Are you having difficulty selecting the most effective investment method for yourself? Join us in this insightful episode as we discuss the pros and cons of various popular investment strategies, empowering you to make informed investment decisions. Tune in now!

Key takeaways to listen for

• [03:24] Why you need to begin with the destination in mind
• [04:44] Pros and cons of turnkey properties
• [09:01] BRRRR method: What it is and how does it work?
• [16:00] How to choose the right investing strategy for you
• [20:23] Benefits of investing in real estate syndications

Resources mentioned in this episode

• [21:13]  Nomad Capital
• [21:59] Airbnb

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There's a lot of people that want to get started in real estate that don't typically have the capital to get started. So one of the lower income ways, in terms of the amount of money that you have to inject into the strategy, is wholesaling.

You're trading time for money, you're trading hustle. The people that are pretty good at it, that get used to being told no, start having some success.

Welcome to Truly Passive Income. I'm Neil Henderson.

And I'm Clint Harris.

Today, Clinton and I are going to talk about the most popular investing strategies that are out there, sort of the pros and cons of how they look to a high net worth, high income investor who's got goals of achieving financial freedom and whether or not those investing strategies really align with those goals. Correct?

Yeah.

I really want to talk about economies of scale here because especially starting off as a young investor, you're always looking at the next deal, what you're focused on, the next project, a single family home or the flip or whatever it may be. It's really easy to get locked in on the next deal, especially when you identify something that looks like a good opportunity.

I say this all the time, and I mean it.

And that's one thing I want to talk about today, is that a lot of times, let's say you started off as a new strategy and you're going to do Airbnb properties or whatever, it's really not about the next deal, it's usually about the deal after that and the ability to scale.

Because one deal can be great and it can get you started and you can learn a lot the concepts, a lot of times where things are going to apply and bigger deals later on down the line for you. But what we're really talking about here is the ability to make tangible changes to your life that affect the amount of money that you have.

And by proxy, it affects the amount of time that you spend at work, the amount of freedom that you have, and the amount of location independence that you have.

So I want to walk through some of the strategies you and I discussed earlier off camera and just talk about one deal may be great, three may be great, five may be great. But if you have to do 30 of them before it affects your life in a meaningful way, is there a bottleneck?

And if so, and it's going to take you five to seven years to discover that you can be building your portfolio in the wrong direction for five to seven years before you figure that out. You only have so much time, so much Energy and so much, you know, dry powder in terms of money that you can throw a different project.

So a lot of times you see people going in a lot of different directions before they figure out what they want to do. Use the analogy before. It's like being on an island in the middle of a lake and you got enough wood to build a bridge to the mainland and.

But you start building it 10ft in this direction and then you stop and you go build it 7ft in this direction and then 10ft over here and next thing you know, you're out of lumber and you haven't gone anywhere.

At the same time, there's a really big pitfall that I fell into of getting into short term rentals, understand the value of multifamily, which was very helpful, and then got into short term rentals and built out a portfolio of 14 of them before we realized, yes, in terms of finances, this is really beneficial. But what it didn't give us was any time or location independence. So I want to have a conversation today about identifying goals for yourself.

Not just financial, but much bigger than that in terms of quality of life.

And start with the end goal in mind and work backwards to what is the right strategy and does it have the economies of scale that are going to get me to that goal or am I going to run out of lumber?

I love that. And I so often say this for anybody who's talking about financial freedom is you need to begin with the destination in mind.

What does your life look like once you have achieved whatever level of financial independence it is that you are striving for?

The life of a financially independent house flipper or wholesaler is very different from somebody who has a portfolio of single family rentals or a portfolio of syndication deals. Those are very different lifestyles that those three people are living.

And I think often people just kind of charge off down the road of, okay, well, this is a strategy I can do, I understand it, and I just need to scale it until it achieves whatever financial number that they've got in their head. Just for argument's sake, let's start with turnkey rentals.

Turnkey rental is a single family rental, even sometimes a duplex, triplex or fourplex, although those are rare that a turnkey operator has bought. They've renovated it, and then they just turn it around to an investor and offer it as a rental that they can purchase for the cash flow.

