Travis Watts - The Untold Stories of Real Estate Investing - Oil Fields to Living Off Passive Income

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The Untold Stories of Real Estate Investing. Welcome to the Untold Stories of Real Estate Investing. I'm your host, Wayne Courageous. For our next episode, we're excited to have Travis Watts with us today. This show is going to be unique in that we are going to dive deep into passive investing real estate. Travis is a full time passive investor, having invested as a limited partner in over 30 deals. He's also the Director of Investor Relations with Ashcroft Capital. An investor and leader in the real estate industry. He has been investing in real estate since 2009 in multifamily Single family and vacation rentals. Travis began investing with Ashcroft Capital several years ago and has taken part in more than 30% of their opportunities. Travis also has a background in traditional Wall street investing and obtained a Series 7 and Series 63 license while working at a major brokerage firm with more than 400 billion in assets. Travis now dedicates his time to educating others in the world of investing and has made it his mission to share passive investment strategies in order to help others achieve and maintain wealth in real estate. Welcome to the show, Travis.

Wayne, thanks so much for having me. That is a very long intro. I should probably shorten one of these days.

Well, I shortened a little bit because I was like there's so much good, good background and it's unique for our show because we've been talking a lot about active investors since we launched in.

June and about.

Everything ranging from single family, student housing, obviously multifamily. But it's unique because you have positioned yourself as a full time passive investor. So I'm excited for you to be on our show. Have I missed anything? Anything else you want to say before we get started?

Wow, man. That's all the real estate related stuff. I guess we were talking before the show. I've done a handful of just crazy out there things from live show production, audio, visual. I work for Walt Disney Oil Field. I've been all over the place, man. But the one thing that's been consistent has been the real estate. That's always kind of been my underlying Goal side, hobby side, hustle and now full time focus. So yeah, I think you nailed it.

Perfect. And I know as we get going, you know, passive investing has allowed you to do a lot of the things that you've enjoyed. So I'm sure we'll talk about all the other things outside of real estate too that you've been able to have. Yeah, success. So, so how did you get started in real estate investing? And, and what has continued to attract you in real estate investing?

Sure, yeah. A little bit of dumb luck and a little bit of prep. So in high school I was, I was out visiting my dad out in Colorado. My dad's a big garage sailor, so he was out that summer. He finds this book at a garage sale, brings it home for me to read and, and it was called Rich Dad Prophecy. So not rich dad, poor dad, as everyone attributes to their gateway into real estate. But all this book really taught me to be honest with you. All I can remember back in high school was it's basically just said don't be in the stock market because we're going to have this huge meltdown. Right. And this year, just for reference, was probably 2005, 2006, somewhere in that ballpark. So before the Great Recession. So that's all I really knew. Don't be in the stock market. It wasn't really a pro real estate book either, but I knew I wanted to get into real estate. My dad had a few single family homes. I love this idea of passive income. It made a lot of sense to me. Something I can invest in and also use or change the use of that kind of stuff. And so what happened was I kind of sat in cash, was going to college, was doing my thing and wasn't ready to get into anything at that time. And, and then here comes the Great Recession, right? So I'm popping out and graduating in 2009 from college. I can't find a job anywhere, you know, it's total crap. But there was a silver lining, which was real estate was on sale, right? So I moved at that time back to Colorado and I was checking out this two bed, one bath house, contemplating do I want to get involved with real estate now as an owner occupant, right. I got to live somewhere. So it's either rent or own. So the government's given out $8,000 tax credit. The home I'm looking at previously sold for about 165. It was selling for 95. And I thought, worst case scenario, I'll get a roommate. It was near A college campus that I was very familiar with. I grew up in Fort Collins, about an hour outside Denver. I thought, worst case, I'll just get a roommate that'll cover my bills and I'll see if this works. So I think that's where the momentum kind of started, was seeing a check be handed to me for approximately my mortgage payment. And I didn't have to do anything for that check. You know, I just had to open up, you know, a spare bedroom basically. And that concept really resonated with me. I wasn't making much money at the time at my job, and I thought, man, this I want to do this times 100, you know what I mean? This is like really what I want to focus on. So I dove headfirst into single family. I did fix and flips, vacation rentals, buy and hold house hacking, owner, occupied rehabs, all kinds of stuff. And by 2015, I had burned myself out completely. Just too hard, too fast. And I was working an oil field job which was 14 hour days away from home. I worked in the Middle East. It was just, it was too much for me. I bet there's a lot of folks out there. I know there's a lot of folks out there that are career focused. Engineers, doctors, lawyers, attorneys. Right, who want to stay career focused. They enjoy what they do, but don't have the time to go bouncing around on the weekends to neighborhoods and trying to find off market deals and knocking on doors, all that kind of stuff. So 2015 was a big pivot year where I thought, hey, listen, I love real estate, I love the tax advantages. I like a lot of things about investing in real estate, but I don't like to be hands on. I don't like to be managing tenants, putting things together myself. I wasn't very good at rehab and being a handyman, so I just wanted to invest passively, hands off. And that's where I discovered multifamily and syndication investing and private placements. And just basically the bottom line was how do I become hands off as an investor? So 2015 through 2020 has been 100% passive deals. And I sold all my single family and that's all I do. And so that's created some miracles in my life and with my wife and just kind of our lifestyle overall. So I'm sure we'll get into that. But that's kind of the recap of how I got started and what brings us here to today.

