Alternative Investing Tips and Strategies for 2024 with Erik Hemingway

Artwork for podcast Truly Passive Income

Episode 40 • 26th February 2024 • Truly Passive Income • Truly Passive LLC

Erik Hemingway: 00:00:00

We just need to go all in on commercial real estate. We've dabbled in other asset classes, but keep coming back to storage. It's not that complicated. There's a lot of things about it that we love.

You have 400 tenants instead of one anchor tenant that's going to move out and leave you high and dry. So still commercial real estate. It's still based on a cap rate. You can force so much appreciation in these projects.

Neil Henderson: 00:00:17

Welcome to another episode of Truly Passive Income, where we dive deep into the world of alternative investments to help you, our savvy listeners, find the path to financial freedom without sacrificing your precious time. I'm Neal Henderson. This episode is a little different.

It comes from a panel discussion from our local alternative investing meetup in Wilmington, North Carolina.

I interviewed my two good friends, Clint Harris and Eric Hemingway, seasoned investors who've navigated the complex terrain of real estate and beyond to achieve not just financial independence, but true control over their time and life choices. So join us as we explore their journeys, the pivotal decisions they made, and the lessons learned along the way.

Whether you're a seasoned investor or just starting out, you're sure to find valuable nuggets of wisdom to help you on your quest for truly passive income. Thank you all for coming. I know most of you that are in here. I'm Neil Henderson.

I work with investor relations with Clint General Partnership as well. And I'm going to be asking the questions. I did not memorize them, so I'm going to have to use my little notes here. So I'm going to start with Clint.

You have three minutes to answer this question. Clint, what were some of the earliest investing professional life goals that you can remember setting for yourself?

And, and in what ways did those goals change over the years and in what ways have they stayed the same?

Clint Harris: 00:01:30

So I started out with a very intentional goal at a career medical, sales and planning pacemakers and defibrillators, which is kind of a young man's game. I had an idea of building a potential off ramp down the road through real estate. And my goal originally was cash flow.

I wanted cash flow to replace my income and take it from there.

We built up a small portfolio of single family properties, which eventually we took that apart because it wasn't going to scale to what we wanted it to be.

And then my wife and I started buying small, small multifamily properties in Carolina beach and converting them to Airbnb properties, which came with some pretty lucrative returns. With that asset class conversion, it was a big jump and so we created six figure income.

But the thing that I got wrong about that was that at that point in time, my goal was financial freedom and cash flow. What I got with a short term rental portfolio was something that was very labor intensive in terms of the amount of time it takes to manage that.

During the summer, during the weekends, instead of one tenant per property, I had eight to 10 units per property per month. Very labor intensive. So I got that financial independence at the sacrifice of time and location independence.

And so for me, the goal that shifted was the goal is what we've already mentioned earlier. It's time, location and financial independence together.

Because those things create an independence of purpose, which is where you decide what you want to do, how you want to do it, and when you want to do it.

And if you build out a portfolio that is you're getting one of those and potentially sacrificing one or two of the others, it takes that from you and eventually you either have to pivot or completely take that apart and rebuild it in another way, which is obviously very time consuming.

Erik Hemingway: 00:03:05

So kind of what Clint was saying, like location, time, financial independence, or freedom from those things, it's kind of the old, you can have it done well on time or on budget. Choose two. It's kind of like what you were saying about you had two, but not the third.

So for me, I've been in real estate for a long time from the very bottom, you know, sweeping out construction jobs and getting into construction, and then got went on my own and got my license and started building spec homes. And it was great, you know, I was making good money, 30, $40,000 on a house, but soon realized as soon as I stopped building houses, the money stops.

s. Right? It was in the early: 2000

It's what most people assume it is, but it's really just a way to shift your thinking about money. And that was super impactful for me.

I bought it for some high school graduates in my life at the time, because I'm like, this is a great foundation of how to think about money. So that led me to thinking more about commercial real estate. My wife and I had managed residential rentals for a while, 22 units.

And that was a lot of headaches. So I thought, let me explore commercial. Built a couple commercial buildings.

And I was driving through our town and see these old buildings and you know, there's always a new tenant in there, a new business.

st self storage in Arizona in: 2006

So that was my big mind shift change about trading time for dollars.

Neil Henderson: 00:04:41

Do you recall where you saw that going back then? I mean, there was. Was there a big plan?

