All Forum Posts by: Randy Smith

@John Sayers. This is a really great note.  Any one of the metrics can tell you part of the story, but you really need to see them all to get a full picture of what exactly is happening with your investment dollars.  Each person has their own unique needs from an investment, and these metrics (as well as Equity Multiple) can help you identify the best investment for your specific needs.

@Simmy Ahluwalia. Great point Simmy. Some will argue the hold period is actually positive as many investors mistakenly shift when things get tough. I personally like to hold a portion of my money in long term holds (5 yr or more), and a portion in shorter term holds. I’ve heard of many investors shifting over to notes or hard money lately to decrease hold periods but still make some money while waiting for the tides to turn with rates. 

@Basit Siddiqi. Good catch. I’ll admit, my copy editing could use some work. Multifamily/Multi-family. What’s your vote?

@Chris Seveney. I’ve been investing in multi family for about two years and researched for about one year prior to that. I would agree with you that most deals today don’t work, but I think we are about to see some really great opportunities due to the shift in rates combined with so many that didn’t get rate caps or hold strong reserves. 

I talk with real estate investors almost every day, and the number one question they ask is, “How can I leave my W-2 or at least become work optional through passive investing in real estate?” I’ll cover a simple but not easy strategy below that you can leverage to reach this goal in 5 years or less.

Get Your Financial House in Order

The fastest way to retiring in 5 years or less is to get control of your current spending and finances. There are tons of books and strategies out there to do this, but my wife and I chose the Dave Ramsey Baby Steps. While there are very strong opinions about the Baby Steps, they allowed us to pay down our debt, increase our savings, and give like crazy to the causes we care about most. Once we were no longer burdened by the heavy weight of debt, we could shift our efforts over to wealth accumulation and giving like crazy.

Find your Minimum Required Income Level (MRIM)

Now that you don’t have any more “bad debt,” what is the minimum amount of income you need to live on annually? This number will include your mortgage (if you didn’t do Baby Step 7 above), utilities, groceries, auto, household expenses, planned giving, and a little extra for fun experiences. It’s important to include anything that regularly comes up throughout the year (here’s a hint: birthdays, Christmas, soccer uniforms and summer vacations come up every year).

Invest Your MRIM Each Year For 5 Years

Here’s the tricky part: Once you determine your MRIM, you’ll need to invest that amount each year for 5 years into a passive investment opportunity with a 3–5-year hold period that has projections of doubling your investment during that period. If you do not have enough income to save your MRIM each year, your goal should be to focus on increasing your income so you can save this amount each year. There are plenty of great resources available to help you figure out your strategy to increase your income, so I’ll leave that to the experts in that field.

Reinvest Your Original Investment When Deals Go Full Cycle

Once you hit the 5-year mark, your first investment should go full cycle returning your original investment with the additional returns. You’ve now created your MRIM for the following year, and you can invest your original investment to keep feeding the machine. From that point forward as your deals continue to go full cycle, you’ll simply invest the original investment amount and live off the additional returns produced by opportunity.

Shazam!!! You’ve done it! You’ve created your path to leaving your W-2 or becoming “work optional” in just 5 short years. Of course, this is not an easy process, but the strategy works if you can execute it perfectly. And even if it doesn’t work perfectly, maybe it will take an additional year or two to hit your target. Either way, you’re well on your way to breaking those golden hand cuffs.

With the new year just around the corner, the buzz around goal setting and new year’s resolutions has started to increase as it does every year. Many people will set goals only to look back in a short time with disgust about how few of them are accomplished or even remembered. In the following paragraphs, I’ll walk you through my goal setting process and more importantly, my process to stay on track and achieve a large majority of them.

1. Goal Setting Date with the Wifey

My wife and I have a tradition that we’ve followed each of our 8 amazing years of marriage. We schedule a full day between Christmas and New Year’s to dedicate to our goal setting session, and we come prepared for a long, intense session to help curate the year ahead. It’s not uncommon for pajamas to be the dress code and leftovers to be the sole items on the menu for this date.