Yeah, it's unique that you had that active experience from 2009 to 2012. You realized that, hey, it's not exactly what you want to do for the reasons you mentioned. And then, you know, 2012, you mentioned the pivot. So how did you find the deal sponsor and what did you do to prepare yourself, educate yourself, to get on the passive side?

Yeah, yeah, no, it was so. So it was. 2015 was the year, the big pivot year. So it was. Here's what I did right and what I did wrong. The thing was, I did go back to the drawing board. I did dedicate, I did set goals, I did listen to podcasts and read books and do all these things. The problem was, again, I went too hard, too fast. And I set this goal in January 2015. I said, I'm going to read 52 books this year. That's a book a week, and I'm going to knock this crap out and I'm going to figure it out. Well, the problem is if you're reading 52 books a year and podcast and audiobooks and mentors and networking groups and, and. And there's no spare time, right? So I'm back to, you know, square one. I don't have the time, so I wasn't taking action as much as I probably should have been. It's kind of that finding that balance, that, you know, equilibrium between educating yourself, cool, getting a few takeaways, and then go out and try it, you know, go experiment with that. So that's kind of what I failed to do ultimately, that year. But I did catch up 2016, 2017. I mean, I got to where I wanted to go. It's just 2015 was too hardcore. I probably should have read, like five books, right, that were, like, very relevant to what I wanted and just gone that way. But in any case, you know, to answer your question more specifically, how did I find these sponsors? Not the right way, I guess. I found some local folks that were local to where I live that were doing. What's that?

Is that in Colorado?

Yeah, that was in Colorado. Yeah. So some Denver groups. But the thing was, they weren't doing Denver deals. They were doing deals in other states. Right. And. And for some reason I thought that would be so important to find a local operator. I don't know why I thought that, but they were newer to the space, didn't really have the experience, track record, whatever. But I did like the people, I did like the general partners, and they ended up doing some good deals and some okay deals and a couple not so okay deals. But it was just this lesson learned of, like, I probably just should have focused on more of the track record, experience and an operator that really specializes in what they do and really does it well. And that's what I failed to do initially and eventually got on that right track to investing that way. So that was my first year or two of experience, was that it's good advice.

And I think a lot of people, I mean, it's. Especially with relationships, when you have those relationships with the deal sponsors, it goes a long way and best way to. A lot of times the relationships come with your local, local, local group. So definitely pros and cons, especially if they're, you know, pro, if they're local and they're investing in those, you know, cities and they have a track record or they're partnering with those that have a track record.

For sure.

I do think it's. It is harder when you have those sponsors that are going outside of their markets and maybe, you know, a few hours, four or five hours, you know, that's not bad. But when it's in completely different states and you know that it's hard. So is. Was there an experience that, you know, really made you think twice about going with the local. I mean, is there an actual experience or was it all about the returns and.

Well, yeah, so that, that's kind of the, the problem, I guess is what I did is I started, I was looking so heavily, I was like an analysis paralysis over the deal itself. And so all I'm looking at really is, are the projected returns on all these different offerings from all these different groups. And it's like I was a little naive and thinking, well, this one says it's 10% a year and this one says it's eight. So I'm just going to do the 10, right? That's more money. I mean, you know, but without factoring who's actually going to execute that deal, can they actually execute that deal? And one example, one true story. I partnered up with a group and we did a deal out in Georgia. They bought a great asset in a great location and a great market at a great time. I mean, all that stuff was in line, but the sponsor, man, to no credit to them, they basically made every mistake you could make and they couldn't execute the business plan. And they got a little ways into the rehabs and thought, man, it's a lot of work, we can't pull it off. And excuse after excuse, right? They ended up just selling it early. But what I learned from that experience was what I initially had done my homework on, which was the asset class in the market make a huge amount of difference in your success. Right. And so that really taught me a lot about markets and deals themselves and kind of reiterated my point around what I invest in is value add, you know, mostly BNC class, multifamily apartments in particular markets. And so to see that really come through, to see that even someone that really didn't know what they were doing, that kind of messed up a lot of things. We still ended up profitable and able to exit the deal. And so that was kind of my first experience. And so I thought, well, man, if I could get the right deal in the right market with the right sponsor, then my risk could potentially really go down. And so that's what I ended up kind of getting to over time.

Yeah. And I was going to ask this later in the podcast, but go ahead and ask it now. You know, what are those target markets that you're feeling really comfortable investing in? And then, you know, we talked about value add. So there's that risk spectrum of opportunistic value add and core. Can you talk to us about your risk tolerance and what the returns are for the different risks that you're potentially taking?