Erik Hemingway: 00:04:46

nd maybe it was cash flowing,: 1500

And I think from when we started, we just didn't dream big enough. You know, I thought, if there's a way I could get $5,000 a month without having to do anything, that's it. I'm done.

In real estate, especially commercial real estate, it's not that hard. If you grind it, you can probably do it in two years, three years. And I thought, all right, well, what else can we do? And let's think bigger.

hat's just kind of been since: 2006

Neil Henderson: 00:05:24

Throughout your journey, you said that your goals and what is important to you has changed. With that in mind, how do you look to the future and what are the core values and beliefs that have remained constant?

Clint Harris: 00:05:34

I think one of the things I got wrong when I started with single family homes and then small multifamily, and then started getting into self storage with Eric, is I kind of assumed that your skill set's going to change as you go along. You're going to get better and better and better with the size of the projects, but your goals are going to stay the same.

And what I found out for me and my wife and our family was the difference is that the skill sets from either flips or single family renovations or properties, and then small multifamily, that converting them to Airbnb properties, those stay the same. It's really the same thing. From a small property to a larger project. The only thing that changes is some of the zeros.

What did change for us was were our goals along the way. One of the things that Neil and I are involved with a podcast called Truly Passive Income. He's great at it.

I'm not very good at it, but one of the things I really enjoy about that is we get to talk to a lot of really intelligent people out there, and they're willing to just share their condensed life experience with us in a way that I don't think they would do if I just asked them to sit down and have breakfast. But because we give them a platform, they're willing to share that.

And one thing that I've seen their goals shift, which I'm early recognizing my goals are shifting, is that ultimately their time becomes worth more than anything else. And I specifically, we had an interview recently where a guy was talking about, I used to look at return on investment.

I used to look on my cash on cash return or the return on the initial purchase price. He said, I don't do that anymore. What I look at now is what's my return on the amount of time I think worrying or thinking about that asset.

And it was a mind shift for me because if I used to do a deal and I made a 50% return on investment, that was a home run.

Now he goes, if I make a 20% return on investment, but I think about that investment for an hour once every quarter when a distribution or a report comes in, because that's a significantly better return per hour that I think about that.

And I've tried to change my thinking in the last few years to look at the people that are farther down their investing journey, or financial freedom journey, or freedom of purpose journey, whatever you want to call it, people that are farther down the line and try to get some guidance from that as to where I think I'm probably going to want to end up. Because if you don't know where you're going, it's really hard to tell if you're on track.

So that's one of the things that I saw that if their goals are shifting in that direction, where ultimately time is always more important than anything else, that's where my goals have shifted as well. But the skill sets to get there have remained the same.

Neil Henderson: 00:07:57

So throughout your journey, you've said what your goals are and what's important, who's changed? With that in mind, how do you look to the future and what are the core values and beliefs that remain constant?

Erik Hemingway: 00:08:07

I'd say my beliefs have shifted in the fact that, not to sound corny, but if you set your mind to it, you can achieve it. So I think goals wise, my goals now are, I would say, more to just to challenge myself. It's not about a number necessarily.

That's kind of added bonus, if you will. But it's not really the goal. It's just more like I just Want to keep stretching and doing hard things and seeing what's next.

I love learning new things, new challenges, risk. I like all that. I like learning how to solve a problem. And I look at what people would call challenges as just riddles to solve.

And so that's really, really fun. That's a game that never stops, and I love that. So I think that's probably the biggest shift in how we do things.

I think as far as what we're doing now with real estate is we put off the idea of syndicating or bringing in partners on deals for a long time.

Neil Henderson: 00:08:58

Yes or no.

Erik Hemingway: 00:08:59

We're introduced to the idea of syndicating seven or so years ago, eight years ago, and we're just going to figure it out on our own. Very maverick attitude. And we heard something at a conference that was like, yeah, but you're short, changing.

You know, if you have the skills, you have the knowledge, you have the ability to spot deals and do these things, it's kind of selfish, you know, it's like you're cheating your potential investors of great returns that they could get and could potentially add less stress to you. I'm like, that was a big moment. It was like, yeah, why would we not? So that was huge.

Neil Henderson: 00:09:31

Eric has one of the more well developed wrist muscles that I've ever seen from anyone I know and such, so that we have to be careful of waving new challenges in front of him because he goes, yeah, that sounds cool, let's do it. But I agree. Like, I remember when I met first met Eric, he had one facility, no, two facilities.