Now, what would you say are some of the pros and cons of the turnkey strategy right out of the Gate.

Well, first of all, I get it. It has one of the things that you and I focus a lot of our intention on. For the most part, it can be passive, right?

Somebody has front loaded the work and for you, there's very little capital expenditures because it's a stabilized property. It's renovated, it's ready to go. And so it takes very little time on your part, which is very appealing. The problem is you're paying for that, right?

Somebody else did the heavy lift of getting that property in good shape, putting a tenant in place, managing the tenant. And so yes, you're getting the more passive strategy that comes along with that. But what you're not getting is the value add.

Typically you're going to get a little bit of cash flow, hopefully, as long as you've done the math right and you've factored in on occupancy from people moving in or out or everything else that comes along with it. But what you're not going to get is the appreciation.

Because most depreciation comes by way of forced appreciation from doing renovations on a property, swinging the hammer, new bathrooms, new kitchen, you're making it nice. That's what's really increasing the value of the property. The person getting that is the one selling you the turnkey rental, right?

They did the heavy lift, they got it stabilized, they're turning it over to you and you're paying a premium for that. So, yeah, you're going to get a stabilized property for now, for the next five, eight, ten years before it starts having problems again.

But you're paying a premium for it. You're not getting the appreciation that's coming by way of forced appreciat.

You might get natural appreciation in that market, but the chances are you're going to be buying one of the nicer properties in that area, or if it had a lot of room for forced or natural appreciation left, they probably wouldn't have sold it to you, right? So from that side of things, yes, you're getting some benefit there.

One of the cons is by paying a higher price, you're typically giving up some of the cash flow because your monthly payments are going to be higher if you've got a mortgage on it.

So your cash flow is fairly minimal, which means your cash on cash return is fairly minimal, which means it's going to take you a long time to get money back that can be redeployed on another property. It has some of the things that we love. It's fairly passive.

It has one of the things that we Hate in that it's cannibalizing your cash flow and it has very little economies of scale. If you're going into a passive strategy, you have to have enough units that it has economies of scale to make it worth it.

So will one property help you? Sure, probably. Mostly because somebody else is paying down the mortgage for you. Is it going to affect your life 10 years from now? Probably not.

Besides what somebody else has paid down on the mortgage and your ability to refinance or sell the property, I've seen a lot of people start off with that type of property. I have not seen very many people stick with it. It's a single family asset. So let's take that a step further. Let me flip this around and ask.

Well, I think you bring up such a good point, is that any value has been extracted by the turnkey operator, which is fine. I mean, they're doing the heavy lifting for math's sake. Let's talk about somebody who wants to generate $120,000 a year in passive income.

What's the average turnkey property going to cash flow per month? $100 maybe, if they're lucky, if they've done really well, $300 a month.

So let's say, you know, your average portfolio wide, you're doing $200 a month in cash flow. Like do the math on how many turnkey properties that you need to financing on.

And oh, by the way, banks are going to cut you off at 10 mortgages unless you start to then go to a portfolio lender which is going to want a bigger down payment. It's going to be different terms, the interest rate's going to be higher. I mean, it's a whole different ballgame.

So really the point you brought up is it doesn't scale. Like, there's no way to scale that.

All right? In terms of economies of scale, throwing taxes out of it, let's say you're making $200 a month per property. That's 20 $400 a year.

In order for you to walk home with $120,000 a year, that's 50 properties. And because the cash on cash return is so low, you're never going to get there.

So the first 1, 2, 3, 4, 5 properties might be great, but by the time you get to five, it's probably taking you a couple of years and you're making $1,000 a month. That is not going to change your life in a meaningful way, except for maybe helping you take one extra nice vacation per year.

Now, outside of that, so Aside from turnkey rentals, something that you and I have dabbled in is Brrr Properties. For those of you don't know, it's Burr B R R R R. You buy it, you renovate it, you rehab it, you rent it out and then you repeat the process.