Yeah, yeah, exactly. So it really starts with knowing yourself, knowing your own criteria, and kind of knowing why that is. Right. And so how do you get to those answers? Through some education, you know, whether that be a seminar or a book or whatever through. So it's kind of a two part question. I'll answer the first part, which is before COVID I was going around nationwide to real estate conferences, multifamily conferences, investing conferences, and for those who have been to these national types of events, you know that there's always the person with their crystal ball or the economist or what have you that's putting up on the board. Here's the top 10 markets of 20, 15, 16, 17, 18. And I'm a big advocate for leveraging other people's expertise. And that was a unique experience because I got to see one economist said this and the other said that and the third said this and the fourth. And so what I'm trying to do is tie in the commonalities and say, wow. Well, everybody says, you know, just to use a blanket example, like Dallas is a great market, you know, in general, you know, that kind of stuff. Obviously these things change, Right. Every year's a little bit different, but I still hold a lot of portfolio in Dallas, Fort Worth and the surrounding sub markets. There's. And also out in Florida in Jacksonville, Tampa and Orlando. But in full transparency, I've Got investments all over the place from Colorado and Ohio and Georgia and Arizona and Michigan. So it just kind of depends. But I like to do that high level research, kind of that macro level. Where are people migrating to, what are the trends, where are companies relocating their headquarters to? I like to know that stuff from a high level. And then I let the sponsorship group fill me in on why a very specific sub market might be a great play or a great investment. You know, I can't memorize all the sub markets out there, so I kind of leave it to the experts to fill me in on that. So that's kind of how I go about doing it. The other question, the second part of your question was about kind of the core, the value add, the opportunistic and the risk reward ratios. So for those listening that may not be familiar and in full Transparency, I'm not 100% familiar here, but I can go through like what core is, which is basically kind of your safest, quote unquote investment profile. Usually you've got a low debt leverage with it. I've seen even like 50% debt. And we're talking about a loan or a mortgage, right? So you've got a lot of cushion there for a bad economy or things that go south. You've got room, you know, to kind of save yourself, so to speak. Additionally, those properties are often in major metropolitan areas. So think about like, I don't know, a 200 unit apartment complex in Manhattan or something like that, a San Francisco or something, right? So very, very safe known markets, so to speak. And then, then you've got like Core plus, which usually has a little higher leverage to it. And by the way, Core and Core plus is kind of like where a lot of institutional capital plays in that environment. So pensions and REITs and things like that, they don't want unexpected events. They don't specialize in massive rehabs. For the most part. They're just wanting to. It's a cash flow play. They want to park $70 million and just let it, let it go for five or 10 years and not have to do a lot to the properties rightfully. So then you come to value add, which is kind of the sector. I like value add. It kind of focuses roughly 50, 50 on cash flow, which everybody loves, and equity upside potential. So you're taking older properties maybe in the 70s, 80s, 90s, early 2000s, and you're renovating them to be up to the market standards. You know, package locker systems, covered carports, maybe self storage on site, fencing in the Ground level, yards. There's all things you can do that are quote, unquote, value add for both the tenants and the residents and us the investors. So that's kind of the space I like to play in. You usually have a little higher leverage on those. I don't even know, 65 to 80% leverage, you know, that's kind of a range, I guess. So therefore, technically risk, depending on how you look at that, and then opportunistic, you know, would be the riskiest. These are properties that have big issues. They have a lot of deferred maintenance. Maybe, maybe their Occupancy is only 50%, so they're kind of struggling. Maybe the last owner didn't take care of it. Maybe there's a big fire or a flood. So the business model is usually let's go in and take something non performing and let's turn it around and make it performing again. And so it's, you know, higher risk, higher reward potential, really. And I like to generally stay out of that space unless I'm working with an extremely well versed operator that can just prove it over and over and over again that they've, they've done this for 30 or 40 years and here's what, what they have to show for it. It's just riskier, that's all. And that doesn't mean anybody listening, you know, shouldn't be involved in that stuff or they shouldn't do core because it's for institutional buyers. That doesn't make any sense. It's knowing yourself and your own criteria. And I'm kind of the, I guess, moderate risk profile. So that's why I do value add. So yeah, that's kind of my two part answer.

Thank you, Travis, for that synopsis on the opportunistic value add and core asset classes. What did you see? I should say pre Covid with returns and value add and what are you seeing now? Or when you're looking at investment opportunities, are you having the same returns that you expected? Pre Covid?