You'd just done the conversion here in Wilmington, and not long after you got in Front street, you'd done that. And I was like, eric, man, you got it. Let's syndicate. We just got him back from the best ever. But he was right.

I don't think you were ready at the time. If we've gotten a taste of what a challenge that would have been without what you built out from those skills now, I don't know what would have.

So anyway, all right, so Clint and Eric, you both have mentioned pursuing investment strategies. You ultimately left and pivoted to something else. Is that more often because your goals changed, that you found a faster way to accomplish them?

And we're adapting.

Erik Hemingway: 00:10:25

I think it just piggybacks off the last comment about wanting to explore new things. And so we started syndicating. No idea how to go about it. The first one we bungled up pretty well.

But we got accused of amateur lawyering from our attorney and he's like, all right, if I'm going to help you guys with this, no more amateur lawyering. So we learned that we hired an SEC attorney, did it the right way. We did a few deals like that. And it was like, we need to start a fundamental.

Let's do a few more one off deals because we don't know how to do a fund. Well, how else are we going to figure it out unless we do it? So we already have two deals under contract. This is the perfect time to start a fund.

And it was hard. It's hard. We're in the fund right now. But that's pretty much my approach is, well, let's just figure it out like other people are doing it.

Let's find the people that know how to do it, figure it out. So that's my approach now, is pretty much.

Neil Henderson: 00:11:11

Yeah. And let me interject before Clint answers, is that, you know, Clint and I hammer on this all the time nowadays. We all do in the office.

Is it sounds like a who not how problem a lot. It's a great book, if you ever read it, called who not How. Rather than sitting around and trying to figure out how do I do this?

And bang your head up against the wall and spending a year learning how to do whatever, find somebody who knows how to do it, pay them and you'll probably come out ahead in the end.

We have to do that to ourselves all the time where it's like we're beating our head up against the wall trying to figure something out and it's like, was this just a who, not how? Yeah, just find something.

Clint Harris: 00:11:43

The question was about goals and if those changed over time as you change strategies.

I've already said before, my goals did change, but originally when I changed strategies from what I was originally doing, it was just because it didn't have velocity. The velocity of what I was trying to accomplish, especially with single family homes, it's not going to happen.

The velocity was there with multifamily.

Specifically, multifamily converted to a different asset class, which thereby changed the formula by which that asset class was valued and changed the cash flow. It was there at the sacrifice of time and location independence.

The ultimate goal that I was trying to accomplish in terms of cash flow and forced appreciation and equity, that all stayed the same. I changed strategy specifically just because of speed and velocity.

That's also the reason that when I met Eric and Levi and found out what they were doing, I was coming from a place of a portfolio that was wildly active and I was trading time for money. My wife and I were kind of managing that ourselves, and I had other things going on.

I was working in medical sales and was on call and busy, and she was taking the brunt of that.

But ultimately, the lessons that I learned there, the asset class conversion, the forced depreciation, and the value of multifamily and multiple units with one set of single fixed overhead from one mortgage payment, but multiple units and multiple rental incomes.

When I met Eric and Levi, their strategy just like, slapped me in the face where my goals did change a little bit because it wasn't just financial, it was also time and location independence. So there was a shift there. But the reason I recognized the value of what they were doing is because it was the same thing I was already doing.

So I would say that my goals did change, but the reason the strategy changed was because I was looking for a certain amount of velocity. Because I think we live in a world where so many people have come to normalize. Trading time for money.

You're trading your time for money hoping to save enough faster than inflation and bad fiscal policy can dissolve the value of your dollar out the back door.

Like your job is to work and trade your life to somebody else to pay for their days off, to make money so that you can save it faster than inflation can take it away, so that one day you can get your time back to do what you want to do. That doesn't make sense. It just doesn't add up.

So for me, the only way to save money fast enough was to make it at a significant rate that I could squirrel it away faster than the value was going away. And ultimately what I discovered is that our grandparents can save their way to retirement, my parents could save their way to retirement.

And the ability to save your way to retirement has been taken away from me and my generation. For the vast majority of us, if that's the reality, then the ability to play defense and save as a strategy has been taken away from us.

And the only way to change is to go on offense. And that's where I was looking for velocity. So that's where I changed my strategies just to try to increase the velocity.