So basically, yep. Refinance. Excuse me?

I had to leave 9,000 left in the property. I use that as a vehicle to speed up the payments and pay for my kids college.

Then I took the money from the refi and I went and bought a multifamily property. So it can be a tool that you use.

But if you're living in that BR space, in that single family space, you're cannibalizing your cash flow to pull the money back out.

Now the good news is, because you're pulling the money back out, you can scale significantly faster than trying to save that money to reinvest it again. But if you refinance and you pull that money out, first of all, it's hard to do in a high interest rate environment like we are right now.

You're basically doing the same thing. You're squeezing that property to where you're going to make probably two to $300 a month off of it. Same math, right?

If you're making $200 a month off of the property, to make 120 grand a year, you have to have 50 of them. You think one project or one property that you take on is pretty easy and maybe you have one or two headaches a year. Multiply that by 50. Right?

10 of them is a pain. 20 of them, 30 of them, 40 of them. It's a huge pain.

And now you're talking about like how much time and location independence have you given up to try to make an extra little bit of money? Hopefully you've got a property manager doing it for you. If you don't. Okay, well now you're a property manager.

You could have just gone and got a job for 60 or 80 grand as a property manager with somebody else. The idea is hopefully your time is worth more than that.

Yes, you can get economies of scale by scaling faster, but as long as you have equal numbers of rental units as you have mortgages. You are not going to get ahead.

You're going to hit a wall to where finally one day you're going to say, you know what, I've got 17 of these, I got 23 of these, I got 31 of these and it's a pain. I had nine at one point and it is not worth it.

You're not going to get there. And Burr Properties. And let me ask you this, Neil.

If you're a wholesaler or you're a flipper, what's the one thing that happens the day that you stop working, you stop getting paid. Exactly. Because you're trading time for money, Right? I've told you before my version of what the lifecycle of the young wholesaler is.

I'll try to run through it quickly. And I've seen this a lot. I've had this conversation over and over.

There's a lot of people that want to get started in real estate that don't typically have the capital to get started. So one of the lower income ways, in terms of the amount of money that you have to inject into the strategy is wholesaling.

You're trading time for money, you're trading hustle, right?

We buy ugly houses, you're putting signs up, radio ads, Facebook, whatever it may be, you're cold calling, you're driving for dollars, you're doing all the things right.

The people that are pretty good at it, that get used to being told no, start having some success and you get something under contract for 80 grand and then you flip the paper and you sell it for 90 grand and it closing. You never close on it, but you get a check for $10,000, that's a big deal.

When you're in your 20s and you're just getting started, that's great, right? People will wholesale land or single family properties or whatever.

Eventually that person, a lot of times they're selling it to flippers and they start looking at, man, I'm selling this to a flipper for 90 grand. They're putting 20 into it and they're selling it for 140 and making $30,000 after holding costs. That seems like a pretty good deal. I should do that.

And so they do. They flip a Couple properties. So they're wholesaling some, they're keeping some for themselves and they're flipping and they have some success.

They probably get a first couple wrong, but they get a couple right and they start making good money and they're rolling until they realize, wow, the day I stopped working is the day I stopped getting paid. Then they say, oh, you know what, I need to start keeping some of these properties as rentals. So I have quote, unquote, passive income, right?

And so they do, they get them in a really low cost basis. That's the beauty of wholesaling is a lot of times you control the deal flow.

So you get these properties, you renovate them, you're renting them out, and then eventually you got some rental income coming in.

But then you start seeing the money coming across from multifamily properties and you realize you look, maybe it's eight units, but it's got one roof, it's got one exterior, and you have so much more stability when one or two of the tenants move out versus when one of the tenants moves out of your single family home.

So eventually those people start to get into multifamily properties and hopefully larger multifamily properties and usually farther in their career, they start getting away from wholesaling, getting away from flipping, and getting more into those properties. And then they go one or two directions.

When they're selling houses, some of them will go get their real estate license because they know they can save on commissions. A lot of them go the other direction because if they get their real estate license, they have to start following rules, right?