That's a great question. I get asked this a lot too, and here's kind of my take. I've always been of the opinion or the mindset of there's always a deal out there, okay? Whether we're in a booming bull economy, whether we're in a recession, whether whatever. Like what happens with real estate and everything else, including stocks and the whole spectrum. Things adjust for the economic circumstances. So what I'm seeing at this very moment here we're talking in August 2020 is we're seeing slight discounts on a lot of multifamily, but not huge discounts. We're not talking about 2008, 2009, where things really were going on sale in real estate. We're talking about 3%, 4%, maybe 5% discounts because of a slight softening that's happening in the market. So my opinion is, well, okay, so if you're going to do a new deal today and you're getting a 5% discount, which is realistic to what's happening, that still is the equal type of opportunity that I was seeing six months ago when market conditions were stronger and we paid accordingly. So I've still been investing since March. I've invested in about four opportunities, all value add, multifamily. And I will continue investing even if the economy does go into a quote, unquote depression. I still think there's going to be deals to be had, there's going to be more distressed opportunities that get taken over. So realistically, I think only because certain groups have become more conservative do I see a slightly lower potential return. But I think that's just to be conservative. You know what I mean? It's not that the deal isn't performing or is performing worse than what it was. So we'll see. Time will tell. But that's kind of my philosophy. And I'll share a real quick story on that. There's a guy, a lot of people know, this individual out there, tremendous track record, 20, 30, 40 years, I don't even know doing this syndication stuff. And in 2015, I had reached out to this guy to kind of pick his brain. And he says, I'm going to stop doing syndications. He's a general partner for the foreseeable future because I think 2016 is going to be a massive, massive economic collapse. And so they quit doing deals. And so I've been sitting on that list. 20, 15, 16, 17, 18, 19, 20, they've done like one deal. And meanwhile, I've done a ton of deals. And, you know, in hindsight, I mean, he could have doubled, tripled, quadrupled his money, you know, in that timeframe, given that he's a. He's an operator. So it's okay to have that opinion. It's just a different opinion. So long winded answer. But that's kind of my take on that.

No, it's a great answer. And the next question I have really, in relating to Covid, is when you're looking at deals that sponsors bring, you've talked about markets that you're bullish In Dallas being one certain markets in Florida. Is there anything changing on the way on how you're looking separate from returns that we just talked about, but any other things that now you're looking more carefully at when selecting that deal?

Yeah, I mean just in general, what I'm looking for right now is a little over the top being conservative. So there was a recent deal I was looking at where they've got a, a full 2% margin on their exit cap rate to what they're going in at. So that, that's being pretty conservative. That's assuming a pretty weak market upon exit. And I like to see that. The other thing I look at pretty closely, more so than before, are break even occupancies. They were kind of creeping up, you know. Again, for anyone listening, that's not familiar, you know, you got 100 unit, let's say property break even occupancy, 70% so you can lose 30 tenants and still be able to pay your bills before you start running into trouble. Now what I'm seeing is 60%. I saw one deal a couple weeks ago, 50% break even occupancy. These are great because if you look back at the history of the property, which most often you can see on these older properties, it's probably never hit that low of an occupancy. Therefore you should technically and theoretically be profitable even throughout a recession. So those are things I'm putting a little more emphasis on. I'm also kind of reeling it in a little bit to investing with kind of my top five operators. We'll say I've done partnered with 14, 15 operators at this point. I'm kind of going with the ones who have outperformed, not just financially outperformed, but outperform my expectations of what I expected them to do. And communication, transparency, reporting, being on time, you know, that kind of stuff. So I'm kind of honing in to do more deals with those operators as well. So. But overall, you know, just being a little more choosy. But not a lot's changed to be honest with you and how I look at deals.

That's good. And a lot of people, you know, have, are just thinking pre Covid post Covid. So it's great advice and insight on how you're looking at it. So shifting over to, you know, mistakes that you've made and common overlooked items that passive investors not look at, what advice, so what experiences can you share that you're okay being a little more vulnerable and saying hey, this was a mistake, this is what I learned and to help others.

Yeah. So I am a big believer in diversifying a portfolio. It doesn't matter what we're talking about. Stocks, bonds, mutual funds, real estate, whatever, gold, silver, oil, gas. Just I'm a big advocate for, you know, don't put all your eggs in one basket. That's kind of my thing. And you'll hear different opinions on that. You know, I've. I've heard the exact opposite. Right. Put all your eggs in one basket and watch it closely. There's that famous quote whoever coined. So here's why I bring that up. I've got 80% of my investable portfolio in value add, multifamily projects, but I allocate 20% to kind of experimenting. I've done first lien notes, I've done distressed debt funds. I've done lease to own stuff. I've done all these different strategies out there and they're kind of hit and miss. And I'm certainly not an expert in a lot of that stuff. And what happened was, this is true story of what happened three years ago, I think I was introduced through an investment group that I'm in to a distressed debt fund. They're basically buying cheap debt off banks and then they're trying to collect on it. Right. Whether that be credit card debt or what have you. And so I partnered in this fund. I put too much money in this fund. It's something I could barely just understand enough to feel comfortable making the investment. And one of the partners in there, not the operators that I vetted, but it was kind of like an operator of an operator. It was kind of a complex system here. Ended up being a Ponzi scheme. So we ended up losing like 35% of that whole portfolio that had to go into receivership and all that. And the point is, I took my eye off the ball. I had something that I knew, I understood, I was a believer in, I had done my homework on, I had had success with. This is, this is multifamily. And all of a sudden I shifted gears and thought, well, hey, why don't I just do everything out there that produces passive income, right? And that's kind of the. I refer to it kind of as like the bitcoin mistake, you know? And I had so many people reach out to me when bitcoin was skyrocketing at whatever, 16,000 or whatever, and it goes to 20 and then bounces back to 10. And I'm just so fortunate I didn't go for that. And it's not anti Bitcoin, it's just, I don't understand it. That's not what I know, that's not what I've studied. And so it wasn't a good fit for me. So I guess, long story short, allocate a percentage maybe of your portfolio to kind of these experimental things, but really try to hone in on what you know and understand and what makes sense to you and kind of focus more on that. And that's what I've done.