That was over three minutes, for sure.

Neil Henderson: 00:14:37

I'm going to reword this. So there's two basic kinds of goals.

There's process goals, which are goals like, I'm going to work out five times a week, and then there's outcome goals. I'm going to lose weight.

So talk to me about setting those process goals versus the larger notional goals and allowing yourself to Be adaptable and giving yourself grace to adapt and change plans.

Erik Hemingway: 00:15:04

uilt my first self storage in: 2006

Took our family of five kids, my wife and I, we had been talking about traveling for probably seven or eight years. That's kind of one of the reasons I started my business. Starting a business is not a great way to travel internationally, by the way.

So it just felt like, you know, it was more in the grind.

But we moved to Costa Rica and then after about a year and a half down there, we had an opportunity to sell a house in Arizona, sold a couple of commercial buildings.

Neil Henderson: 00:15:41

Just real quick, let me just interject there. Had the Great Recession already started when you sold those properties, or did you.

Erik Hemingway: 00:15:46

Luck out in July of: 2008

Neil Henderson: 00:15:50

That's right. That's right. During the election.

Erik Hemingway: 00:15:52

Yeah. I got a call from a realtor while I was in Costa Rica.

He said, I've got this guy that wants to buy these two buildings that you have on whatever street it was, and I think it's a great offer that you should take it. I'm like, okay, let's take it. I was getting cash flow.

e our third child was born in: 2000

Yeah, we found a boat in Greece. We bought it. I flew over there to look at it just to make sure we would fit. But we're not sailors. We're from Arizona.

So I was just basically counting beds, and there was enough beds. So I'm like, all right, we'll buy it.

So we flew our family over there and we thought we were going to live on the boat for one year in Greece and ended up being on the boat for three and a half years. Sailed to 25 countries, crossed the Atlantic Ocean and up through the Caribbean, and that's how we got to North Carolina.

So we got to Wilmington, sailed in the Cape Fear River. So, you know, that was a decision that we made pretty intentionally.

Obviously, like, we didn't think it was going to turn into that big of an adventure, but I was ready to put all the chips on the table, and it did. Basically, we Came here penniless, you know, not quite, but we had spent all of our money on this adventure.

And I'm like, well, I guess it's time to start over. I guess I need to go get a job and put the nail bags back on and get to work because we have six kids to support now.

We had a baby while we were in Israel on that trip.

So that whole thing, I was really pretty convinced that it was going to be this crater in my resume or CB or whatever, even though I haven't applied for a job in 25 years. But really was kind of pivotal of how we think about what we're doing now. And, you know, that's why it's called Nomad Capital.

We were able to live as nomads on the sailboat through income from the self storage that we held through all of that trip and still own today. We just added onto it last year, still one of our best assets. So that's the story of that. So I don't know how that shifted our goals.

Neil Henderson: 00:17:44

But when you came back, you landed in Wilmington. I mean, there's a whole story. You had to go up to Alaska to make some money.

You and Levi worked as commercial fishermen for a summer, came back to Wilmington, you started doing spec houses.

Erik Hemingway: 00:17:57

Yeah, I started just doing anything I could, you know, finding, doing whatever, framing. And then we eventually started doing small remodels for others.

after the other. And then by: 2016

And I thought, we need to do more of that. That's actually the best thing I've done in 10 years. So let's start making steps towards that.

Which led to the property we found on north fourth Street, City Storage, north, right by Flytrap Brewery. And Levi was still in the field doing renovations for another investor. And then we were able to refinance that and leverage into another storage.

And by then it was just becoming obvious, like, we just need to go all in on commercial real estate. We've dabbled in other asset classes, but keep coming back to storage because it's not that complicated.

We can wrap our heads around it, and there's just a lot of things about it that we love. You have 400 tenants instead of one anchor tenant that's going to move out and leave you high and dry. So it's still commercial real estate.

It's still based on a cap rate. All of those metrics that we love. The conversions are just.

We just love that because you can force so much appreciation in these projects with heavy value add. We take it just a building that nobody wants and pennies on the dollar, and by the time we're done, we add so much value.

Now we've changed asset classes and taken the construction risk off the table. It's just amazing talking about changing tack.

Neil Henderson: 00:19:29

Changing plans, things like that.

One of those stories that you and Levi tell, and you guys honestly don't remember you telling this until recently is when you first got on the sailboat, you didn't know anything about sailing. You knew a little bit about it.