So a lot of them go the other direction and start getting more into the multifamily side of things.

Eventually, if you fast forward that investor's life 12, 15, 20 years, usually eventually their time becomes worth more than money and they start taking the capital that they are making out of their wholesaling, their flipping business or selling houses or from their multifamily, and they start investing into larger projects and doing mobile home parks, syndication, large multifamily deals where they can pool their money together with other people. They get maybe a little bit less of a return than if they were doing it on their own.

But they don't have to spend any time or effort on it because somebody else is doing it as a full time job or they start hard money lending and note lending, same thing. They're giving the money to somebody else. They get paid, but the other person's doing all the work.

Eventually for that investor, their time becomes worth More than the money, they're willing to take a little bit of a less return in order to continue and scale.

Because their ability to scale is only limited by the amount of capital that they have to invest in deals and not limited by the amount of time that they have to invest in deals. I'll tell you this, anybody listening, you may not want to hear it.

The older you get, the less time you're going to have for things like this, kids, life, hopefully vacations and time spent with your spouse or whatever you want to focus on. The older you get, you're going to have less time in your day to day life.

And unfortunately we're all going to have less time in terms of our longevity and our health span. The time becomes worth more to you.

The sooner you know that and you can shift your investment strategy to focus on time, I think the faster you'll get to where you want to be.

And that's one of the reasons we're having this conversation is to not necessarily point you to the strategy that does work for you, to help you see some of the pitfalls of some of the strategies that are not going to scale to help you get to the time goals that you may not even know that you have for your life yet.

I remember when I was a young baby real estate investor back in Las Vegas, seven or so years ago. I'm sitting there in Las Vegas and I'm searching for a strategy that's going to work for me.

A guy that's working a full time job, it's got a new 2 year old son at home and in the Vegas market, really at the time, the Vegas market was really all about house slipping. It still is really. I mean house flipping and maybe large multifamily and at the time I couldn't afford to buy a large multi family.

Well, house flipping is a full time job. Even somebody who's just good at hiring crews to do all the work.

I was never intending to swing a hammer, but you still, even if you're not swinging the hammer, you have to have your thumb on those crews otherwise they're going to rob you blind, whether intentionally or just through negligence.

And so I very quickly threw out house flipping as a possible strategy for me as a professional who had a W2 income and was looking to create income another way. But I think we've seen, you know, somebody we know, a guy named Jason Veeley. You know, Jason started off as a house flipper.

He still is house flipping, but he's grown to the point where what he's doing rather than just spending all the extra money, he's rolling that money over into medium sized multi family properties that he owns that produce cash flow for him. And I think that's really where you always have to kind of have your eye on.

And you bring up such a good point, which is eventually your time becomes worth more than the money and you're going to be willing to give up some of the return. Because when you're actively investing in real estate, you can get amazing returns. I mean like conservatively, a 50% cash on cash that's very active.

Whereas once you start needing to be more passive, that return starts to drop. And that's true with almost any kind of investing.

And so what you start to learn is that, well, look, I can't produce more time, but what I can produce is more money. But that takes me taking the money that I've made and investing with other people who, who have the time and experience.

And that is how you scale is eventually you have to start taking that capital and investing it with more people and thereby it's basically people who have more time.

You bring up a good point too, is that the market's not always going to give you the strategy that you choose. Like sometimes your job is to listen to the market.

And if you're married to a strategy, if you're married to house flipping, but you're in Wilmington, North Carolina, which is a wildly popular place to move to right now, it's really, really hard to find properties that have the margins on them to flip because it's still a very competitive market, people want to be here.

So if you're married to a strategy, sometimes that means you have to move markets or you have to wait out, you know, a hot market or a cold market or a timeline or move to someplace else. So if you're married to one thing and one strategy and you're a one trick pony, it doesn't always work that way.

Your margins are going to get squeezed. So that's the benefit of hopefully investing with someone else.

As a passive investment strategy, you can invest with different operators that have different levels of insulation.