So a lot of the traditional investors, they're possibly listening to the podcast to learn more about investing in multifamily. So to some, this would be an experimental category for them. They're learning about it. But the rest of their portfolios and stocks, mutual funds and bonds. So you have a lot of knowledge and I would say you're an active passive investor where a lot of people are learning and hearing the successes that you've had. One question I have is for investors that are looking to get in, if they're looking at value add, are you still seeing that 7 to 8, 9% cash on cash and 12 to 15% IR? When you got in years, say four or five years ago, it was not uncommon for over 20% IRR. Are you still seeing those and what's realistic for, you know, somebody that is just getting into a value add, you know, and let's say it's a stable property, you know, what type of returns can they comfortably feel like they can get without it feeling too good to be true?

Sure. Yeah. I put a quick disclaimer out there. This isn't, you know, pertaining to any particular operator response or anything like that. I'm just, I'm taking a look right now in my head of my entire portfolio among 14, 15 operators in this type in this space. And I'm looking at, and I'm trying to factor all this stuff together and I would say that what I'm seeing for projected returns today in the environment we're in is still what you described. It's still a 7, 8, 9% cash flow kind of thing with a potential upside to be 12, 13, 14, 15, whatever. And again, to your point, what did I, you know, some of those first deals I did in 2015, 2016, exited early and we did get over 20% IRR. You're exactly right. And so I look for groups that kind of under promise and over deliver and in full transparency. Since Covid's hit in March, I haven't had any properties sell, so I can't realistically give you an answer. To like how that's affected things. I think a lot of owners right now are just sort of pumping the brakes on putting things up for sale in hopes that they don't have to take a discount on these properties given 12, 24 months out from today and kind of looking back and going, crap, you know, we sold that for a 5 or 6% discount and we should have just held it. So I don't know markets, you know, everybody knows we have market cycles, we have the ups and downs and the great times to invest and the not so great times to invest. But again, the way I look at it, what gives me sleep at night is not putting too much emphasis on IRRs and potential equity. It's just looking at cash flow and saying, is that conservative? Is that realistic? If I invest in this property and they tell me there's a 7% preferred return, do I really think it's going to continue a 7%? Prof. Through a recession, through the ups and downs and the sideways. And if I do believe that, I'll invest in it. And that's really what I'm looking for at the end of the day as I'm banking on the cash flow. So everybody's different. That's just kind of my take on it. But yeah, there haven't been massive adjustments as we talked about, that I've seen personally through Covid, some kind of similar deals to 2019 for the most part, maybe a slight discount. Yeah.

And you mentioned earlier with the value add, you have that 50% cash flow and 50% equity at the end of sale. So, you know, you're looking to get those 7 to 8, 9% annual returns. And then at the upside, when that strategy has been completed with renovations stabilizing the property, higher occupancy, higher rents, making the property more efficient on operating expenses, year five, year six, that's when the larger equity piece comes in.

Right, Right. Yeah, just rough numbers. It's not always 50, 50 obviously, but yeah, just in general that's sort of what you see, you know, seven to nine and then hopefully, and technically you can double that type of return at the end of the project when all is said and done, you're looking at how much you really got in hand over, over that, say five year period. You're looking back and averaging that over five years and hopefully you're, you're in the double digits. So in my experience it has been that way. Just everyone listening knows, you know, the dreams have come true. But, you know, but, but you never know. You never know. Right. Bad Operator, bad market, shifting demographics, recessions, all, all things factor risk, interest rates. I mean, a lot of stuff could change in the environment. So that's why I try not to put too much emphasis on predicting what the world looks like in five years. Because nobody knows. Yeah.

Which is the importance of that cash now, cash flow.

Right, Exactly.

Today, not looking at that five years, but I think from anybody, whether you're an active passive or you're a passive passive investor, looking at the underwriting or at least the projections, what's year one in today's environment? Are they showing any rent increases? You know, and if they're showing a 2 to 3% increase on year one, you know, that should bring some red flags. It should be zero, possibly, you know, negative in some markets on rent and then from operating expenses, you know, you had mentioned that you are break even on some of these deals that are being presented are 50, 60%. I mean, that's incredible. Are they leveraging their size in those markets to allocate labor? What are they doing? If rental rates aren't dramatically going up over the next two years, then obviously they're dramatically reducing expenses. Have you dug into those?