Erik Hemingway: 00:19:40

The pointy side goes up, does most of the time. We knew that.

Neil Henderson: 00:19:44

But you just figured out what was in front of you. You had to figure out how to anchor.

Erik Hemingway: 00:19:47

Yeah.

Neil Henderson: 00:19:48

Early on, you had to figure out how to anchor because you kept on waking up across the bay from where you anchored.

Erik Hemingway: 00:19:52

True.

Neil Henderson: 00:19:52

You know, there's a whole host of other things you had to learn how to tack, how to sail against the wind, all of that. And you've talked often recently about how that's kind of what we're doing now. We sit there and go, okay, well, we don't know how to do that.

Okay, well, let's figure it out.

Erik Hemingway: 00:20:08

Right?

Neil Henderson: 00:20:08

It's in front of us. We got to figure it out. It's a hurdle. So talk to me a little bit about that.

Erik Hemingway: 00:20:12

So, yeah, there was plenty that we had to figure out on the boat. We had done a little bit of sailing on a lake, so kind of knew the basics of how to move the boat, but literally no ocean experience at all.

So the boat that we bought was on the hard, which is out of the water, up on a boatyard. And we bought it from a couple from Austria who we never met.

And we got to the boat, it had been winterized, it had been sitting for two years, and literally opened up every cabinet and finding out what's in there and where does it go, you know, because they had taken all the sails off all the lines. Everything was packed away. And we're like, you know, okay, well, this. Oh, hey, look, there's 14 of these. This must go on this thing. Look, there's 14.

So we got the sails on, got the lines on, got it set up, had to paint the bottom. Asking the guy in the boatyard if we're doing it right.

And then we met a couple from a British couple that were real sailors that we said, like, what do we need to know? And they said, you really should know how to anchor. We're like, anchor? You put it on the bottom. I mean, what's the deal? So we did.

We went out to the bay and literally just pulled in by the sand and just loosened up the anchor and dropped down it sp crystal clear water, 20ft down. There it is. We're good. Let's go to bed. And then we woke up on the other side of the bay.

There was a lot of times where we sat with binoculars on our boat watching other people, like, okay, okay, so they're going backwards. Then they let out the anchor, then they like, pull on it. I bet you it sinks into the sand. As terrible as that is to say, that's how we learned.

So all of those things. Yeah, it really was just one problem after the other. Obviously, you know, we did not get on the boat and say, we're going across the Atlantic Ocean.

The journey of a thousand miles starts with one step. And that's really true.

And it can be overwhelming when you look at the path and there is 20 steps ahead of you, but you can only do one at a time, and you just break it down one by one, so.

Neil Henderson: 00:21:59

Well, that's really what I want.

The point I wanted to get to thank you for tying that perfectly together, Eric, is that I don't know how many of you are going to go from zero to $100,000 a month in passive income or whatever, or one self storage facility to $25 million fund. There are steps in front of you. It's okay to just sit there and figure out, all right, what's the next step that I can do?

That's what I love about that story. And it's really continued as you've grown in business. Yeah, and I can see that. So.

All right, Clint, you often talk about how you decided to invest in storage by working backwards from the goals of older investors that you look up to. How did that come about and lead you connecting with Nomad? You've talked about this a little bit.

Clint Harris: 00:22:39

But yeah, I work backwards from single family homes that weren't going to scale to multifamily properties that helped drastically but were very labor intensive.

What I did at that point in time, when I was feeling really burned out, I went to the local real estate meetup and that was where I found the first few people. But I ended up asking, I think it was seven different people, some of which I really knew, some of which people that they knew.

But specifically asking the old people that look like they're sitting around not doing much, fishing whenever they want to and can go where they want when they want. They look like they had the money to do what they wanted to do and were doing it. I was like, okay, what are those people doing?

Because it's not Airbnb and it's not arbitrage and it's not single family homes, so what are those people doing? And ultimately, when I asked the question to those people who I felt like I could trust their answers, it came down to three answers.

It was hard money lending and note lending, which is where you're lending money out to house slippers. Typically it was mobile home parks and it was self storage. I had no money to lend. You need basically seven figures to get started.

And frankly, like your money's only earning money when other people are doing it, which is kind of market dependent in my opinion. But I obviously didn't have the money to get started with hard money lending. I had no interest in multiple home parks.