Either they are general contractors, so they can do builds themselves and control costs through being vertically integrated, or you can change strategies and invest with house flipper or invest with mobile home Syndicator.

Or RV park parks or whatever it is and kind of listen to the market a little bit more and just have a little bit more adaptability than being married to one thing. That's your thing.

There's a phrase that gets tossed around a lot with real estate investing, which is live where you want to, but invest where it makes sense. And you know, I'll use myself as an example. I did the burst strategy and with some long term rentals in Fayetteville, NC.

I live thousands of miles away from Fayetteville, NC. I lucked into a team that was already operating in that area.

It was a team of deal finders, wholesalers, it was a team of contractors and it was a team of property managers. Had I not been able to tap into all of that, I would have had to build that myself. And I've seen a lot of people do that really badly.

The number one thing I think I want to focus on and lesson that I learned often the hard way because like I said, I built a single family portfolio before I realized I needed to unpack that and switch to multiple, multifamily and specifically switch to asset class conversion from long term rentals to short term rentals because it drastically increased the cash flow off the property and the forced appreciation. What it didn't do is do anything for my time or location independence.

So I got to a point where I had to either unpack that portfolio or come up with the solution. Our solution was building out a property management company which took two years to do that, can manage that.

So for now I'm okay keeping those assets because they're cash flowing, they're scheduled to pay down when my kids are about to reach college age. So it's going to help fund that.

But what we have focused on is a shift towards the most passive investment strategy that we could find, which is syndication. And specifically for you and me, it's self storage syndication. Neil and I work with a group called Nomad Capital.

We focus on buying big box retail like Kmart's grocery stores and warehouses across the Southeast and we convert them to class A climate controlled self storage facilities. Why is that?

Because one deal like a Kmart can convert to 700 units and we're just taking a big building, breaking it up and renting someone a box of air. Right.

There's nothing that inherently great about the strategy except that it has very good stability because 700 tenants aren't going to move out all at once. The way that people look at storage is that it's basically A necessity.

They're very unlikely to go into default or foreclose on something that's climate controlled self storage. They're paying a little bit more. It's usually nicer clientele, it's usually your nicer products.

I can go make a better return doing Airbnb, multifamily properties, duplexes, triplexes, quadplexes. That's kind of my bread and butter.

I can make more off an individual deal in terms of immediate cash flow, doing that in terms of a percentage of return. But what I can't do is have the level of economies of scale that I need for it to affect my life in a meaningful way.

The more I built that portfolio up and I hit financial freedom and replace the income that I made from doing heart surgery and implanting pacemakers and defibrillators. What I did not do is replace my time. And that's when they're on vacation, during the peak season, during summer, when I want my time off.

I painted myself into that corner.

I'm willing to take a little bit less to focus on a strategy that I was just as busy specifically working nights and weekends because that's when people are checking in and out of units, quarterly dividends plus plus larger cash events. And we can take that capital and reinvest it. We still have our investment in the first property, but we can reinvest it again and again and again.

And it's scalable because I'm not spending my time and I'm not locked into a location to manage that. I have people that are doing that for me that are partners now. I'm one of the general partners.

And I'm doing it because I'm passionate about it and because I'm having more fun than I've ever had with any other strategy. And anybody that can hear this knows I love real estate and I love talking to people and I love dealing with investors.

I'm a big extrovert, so it checks the boxes for me. That doesn't mean it's for everybody. What is for everybody?

That it comes with the level of economies of scale where it doesn't just work right now and then I'm going to hit my limit in five years from now and be stuck. I'm becoming more financially independent, more time independent and more location independent as it goes on.

And that's the the synergy between the three things that I'm looking for to create independence of purpose. That's why we want to talk about this like brrr Strategies. Be careful what you wish for.

If you get 50 properties, congratulations, you're making 120 grand a year, but you've got 50 properties. Like, that's a lot of headaches. Single family is not the way.

Mid level multifamily is a great investment strategy, but if you're going to make 30, 40, $50,000 a year in cash flow, if you increase the rents, you're likely to increase the value of the property by half a million to a million dollars.