Yeah, these are just again, kind of as a general disclaimer to a deal like that. If you're seeing a break even occupancy, it's probably not that they're getting some incredible deal, you know, that's off market. It's probably a lot to do with the debt leverage and things that they're putting on it. And in general, what you're going to see with something like that are probably lower projected returns. So this is why it's important to know your risk profile. Right. Because a lot of folks, even years ago, even in 2015, I was talking to an operator, he was launching a fund and he says we're. It was like two things which I thought were crazy at the time, but there was a lot of people in the boat that kind of resonated with this. It was something like we're only going to put 50% debt leverage on our projects and we're only going to distribute 75% of the available cash flow. Something like that. And just to be like ultra, ultra, ultra conservative because there's always folks in the mindset that we're about to go into the Great Depression. It doesn't matter what year we're talking about. And there's a lot of people that resonate with that message. So, you know, if you're okay with, you know, 3, 4, 5% annualized returns, there's ways to, you know, to have a conservative project line up to that. But there's also folks on the other extreme spectrum that are into that opportunistic stuff or the new construction, a new build and think, God, I could potentially double my money in three years or something like that, you know. Yeah, potentially. But there's a hell of a lot of risk in that too. But hey, you know, whatever, you got 100 million bucks and you're putting 50k into it, whatever. Right.

It all goes back to the risk.

Right.

If you have the money, that can be a little more risky than it goes back to your structure of if you're having 80% into assets that, you know and 20% that you're testing out or, you know, seeing if it, if it makes sense. Yeah, you can, you can balance that. So from a passive investor side, you know, what can, what can someone expect from the beginning to end? Like, you know, just if you could walk us through on, you know, you say you've gotten the education, at least a basic knowledge, you're a medical doctor, attorney, one that's not going to dig too deep into it. So let's start with that.

Yeah, yeah. Kind of what to expect there. To my surprise too, when I got into this whole world of passive investing and private placements, I guess my assumption in the beginning was if I'm going to be an investor in apartments, I'm going to have to be like a billionaire. I'm going to have to have 20, 30 years of experience in real estate or these are like my preconceived ideas. But come to find most investors that do this type of stuff are the doctor, dentist, lawyer, attorney, business owner, athlete, what have you. It's a highly paid individual that is parking some cash that they don't necessarily need to live on. Right. Maybe they don't want to put it all into the stock market. So this is kind of the basic, I mean, everyone's got their own approach. This is kind of the general approach. It's a relationship business. So you need to build some relationships now that can be done as simple as going to Google and finding some operators and then calling them up and saying, what do you do? I'd like to get to know your firm better. I mean, you can do that. You can get on forums like BiggerPockets and what have you and kind of network with people who's been investing in the space. What's your success been, what operators do you like, you know, you kind of have some private messaging there. For me, it was seminars. I just found that, hey, I know we can't do it at this very moment besides the online conferences, but I like being in an environment where there's 1,000 people and 2 or 300 of them are passive investors and I can just kind of mosey around and pick people's brains, so to speak, and swap experience. And I got to learn who some of the key operators are and kind of what to look for and all of that. Okay, so it starts with the education and the networking and building relationships to an extent, figuring out who you want to partner with, because ideally you've already figured out what you kind of want to do, what your criteria is. Do you like value add or core or self storage or mobile home parks? You gotta, you gotta do the kind of some of that education up front, whether through podcast or reading and then you. All I'm trying to do at the end of the day is align my interest and philosophy with other people that have a like minded idea. You know, we kind of generally agree on just general concepts like whether that be markets or deal types or the economy or whatever. So you're kind of like building a friendship, more or less. You're going to be communicating with these folks for three years, five years, seven years, 10 years. It depends on the business plan. So you want to make sure you do your due diligence that way. And then you're getting on their deal list so they're saying, hey, we'll keep you in mind when we have a new opportunity pop up. Be sure to send it your way, that kind of stuff. And so expect to get an email at some point that says new opportunity, you know, 300 unit in Dallas, blah blah, blah. And then you start vetting the deal, maybe get some references, keep, you know, talking to the operator, get your questions asked, attend the webinars, the Q and A calls, they have, stuff like that. And then you're just making a decision, really. I mean what we're talking about right now is all the active part of being an active passive. And once you make that decision, I like this deal, I like this operator, I want to do this. Send in your funds, sign your docs, and off you go. You can be as passive as you want to be. You'll usually get either a monthly update or a quarterly update and a monthly distribution or a quarterly distribution, depending on the business type. Like I said, it's three years, five years, seven years, 10 years depending on the business model. And away you go as you go through these motions over and over and over. When you have the spare time, it gets easier and easier. And this is where you can start to scale a portfolio passively. You know, you can go from doing one deal like that to having 50 deals. I know people on my network that have done probably 150 plus private placements, you know, as a passive investor, and they can get through them pretty quickly. They've looked at enough deals at this point. So, yeah, that's kind of the general process.

So you mentioned documents. What are some of those documents? And obviously you're not attorney and all, but highly recommend anybody listening get an attorney with those documents. But can you talk to us about the documents that you typically see and some things to look out for?