I was already kind of tired of dealing with tenants. So that left self storage.

And so I was actively pursuing a self storage self education when I met Levi and then Eric through one of the local Bigger Pockets meetup, Joe Prillin's meetup. And there's the strategy. Self storage is self storage.

Erik Hemingway: 00:24:12

Right.

Clint Harris: 00:24:12

Let's be honest, just to cut to the chase, there's nothing sexy about self storage. You're renting someone a box of air.

That having been said, their strategy is buying old big box retail buildings, Kmarts, grocery stores, warehouses that nobody else wants, that you can get for pennies on the dollar compared to the replacement cost. And because they are the GCs and the builders, you convert that into a class A climate controlled self storage facility Asset class change.

I've heard that before. You convert it from one giant unit into six or seven hundred smaller units, multifamily. Heard that before. So it checked the boxes for me.

And when you change the asset class, you change the formula by which the asset is valued. And then you don't really care if you have five or 10 or 20 tenants move out at any given time.

Even if it's from rate changes, you know what's going to happen? Somebody else is going to move in at those new prices. One of the things I know about Airbnbs is that it's highly inflation resistant.

Hotels and Airbnbs can change their rate on a night to night basis.

But if somebody's got a triple net 10 year lease, yeah, the expenses and insurance costs may go up, but you can't change the base cost of the lease for 10 years until that is up. Self storage is month to month. Right. So just based upon the very rudimentary lessons that I learned, it checked all the boxes for me.

That's what happened, is I asked what other people were doing, and that's eventually what led me into it. And then the few lessons that I was smart enough to retain leading up to that made me leech onto people that are smarter and more skilled than I am.

Neil Henderson: 00:25:38

Well, it brings up such a good point about syndication. There's no syndication. Is private placements, alternative investing. It's mostly a private market. There's NO S&P 500.

There's no index for private placements. And so most of the way that you find them is networking. You have to go to meetups.

You have to sit there and listen to podcasts and listen to who's doing what. We met Chris Odegaard this last October at an event put on by a group called Left Field Investors.

And we love them because they're all basically a group of people that got together and started trading information about their alternative investing strategies and sponsors that they were hooked up with good and the bad. And that's really what you did, Clint, was you basically went out to a network and started asking, okay, what are you guys doing?

And like you said, you saw the people who looked like they weren't doing much. So it was probably what you want to do. You modeled, which is a Tony Robbins thing.

You know, you want to know success leaves clues, and you modeled what they were doing.

I think it's such a huge part of when you're looking at a life you want to build, find the people that have the life that you want to live and just model what they're doing. And that's essentially what we did. And the same thing goes with investing. It's like somebody's having success. There's somebody right now.

I've seen this a lot lately.

It's amazing how people get into government, are representatives, and they're not paid very much while they're in government, but they come out very wealthy. And a lot of people think, well, they're, you know, taking bribes, things like that.

No, actually, what they're doing is they're still allowed to invest in the stock market, and they know what's going on with regulations.

And there's a group now there's a whole app, I can't think of the name of it, where they actually track what they're investing in and they can see the traditional way of looking at an investment are return on investment, cash on cash, return, et cetera. In what ways has your perspective on returns changed over your investing career? And Clint's already answered this, so I'm.

Erik Hemingway: 00:27:34

Going to put it so for me, it's easy.

This is something that I guess it's a whole thing, but came to a couple years ago as we've owned some of these assets longer and the expenses stay relatively level as the income keeps climbing as inflation goes. Return on equity is something I look at now.

So just for round Numbers, you have $100,000 equity in a house and it's a rental Airbnb, and you're making 10,000 a year on it. Well, that's 10% of your equity.

But if the house keeps going up in value and all of a sudden there's 800,000 of value and you're still making that 10, maybe 15,000. Now, your return on that 800,000 locked up in that house is pretty small.

So that's definitely something that's shifted a little bit in my mind and kind of analyzing properties, like, when do they get to that point? It's like, okay, the return on the cash is great. I already got all my cash back. I refinanced it five years ago.

And whatever returns I get are infinite returns. I'm not getting a return on my cash anymore.

But now I'm looking at this chunk of equity sitting there and what is that producing and what could I do with it elsewhere? So that's definitely something I look at and it's kind of a fun exercise to see what's. You're like, oh, this property is doing great.