1. G-Day Arrives (That’s Goal Day for those of you not following along)

We usually start the day with a quick gratitude inventory over the previous years’ accomplishments followed by a meditation session to bring the subconscious into the activity. Next, we brainstorm things we’d like to do or accomplish in all our life areas including spiritual, family, marriage, professional growth, finances, health, and career/business. Once the list is completed, we categorize each entry into 1-, 3-, 5-, or 10-year targets and circle our top three in each life area/time-period.

1. Add Rocket Fuel to Your Goals

Emotion and repeated action drive results when it comes to accomplishing goals so this next step is critical to your success: We write out what our life will look like, the things we will have, the people we will have helped, and the emotions we will feel if we achieve all our goals. Be as specific as possible and pay close attention to the details. This might sound a little goofy, but I can’t stress the importance of this piece of the process enough. Finally, read what you’ve written down with a ton of energy and excitement and record it, so you have it to listen throughout the year and beyond. Listening to your goal session from 5-6 years ago can really be an exciting process.

1. Revisit Your Goals Regularly

The final piece to the puzzle is revisiting your goals and adjusting on a regular basis. I like to put all my goals into a PowerPoint file and hang them in a picture frame next to my desk where I will see them daily. I also like to have a small version of the same file in my journal that I can reference each morning while I am setting my intention and targets for the day, and I try to listen to my recording from above at least once a week as well. If my goals change throughout the year, I adjust all these tools to help make sure I am intentional with my goal journey throughout the year.

Writing all your goals is really the easy part of this process, but a decision without action is just a dream. Be sure to build a process where you go back and revisit your goals regularly as this is what I’ve found to have the biggest impact. I hope some of these tools and ideas I’ve shared with you above will help you make next year one of the best years of your life.

Like many investors, I initially chose to invest in multifamily because I was investing in single family homes, and I wanted to grow my portfolio faster than that asset class would allow. What I didn’t know was that multifamily investing offers many more benefits than just scaling fast. We’ll dig into some of my favorite benefits about multifamily below.

Risk Adjusted Returns

Multifamily investing provides excellent returns compared to many of the other asset classes available. The value-add business plan allows operators to purchase distressed or tired assets, fix up the exteriors to drive immediately value, and then fix up the interiors of the units to drive up rents resulting in higher net operating income and investor returns. Once those items are completed, good operators will continue to add value through many different strategies. One of the operators I work with shared that by simply painting a number on 100 parking spots and charging a reserved parking fee, he was able to raise the value of the asset by $1.5MM. You simply do not have as many ways like this to drive value in other asset classes.

Tax Benefits

Everyone knows that there are great tax benefits to investing in real estate, but I would encourage you to talk with your CPA to get all the details on exactly how beneficial investing in multifamily can be for your specific situation. You’ll want to get a good understanding of accelerated depreciation, cost segregation, and passive losses to have a full understanding of how this will impact you come tax season. At the end of the day, it’s not how much you earn, it’s how much you get to keep that drives your quality of life. Taxes are the single largest expense you likely have in your personal finances if you are not already investing in real estate.

A Plethora of Options to Choose From

There are over 21MM apartment homes in the US, and many of those are owned and operated by groups that provide investment opportunities to investors like you and me. With a little research, it’s not too hard to find 5-10 operators in this space that have or will soon have investment opportunities available. In addition, decreasing cap rates and increases in apartment values has created a surge of new operators to the space, so be careful to ask about experience when you schedule your first call with these groups.

As you spend more time researching multifamily investments, you’ll find several other great benefits of investing in this space. These are just a few of the reasons that top my list. I encourage you to continue your research, talk with other real estate investors, and dig in and look at some actual opportunities. I’m convinced you’ll see what I’ve seen in multifamily, or you’ll find another great place to put your capital. Either way, you win!

The evolution of my passive investing strategy has changed over the past few years. As my education and confidence grew in the space, my strategy adjusted as well. In the following article, I will walk through some of the changes I’ve seen in my passive investing strategy in hopes of helping you identify yours.

Diversifying in Multifamily Through Funds

I chose to invest with large, national brands for my first two passive investments, and these operators also offered funds which allowed me to spread my investment dollars across multiple markets and properties. I did decrease my risk by starting with this strategy, but it’s possible that my returns will end up being less as well. Funds tend to decrease the chances of big losses, but they also tend to decrease the chances of your big wins as well. In addition, funds generally have longer hold periods, so these investments will not likely provide meteoric returns like some of the single asset deals I moved on to next.