Yeah, yeah, absolutely. In the private placement world, again, for those listening that may not be familiar, publicly traded companies have to do a certain bit of reporting and transparency in a public way to where investors buying a stock, for example, don't have to sign a bunch of paperwork and go through all this on their own. When you get to the private world, it could be a similar type of investment or company or real estate project, but there is a lot of paperwork involved because they have to disclose a lot due to the SEC regulations. What you commonly have is a ppm, that's a private placement memorandum kind of outlining what this investment is, what the risks are, you know, so that you fully understand who's involved and what exactly you're investing in. That kind of stuff. That's a pretty long document. It can be sometimes hundreds of pages. It could be, let's say, at minimum, maybe, I don't know, 100 pages. But this is where you want to leverage some expertise from your own legal team to get through that. And so you're signing that and making sure that makes sense to you and you don't have any questions. And if you do ask those questions, number two is like usually an operating agreement. So that's how the llc, the limited partnership, is going to be operating and kind of the ins and outs of that, the key players, the general partners, voting rights, all this kind of stuff. And then you've got a subscription agreement, usually, which is what you're subscribing to when you send in your money. It's like you're buying 25,000 shares of this LLC, for example, which is owning this property. So those are some of your common legal docs. Most people execute those in a matter of a few days. And sometimes you have to verify accreditation if the Group's doing a 506C offering, which is a publicly Advertised investment opportunity, different ways to do that, through broker dealers, through attorneys, through CPAs, through these online platforms like verifyinvestor.com just making sure that you meet that criteria to be an accredited investor. Other groups do self certification because they do 506B offerings, you know, regulation A, that kind of stuff. So anyway, you know, each one's a little bit different. Not to get bogged down in all the legal jargon, but that's typically and commonly what, what you might expect. And try to try to find a group that does all this stuff digitally because my God, I had to do that once manually and print out hundreds of pages and I was not a happy camper. So most people are using Adobe sign or DocuSign, stuff like that. But yeah, that's kind of how that works.

And you mentioned a few things that I want to point out like 506B, 506C and accredited. Can you share just high level on 506B, 506C, and then demonstrating an accredited and a sophisticated investor.

Yeah, a lot of folks, myself included, when I first got started in this world of private placements, thought everything's only available to accredited investors, high net worth, high income people. And if you don't meet the criteria, there's nothing you can do here. And it's rapidly evolved and evolving as we speak. And a lot of these sponsors are doing a 506B offering. So we'll talk about that first. What that means is it's a private placement offering where if the sponsor chooses to do so, they can bring on 35 sophisticated investors. Those are folks that understand what this is that they're investing in. They understand the risk profile. You know, either through an advisor or on their own, they can comprehend what they're doing here. So they're sophisticated in the sense that they know what they're investing in. That's a sophisticated investor. So you could take up to 35 sophisticated and then an unlimited number of accredited investors. Which means that you either have a million dollar net worth excluding your primary residence, whether you're single or married. You can qualify through net worth that way or you can qualify by income. So if you're single, it's 200,000 per year in income for the last couple years with the expectation to do the same in the current year. And if you're married, that bounces up to 300,000 per year for the last couple years, expectations to do the same in the current year. So if you meet that criteria, the world is your oyster, so to speak. You can participate in pretty much any offering out there. So as long as you meet the minimum investment and all that kind of stuff. So a 506C as in Charlie is where you can publicly advertise the offering to the general public, but you can only take accredited investors and they must verify or you must verify that they're accredited. So you can use the like we mentioned verifyinvestor.com broker, dealer, attorney, CPA. There's different ways. It can just be as simple as a letter from your CPA saying I've taken a look at the assets of John Smith and turns out yes, he's accredited and they sign and put their registration license number on there, but no exceptions, right? It's accredited only. So the reason people I believe think that in this industry it's all accredited is because that's the only deals that you see publicly advertised. So it kind of gives you this illusion that man, all I see says accredited only. But a lot of groups, the majority of groups are running off 506B and as long as you have a pre existing relationship with that operator, they know you, you know them, they understand your risk tolerance and your goals, that kind of stuff, they can potentially send you their offerings in the future. You can't do it on day one. But that's called the pre existing relationship, so. Or substantiative relationship I think it's called legally. But again not an attorney or anything like that. It's just that that's kind of how the world works there in the space. Different courses for different horses.

Yeah, it's a great recap. And you know, I think if anybody is seeing so you know, we all are, you know, we Google something and then next thing we know it's in our Amazon advertising, Facebook advertising. So be prepared for those advertisements. If you're seeing those advertisements that are showing 2x multiple on your investment and 18% IRR all those investment metrics that they're projecting likely or. Well, it is because they are publicly advertising an investment to stay in compliance with SEC regulations. They are looking for accredited investors. And Travis, I think you did a fantastic job of explaining what an accredited investor is. And I know at Crei Partners we focus a lot on the 506B only because I really, we talked about earlier that you're having an investment that takes five, you know, seven years. That's a long time to be in business with somebody. And it just for me and many other deal sponsors out there are looking for having that relationship which is required in that, in that 506B so thank you, Travis, for going into all those details from the legal aspects. And I know you're not an attorney, so caveat, talk to an attorney. But I think anybody that's listening in from passive investor side, a lot of value was made there.

Awesome. You bet.

So have there been any real estate investing stories that you haven't shared, but want to share to avoid, to help others avoid pitfalls?