At that point in time, wouldn't you rather just 10, 31 exchange into a larger property or take some of those chips off the table and invest them to something where you don't have to worry about the quality of the property or who's managing it? That may not be where you are right now, but I can tell you if you live long enough, it will be where you are.

Because eventually the time is going to be worth more than the money.

And I think the sooner people realize that, don't look at this deal, look at the deal after that and look at the 10 deals after that and calculate how many it's going to take for you to hit whatever your financial goal is. People aren't going to want to hear this. Like, I think your financial goal should probably be a lot higher than you think it is.

Replacing your income should not be the goal, because when you hit that level, let's say you need $200,000 a year. Once you hit that, you're going to have a lot more time off than you currently have if you've picked the right strategy.

But when you have more time, you do more travel, you're going to spend more than you think you do. You probably need to make about 120 to 140% of what you think you need to replace your income.

And above and beyond that, that number's probably higher than you think it is. You know, these days, like 250, 300 grand is not that much money, unfortunately.

You need enough to live on, enough to save, and enough to continue to invest just to keep up with inflation and bad fiscal policy. So I think that's the point of what I wanted to talk about today is economies of scale. Look at your strategy.

Look at, as it grows down the line and you increase the size of that portfolio, what happens to the work burden? Because it's going to go up and it's usually not linear. Usually the more properties you have, the higher that burden and it continues to go up.

And just be careful about painting yourself into a corner instead of looking at the long term strategy of what Your time, financial and location independence be will what needs to look like for you to be happy and work backwards from there, Even if it means a little bit less of a return, but it has a higher ceiling in terms of scalability, it's probably a better pathway.

Well, at the end of the day, you can't clone yourself.

The closest you can come to it is by taking your money, which when we refer to this as life energy a lot, and putting that life energy with somebody else. And that's the closest you can come to being able to clone yourself.

And when you do it with this syndication, one of the things I like about it is one you're not having to sign on the debt. It is a big financial commitment. Usually most syndicators, it's going to be probably a minimum of $25,000 to start. More often than not it's $50,000.

But that syndicator is probably going to pay you a preferred return, you know, anywhere from 6 to 8% annually. And so you'll be getting that cash flow but then you also still have that equity.

You know, if it's smart Syndicator, smart sponsor, they've probably bought a deal that has some value add potential, so they're forcing that appreciation. You're getting the same tax benefits as owning any other piece of real estate and you're getting that debt pay down.

But here's the one thing you have to do no work at all other than vetting the sponsor, maybe vetting the deal as best you can, and wiring your funds in and then just keeping up with communications and that's it.

I think that's it in the long run in terms of where we are today. You and I both feel grateful to have found the strategy. It's a strategy that works well for us and it's not for everybody.

If you love flipping houses, keep doing it. Eventually you're going to be 75 or 80 years old and probably get tired of it.

If you love what you're doing right now and you don't see a shift happening because you want to keep the main thing the main thing, or you're a high income earning individual, you're a white coat professional, it, professional, whatever, you don't have to make a change. Your time is best spent keeping the main thing the main thing as well.

But in the long term, think about shifting some of those dollars that Neil eloquently calls the store of life energy, like take some of those dollars shifted towards a strategy that in the long run is going to help you buy your time back and you're not spending your time building a portfolio in the wrong direction that you have to unpack later.

Okay, I think we've run this down and we can continue to talk about this but for another hour or so.

But I'm excited to be this is the first one we've actually ever recorded in our brand new fairly spartan podcast studio, which it will get more elaborate slowly but surely.

Many more to come. So great conversation. Appreciate your time.

Neil all right, have a good one guys. Thanks. Thank you so much for listening and watching the Truly Passive Income podcast.

If you liked the show, if you think it would be useful for someone else, the greatest compliment that you could give us would be to share the episode. Leave a comment down below or leave comment a this an honest review. If you have any questions, don't hesitate to let us know down below.

And remember, with Truly Passive Income comes freedom of time, place and the freedom to pursue your higher purpose.

Sam.