Diversifying Through Multiple Operators and Markets

With a little bit of confidence and a couple of monthly/quarterly disbursements under my belt, I started to leverage my new due diligence skills. I spread my next 9 investments across three different operators in multifamily in three different markets. I was able to achieve the same diversification by investing in multiple deals, but now I was also able to invest across multi operators and markets as well. I also found within 14 months that some deals will go full cycle in much shorter timeframes which allowed me to reinvest, take advantage of more depreciation benefits, and see the power of compounding through some of the tax efficiencies provided by real estate.

Diversifying Across Multiple Asset Classes

Up to this point, I had invested exclusively in multifamily, so it was time to start diversifying across multiple asset classes. First was a self-storage fund which performs very well during recessionary periods and then shortly after, I invested in an ATM fund to really skyrocket my monthly cash flow. I had to continue to refine and improve my due diligence skills as I moved into new asset classes, but it was easy to see that the fundamentals are transferrable across many of the asset classes.

Fast forward just a couple of short years from when I first started investing passively in real estate, and I feel very confident with my portfolio diversified across 8 different operators, 15+ markets, and 4 different asset classes with a good mix of cash flow and growth focused opportunities. The biggest challenge now is how to find more capital to continue my investing journey. We'll discuss some of those strategies in another article.

In addition to asset classes, geographies, and operators, your diversification strategy with your passive investments should also include business plans. In this article, we’ll discuss three different business strategies that your operators will leverage to help drive more value to you, the investor.

Development Opportunities

Real estate development is one strategy that can be attractive to the growth investor. Development occurs when an operator takes a piece of land and builds a structure on it. These types of investments generally have longer time horizons before the investor sees any distributions, but this strategy can offer significantly higher returns than the other two options we’ll discuss today. In addition to timeline, the risk profile of development deals can be very different as there are several challenges the operators can run into during the development process like zoning, permitting, municipality challenges, and changes in supply costs during the longer timelines. It’s important to note that there are many phases of development, and it’s possible to invest in just one portion of the project like land acquisition, entitlements, construction, and lease up.

Stabilized Opportunities

Real estate investments in stabilized assets provide the most moderate and conservative returns across the three options because they are much more predictable and there are less opportunities to add value and overcome challenges. As the name suggests, these opportunities are fully leased, newly constructed or recently rehabbed properties in highly desirable locations. Institutional capital tends to flow to these types of investments as the risk matches the returns that these groups are targeting. There are still amazing tax benefits in this space, and capital preservation tends to be a larger focus with these investments. I plan to start investing in this space more and more as I move out of the growth phase of my investing career.

Value-Add Opportunities

My current, personal preference is with value-add opportunities as they offer all the benefits of real estate investing while also having shorter timelines and excellent returns. These opportunities are called value-add because the operator is planning on adding value through either increased operational efficiencies or through improvements in the existing assets. I like to compare these opportunities to a house flip on a much larger scale. Quite often the operators in this space will paint the exteriors, add a new sign, improve the leasing space, add dog parks or playgrounds, and then finish with some level of improvement in the interiors of each of the units. When the value-add process is complete, these assets can look brand new to potential tenants which drives significantly higher rents increasing the value of the asset.

Now that you know the difference between the three main business plans, you can align them with your individual investing goals which will get you one step closer from becoming work optional or leaving your W-2. In the upcoming articles, we’ll dig deeper into the different asset classes so can continue to add to your investing tool belt.

@Snehann Kapnadak.  Thanks for the nice words and also bringing up this metric as it is another one that is used regularly in the space.  I didn't include it in the post as the other three are better measurements for each type of investor (Growth or Cash Flow).  Equity Multiple has some drawbacks as time frame is not factored in.  If I told you that I got a 1.8x EM on a deal, you would not know if this was a good deal or not.  Now, if it was a 1.8x EM over 20 years, you would know this was a bad investment, but if it was in 14 months (like my first full cycle investment in this space), you would know it was an amazing deal.