I think I've shared just in general through Instagram, Facebook, podcasting, pretty much most of my stories. But the one that I alluded to earlier really just continuously sets home with me that, you know, you, you gotta partner with the right folks. You've got to invest in what makes sense and what you understand. And if you don't feel comfortable already, then just simply don't invest, you know, until you are. And you know, taking your eye off the ball like that is, can be sometimes disastrous. So yeah, I think that the more education. I forget who coined this quote, but it might have been like Robert Kiyosaki, but when your education goes up, your risk comes down. And so I'm a huge advocate for self education, whether it's through networking and mentors and coaches and programs and seminars and podcast books, it doesn't matter. It's just whatever works for you and keep on learning, Keep on. You know, like I mentioned earlier, I study the macro level trends, so I like to look at kind of what's happening generally in the US right now and tax wise, political wise, you know, migration trend wise. So just keep up with that stuff. You don't have to be active per se, but you know, when you get 5, 10 minutes, read a few headlines and maybe run a Google search on the weekend and just, just kind of stay fresh with it. So yeah, words of my wisdom. Perfect.

Well, that answered my next question, unless you had anything else on it, was any financial advice on saving or diversifying income to gain financial freedom?

Yeah, you know, we really didn't get into this topic and I'll cover it real quickly, but I came from a very frugal mindset at a young age because of my parents. Right. Both parents were extreme frugality and still are today. And I'm grateful for that now. I used to kind of think it was crappy when I was younger being called cheap, but the politically correct word is frugal. But anyway, what I kind of did is four steps, really. This is kind of what I believe at the core of things. Unless you're going to inherit money or sell a business for millions of dollars, which is Great. And I recommend that. But for me it was like, make as much money as I could make using my highest and best network skill set, what have you. So that was an oil field job, that was flipping houses, that was side hustles and side businesses. I just did everything I could to make money. And then number two is living on as little of that income that you generate for a period of time. This isn't a lifelong philosophy. This is like say five, 10 years, that kind of thing. So you're being extremely frugal for a while as you hustle it out. And then the third thing would be to take that margin from what you're earning and what you're living on and invest all of it, if you can, into investments. For me, that's passive income generating investments. And the fourth thing is just kind of a general caveat of like, avoid bad debt, avoid if you can, you know, personal loans and car debt, and if you can, student loan debt. And if you have these things, try to pay it off as soon as you can. And I literally just followed those four steps. I literally did for five or ten years. And that's what kind of what got me to the financial independence level by doing that. And it's not easy. I know that sounds easy, just four steps, but it's worth it. It's just worth it in my opinion. So that's my general advice on just frugality and money and budgeting and all that.

Thanks for sharing. And as we close, what are some of your proudest moments investing in real estate?

Proudest moments probably come from where I set a specific goal or objective and then I executed on it. And I'll tell you why. I had the single family house back in the day and I bought it at a good price and coincidentally, two years later, I sold it for a phenomenal price with an off market offer. But I didn't feel much fulfillment. I didn't really feel proud, it just happened. It was like, well, that was weird and unexpected and of course I'm grateful that it happened. But I wasn't proud because I didn't do anything that wasn't what I set out to do. It wasn't my plan. So instead the things that make me most proud or where I really hustled and I had my criteria defined and I found an off market property and I was whatever. And then I just banged out the execution of it, invested in the right areas because I did my research and whatever, then I get some kind of return on the flip side and think, wow, I Created that, I produced that that was really cool. So that's where it comes from for me. Anything I'm proud of is something I really dedicate a lot of work into and didn't luck out or what have you.

Well, I'm grateful that you are able to be a guest today and appreciate all the insights. Travis, are there any other items you want to share about Ashcroft or yourself and how can listeners find you?

Yeah, absolutely. And I appreciate you having me on the show too. And some that we didn't talk about is a big way that I give back is giving my time back to others who are on their own journey to financial independence in any capacity. And so what I do, I created this, this calendly little calendar link and I do these 15 minute Q&A calls with people all over the board nationwide. 18 year olds, 70 year olds, we talked about anything real estate. And I open that opportunity seriously to anybody. There's no upsell I don't sell. I don't have any books or conferences or seminars or programs. I just like to network. And right now in Covid it's very tough to do so at conferences. So this is kind of my networking that I'm missing a lot. So if you want to set up a free 15 minute Q& A, anything we talked about here, you have questions on or you want to talk about your own situation, I'm happy to do that. I'm not an advisor or anything like that, but I'd just be happy to swap experience, share lessons learned. And second thing I'll mention, I have a 20 page PDF download. Again, not anything for sale, not an upsell, but it's called Understanding Real Estate Private Placements. And it's basically a quick rundown on industry terminology, how this stuff works from the inside out, how to vet markets, operators, that kind of stuff. You can get both of these that that call and. Or the PDF one, the other, both, whatever. @ashcroftcapital.com ConnectWith Travis so it's ashcroftcapital.com ConnectWith Travis yeah, please do. Because I genuinely wholeheartedly love networking with people and talking real estate. My wife's about sick of hearing about it, so please give me that break.

Well Travis, thank you so much. I hope you stay well and safe and look forward to connecting with you soon.

All right Wayne, thank you. Take care.

That's all for this episode.

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