And then you see with how much cash is sitting there and not earning a lot, you're like you, it's really not that good. Those little soldiers need to get back out there and get to work.

Neil Henderson: 00:28:50

Clint, it's return on time with you. It's return on equity.

Erik Hemingway: 00:28:53

That's something I think about a lot these days.

Clint Harris: 00:28:55

Yeah, I don't think I'm far enough in my journey to think that way. But the people that I'm looking up to, that is the way that they're thinking. So I'm trying to build that into my equation.

Like, Eric is the one that taught me about not thinking about return on investment, but thinking about return on in equity. My wife and I own, they're multifamily property.

So the numbers deceiving, it's only four properties, but it's 14 doors of short term rental units at Carolina beach that have all appreciated greatly. So when I look at my return on investment, it's great.

He taught me to look at return on equity, and I was like, and then when I start looking at return on time and the amount of time that I spend thinking about those properties.

Erik Hemingway: 00:29:29

I went, that's back to the two out of three.

Clint Harris: 00:29:32

Pick one. Right. I don't think I've earned the right to think about it that way.

But if that's where the people that I look up to are thinking about it like Eric does and thinking about it, other people on that track, I want to train myself to think that way, bro.

Neil Henderson: 00:29:45

That's all the questions I have. But I want to open it up to the audience for about five minutes because I want to get to drinking and networking.

Erik Hemingway: 00:29:50

Eric, that was an interesting point.

So you put $100,000 into something, and then you measure your cash on cash return, and then at some point in time, you do a refinance and you get all your cash out, but you still have an ownership percentage. So your cash on cash return is gone because it's left. But now you have a certain amount of equity.

So now you've gone from the cash on cash return to, well, I don't have any cash in this deal anymore. I'm in the infinite return area. So what am I making on my ownership percentage that I still have?

Erik Hemingway: 00:30:23

That's.

Erik Hemingway: 00:30:23

Am I getting that right?

Erik Hemingway: 00:30:25

Yeah, exactly right. Yeah.

Erik Hemingway: 00:30:26

That's a really high level.

Erik Hemingway: 00:30:28

Yeah. So it just happened, you know, as I was looking at the numbers, and it happens when there's huge appreciation. The numbers on one in town here is.

We bought. It's at third in Castle downtown. It's a triplex. It had been empty forever. This is when we are in our residential rehab days.

I'll just run through the numbers real quick. A realtor brought it to me. He said, I think this thing's cool. It's already needed as a triplex. I got a paper from City Wilmington. It's always.

Can be a triplex. We bought it for 110,000 bucks, and it was rough. I mean, it was terrible. Somebody had died there. Somebody was into reptiles. They had snakes there.

At some point, you know, it was. Had a terrible reputation. Wall was crumbling down, looked awful. So we bought it for 110. We worked on it as we had cash from other projects.

So we were on it, and then we were off on it. And it took about a year and a half to get it done.

It was a down to the studs renovation, and we did 80% of the work there, hired out the electrical and H vac and what have you, but we did all the work there. Turned it into a triplex, but we got it back. We reconfigured it how it was laid out. We put probably another, let me say, 130 into it.

Airbnbs were just coming up.: 2014

And then after expenses, maybe 45, 50. Great. On that, 130 of cash. Right. So I had gotten a loan for the 110. I scrounged the cash to renovate.

A year or two after Airbnb numbers, I refinanced for 250, took all my cash back. Great. Going along, getting the 50 grand a year from Airbnb. A lot of time I was doing the texting with the people.

Levi and his wife were doing the cleaning. The flips, all that. Fast forward a few more years. All of a sudden, the last bump values start kept going up.

Sudden I look on Zillow or whatever, hear about some comps in the area. Gosh, this thing is worth 500,000.

Clint Harris: 00:32:14

You owe 100% of it.

Erik Hemingway: 00:32:16

100%, yeah, yeah. I have a bank loan, but there's no investors. It's just me. So now it's worth 500. I'm like, you know, there's 250 grand sitting there.

I could double all the money I have into it, but we're still getting 50,000. So we're getting 50,000 on this 250 sitting there, if you will. So that's 25%. 20. Great. That's a great return. Well, they kept going up in value.

Then I talked to a realtor in town. He's like, I think with this comp that just sold, you're probably looking 650, 700. Okay, now it's getting interesting.

