are going to do next. So if you take the baby boomers, so they've been retiring on the order of 10,000 per day. 10,000 per day. It's incredible. And you lag that by 80 years. Now why are we going to lag it by 80 years? I'm going to show you here. So if you take the baby boomers and you lag it by 80 years, what you're going to find is this chart right here. This is US immigration adjusted births move forward. I'm sorry, this one's 85 years. So why 85 years? The average age of an individual that moves into an assisted living facility is 83 years old and they live there for an average of three years. So from approximately 83 years old to 86 years old. So 85 years is going to fall right in that range. And, and this is why you hear the term the quote unquote silver tsunami that's coming. This wall of demographics looks like an absolute tsunami that is coming down the road when it comes to the baby boomers not only retiring, but now hitting an age starting in the next couple years where they're going to need independent living, 55 plus, but also really assisted living, memory care and those types of senior hous housing. So these are the types of demographics that I talk about or I think about when I, when I talk about using demographics to determine your strategy. What's another area that may be interesting based upon demographics? So I mentioned 10,000 baby boomers retiring every day. 10% of those baby boomers own businesses. So that means 1,000 businesses essentially are retiring a day and are looking to potentially sell. So are you in a position to buy a small business? That may be an area that could be an interesting investment opportunity for you. But as I talk about in my book, which again I mentioned how you can get on the website if you haven't read it yet, I specifically talk about the value add strategy. So after looking at demographics and determining what may be some potential opportunities going forward in terms of investments, when it comes to demographics, you have to decide on a strategy. Personally, I, I really enjoy Warren Buffett's strategy, which is based on Benjamin Graham's methodologies. And what they talk about is basically buying based upon value. So Warren Buffett really buys businesses. Sam Zell bought Businesses. Yes, he got his start in real estate, but he really bought businesses. Great book. Am I being too subtle? By Sam Zell. God rest his soul. He just passed away here recently. Fantastic read and helps you really think how a billionaire does. And billionaires and ultra high net worth individuals make money in two ways, business and real estate. And a lot of them will tell you we make our money in business, but we preserve it in real estate. So what is my preferred strategy when it comes to real estate? The answer is value add. I like value add real estate because it's stable, it's cash flow positive and it allows the potential to quote, unquote, add value. How do you add value to real estate or a business? You do that in a couple different ways. You can do it through enhancing operations, you can do it through proper business strategy, marketing strategies, those sorts of things that all drive revenue. You can also do capital improvements that improve the property. And this could be redoing a kitchen and flooring like we do in our apartments. It could be putting in new equipment or superior equipment like we do in our car wash offerings and then on the operations side bringing in contracts. So large contracts where we lower our costs or maybe regionalizing labor and employees across properties or across businesses help us lower operational costs. All of these things increase NOI in a property or EBITDA in a business. And in some of our businesses, like self storage, like car washes, the larger our portfolio gets, the more valuable it gets because we have more members, we have more cash flows and that is more attractive to larger institutional buyers. So I mentioned, you know, the value add strategy. I like it because you have stable cash flow businesses that you can add value. And all of these things that I mentioned also have great tax benefits typically as well. So we talked about demographics, talked about the value add strategy in real estate as well as business. But then what about the characteristics of a specific investment? Like what, what do we try to do as operators and what do I look for? So number one, I want to minimize risk, I want to minimize volatility. Again, I talk about that in my book when it comes to the Sharpe ratio and why I think real estate, specifically multifamily real estate, is, is such a great play when it comes to the Sharpe ratio because you are minimizing your risk by maximizing your return. But really what I want to do, number one, is I want to preserve my capital. So when I'm looking for an investment, I'm looking for an investment that, number one, is going to preserve my capital. And we Have a strategy that's going to do that. Number two, I want it to produce income. So if you believe like I do that a recession is coming. Now, I don't, I didn't think that a recession was necessarily coming this year like a lot of people do or did. But I think that we're going to face a recession obviously at some point here in the future. And during recessions, if you have cash flowing businesses, those businesses are going to be king. Cash flow is king during recessions because you want that money coming in, whether it's from your career or your business or your investment, so you can take advantage of other opportunities, specifically investment opportunities when they come in. So number one, preserve capital, number two, income, Number three, appreciation. So that's where you take the value add strategy or your operations or the value add strategy with capex or your operations and you drive that noi up. What's nice is if there is a recession, for instance, and you're applying a value add strategy in a property, you can pull back in applying capital and you can preserve that capital and give yourself a bigger buffer, a bigger cushion during, during down periods. So it goes both ways, which is really nice with the value add strategy. And then finally, tax benefits. So I want an investment that's going to preserve my capital, that's going to give me income, that's going to offer appreciation, typically from a value add strategy. And I want to do it in a tax efficient manner. And I look at things in these order, in this order. So if somebody comes to me and says, chris, this is a great tax saving strategy, this is a great tax saving investment. I go back and say, okay, is it going to preserve my capital? Is it going to provide income? Is it going to give me appreciation? And then is it going to help me on taxes? Because I want to make money before I save money on a tax schedule, a tax strategy. Now, that being said, you can blend these strategies together and you can use tax saving strategies blended into your investment strategy as well. But when I look at a singular investment, that's typically the framework that I use to do that. And finally, I want something that is ideally scalable. And again, I talk about this in my book. I talked about how I use systems in my career and my business to help grow the business, to help become more profitable. But it's the same thing on investment strategy. So let me give you an example. Let's say my strategy is to buy single family homes and I'm managing these single family homes and I'm also using my own personal money and signature and credit to finance these. At some point the bank's going to say, chris, we can't lend you any more money. You've, you've, you have too many of these homes. So I have to change my strategy. Maybe I do a portfolio loan, maybe I hire staff to come in and, and manage the properties and do those. But I have to shift my strategy at some point to continue to acquire these and also continue to manage these homes as well as finance these homes. So whereas an apartment, I can buy one apartment, that's 10 units or 100 units, I can buy a portfolio of apartments that's a thousand units. I can use really the exact same strategy, whether I own 100, a thousand or 10,000 doors. And that's a very scalable strategy. I mentioned in, in our car wash business how as we acquire more locations, it makes the portfolio more valuable. That's also an example of how the strategy is scalable. So with that, that ties up really the framework that I use for investments. So as we go back to, to underscore some of the things we talked about, start with the next level income strategy, learn how to make more money, keep more of your money and then focus on how best to grow your money. Look at demographics, learn where people are moving, where people are spending their money. That's going to give you this tide as I talk about in my book that kind of rises, raises all ships on the investment front. And then again, my personal choice is looking at real estate and investments in business. They're going to follow the demographics and they're going to do it in a way that limits my downside risk. And I like the value add strategy for that where we focus on preservation of capital, income appreciation and tax benefits in a scalable strategy. Again, if you want to learn more about how I put all this together in a step by step fashion, you can get our course under the resources link at nextlevelincome. Com. Check out the wealth of information that we have for free on our website, including our book, our blog and our podcast. And best of luck as you put together your investing framework and go forward on your journey towards financial independence. Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coach coaching to get a free copy of my book, audiobook and much more I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.