We ended up selling it for 780, and, you know, there was 500,000 sitting there. All of a sudden, the 50,000 is 10%. And Airbnbs were getting compressed because there was more of them. And so now we were like 35 grand a year net.

It's like, okay, it doesn't make sense.

Erik Hemingway: 00:32:59

Your return on equity is going down, right?

Erik Hemingway: 00:33:02

Exactly. Yeah, yeah. So there's 500,000 sitting there, and I'm getting 7 or 8%. Seven or 8% is not bad, but if you can put it to work elsewhere. So away it went.

Erik Hemingway: 00:33:14

My question is for Clint, from the last year, from what I understand, it sounded like you guys hadn't cashed out yet. My question is, do you envision liquidating your multifamily portfolio for something a little less labor intensive?

Clint Harris: 00:33:28

Really funny you bring that up. I'll tell you this.

When we built up that portfolio, I tried to turn it over to property management, and I was unable to find a management company that could get the same returns that we were. Ultimately, I don't think anybody's going to mind your business the same way that you mind your business.

So we built a property management company which was very labor intensive, took about 18 to 24 months, and now it looks very passive to anybody. Looking from the outside, the reality is it's residual because we spent a lot of time front loading the work on that that's still paying off.

The real reason I did that, I do make some money off the property management company, but the vast majority of it is my properties get managed at cost and I wanted to establish the process that manages them.

That having been said, Eric's point is very apropos to what we're talking about because the value of those properties continue to go up and up and up. And as I'm looking at my return on investment, it's fantastic. As I'm looking at my return on equity, it's marginal.

And as I'm looking at my return on time compared to what we're currently doing, it doesn't fit in with the strategy that I have going for my life. And I've come to terms with the fact recently that that is probably not the destination that I thought it was.

And it's probably a stepping stone along my investing journey. I do have one of those properties that I have set up.

uld want to do some kind of a: 1031

Besides that, I do have a duplex that we use as a house act that we lived in for a year and I've got a short window left of where we've lived there two out of the previous five years, which means I could liquidate that property and pay no capital gains on up to $500,000 profit because my wife and I live there and file jointly.

So I am thinking about that because if what I am preaching is that we are all in on Nomad, we are all in on storage, that's I want to look local, be local, feel local, we want to lean into that. So we're exploring the options of at least moving some of those properties.

Just because if I'm not active with the property management company, like if my name is tied to something, I want to be a part of it and know that it's going to do what it's supposed to do. And if that's part of my past, then it probably needs to just be part of my past.

Erik Hemingway: 00:35:52

So.

Erik Hemingway: 00:35:52

And to follow up, is it more that you're worried about or not worried, but want your time back, more concerned about insurance rates increasing and storms?

Clint Harris: 00:36:03

The fixed overhead cost is certainly potential thing to consider for me. With the one property that we lived in the past, the obvious thing is losing the status of having no capital gains from having lived there.

ern because we bought them in: 2018

The same lesson, the asset class change, the multifamily value add, that's still a part of it. But storage is so much less labor intensive and so much more inflation resistant, pandemic resistant.

It's not discretionary spending for these people. It's not vacation dollars. Right. If the economy gets bad, they're either going or they're not. It's not discretionary spending. This is need based.

The new generation is not buying properties the same way that the previous generation was, which means they don't have an attic, they don't have a garage, they don't have extension of their closet with an extra bedroom. They're renting. And when you rent, you're renting based upon the square footage that you're getting.

nting a two bedroom condo for: 1800

So just in terms of the projection of where I think the demand is going, combined with the asset class change and the forced depreciation that Eric and Levi are able to add to the projects, that's where my journey is taking me.

I'm okay with leaving the rest of it in the past to move in that direction and just realize that that was a big part of our journey, but it was just a stepping stone and not a destination.

Neil Henderson: 00:37:29

Thank you for tuning in to Truly Passive Income.

I hope today's conversation with Clint Harris and Eric Hemingway has inspired you to think differently about your investment strategies and the true meaning of passive income. Remember, it's not just about the financial returns.

It's about creating a lifestyle that gives you freedom, time and the ability to pursue your passions.

If you're looking for more insights and strategies on achieving financial independence through alternative investments, make sure to subscribe to our podcast and visit our website. Until next time, keep investing smartly, but remember to value your time as the ultimate currency.

Thank you so much for listening and watching the Truly Passive Income podcast.

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

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