“If you don’t find a way to make money while you sleep, you will work until you die.” —Warren Buffett
In this episode, Travis shares two ways to help boost your income:
The average millionaire has approximately seven income streams, Travis says. Members of the Forbes 400 list have all started a business, currently own a business, sold a business, and/or invested in some capacity.
Andrew Carnegie said in 1919 that 90% of millionaires own real estate, and that number still holds true today. However, you’re unlikely to find wholesalers, house flippers, house hackers, and duplex owners on the Forbes 400 list — these investors tend to focus more on multifamily and commercial real estate. Travis also notes that the wealthy chase tax-advantaged opportunities, and real estate comes with enormous tax benefits.
Travis recommends passively investing because he finds that it is easily scalable. Even active investors can enjoy the benefits of passively investing outside of their own deals.
Finally, real estate is also a solid investment choice because the United States has been in a housing shortage since 2000, and with COVID-19 and supply chain issues, it has worsened — which is creating a high demand. “I feel good to be an investor in a business where we can provide affordable housing to middle-class Americans at just average, middle-of-the-road prices,” Travis says.
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TRANSCRIPT
Travis Watts: Welcome back, Best Ever listeners. I'm your host, Travis Watts. This is another episode of The Actively Passive Investing Show. I've got a great episode for you here today, something that has been on my mind for a little while now, and I want to put it together under the title, The Two Best Ever Ways To Increase Your Income, because let's be honest, at the end of the day who couldn't use a little boost in income. It doesn't really matter how much you make, it's how do I make just a little bit more? So that's what this episode is about. I'm going to dive into some really cool stuff with you.
So as always, the disclaimer is that I'm not giving anybody financial advice, we're not talking about specific deals, that kind of stuff. This is for educational and informational purposes only. So let's just dive in, let's just kick this thing off.
Number one - and I'll give you the backstory here in a minute, and I'll tell you where this comes from. This isn't just me and my opinion standing up here. This has a lot of deep-rooted history to it. So number one is you need to start a business or become an investor, or it could be a combination of those two. Here's why. You need to have multiple income streams.
Warren Buffett has pointed out many times, if you don't find a way to make money in your sleep, then you will work until you die. Morbid saying, but it has a lot of truth to it. Your average millionaire has got about seven income streams, so that's something to think about just for some perspective as we talk about this. Andrew Carnegie unfortunately passed around 1919, but he was quoted as saying 90% of millionaires own real estate. What's interesting about that is that's an old saying, but CNBC did a recent study to see if that still holds true today. I think the study was actually last year, in 2021, but guess what - it still holds true today. 90% of millionaires own, control, or invest in some way, shape, or form in real estate. We'll get to that in a minute.
But you know, early on, I want to share something that really helped me out, just for some perspective to kind of zoom out of the little bubble I was living in. I went to go look at the Forbes 400 list. It's something that gets published - I don't know if it's annually or quarterly or monthly, but it's basically the 400 most wealthiest people, I think it's in America. And what you'll see there is a common theme... Two things, and it's exactly what we're talking about in this episode. These people either started a business, currently own a business, have sold businesses, and/or they're investors in some capacity. They're investors in other people's businesses, things like that. Or again, a combination of the two, a business owner and an investor.
So here's the deal... Around 2007-2008, it was right as crazy times were happening, much like what we're kind of seeing today, a lot of turbulent markets and stuff like that. I was a lot younger; this was the first time I had really reached out for some mentorship. It's actually before I got into real estate at all, a couple of years prior to that. And there was this two guys that I had worked for - I used to do car detailing and various odd job things; and I noticed = I'm detailing their personal airplanes, and their Porsches and their exotic cars and stuff, and I thought, "I need to sit these guys down and I need to ask them some questions about making money, because clearly, I'm making $15 an hour, they've got a lot here... I just want to learn the ropes and what they have to say."
And guess what, you guys - I kid you not, it ties directly into this episode. They were business owners and investors. They had made the bulk of their money through their businesses, and then they had in turn become investors. Here's the thing - I want to throw this out as another form of disclaimer, if you will. I took their advice and I ran with it. So from high school through college and post-college, for about three or four years, I had launched over 20 small businesses by the age -- I was 25. So by the age of 25, 20 small businesses. Every single one of those failed. I'm telling you this advice, and then in turn, I'm telling you that didn't work for me as far as the business side of it, except for one business - and if you want to look at it as a business; it was real estate.
I was investing in real estate for the first time for about three years at that point. That was absolutely working. 2015, 2016 was my second set of real estate mentors. They had been business owners who had sold their companies in the mid-1990s, became full-time passive investors, which inspired me to knowing that that was a path I could actually take. I could be a full-time passive real estate investor.
So the point is, they said, "Double down on what's working." So I doubled down on the real estate and I let all the other stuff go. All these little businesses I was trying to launch - clothing lines, and all this goofy stuff I went to school for. So the point of me telling you that is that you have to do you. That's my saying, "You do you." If business is your thing, do business. If investing is your thing, do investing. If you want to launch a business, make some money and then become an investor, you do that. But we're all different. And for me, Robert Kiyosaki's I Quadrant on the Cashflow Quadrant - if you haven't watched that episode, I covered that a couple of years ago here on The Actively Passive Show. It's called Cashflow Quadrant Explained... It's the four ways people make money. It's small business owners, it's employees, it's big business owners, and it's investors. The right fit for me long-term was the I Quadrant, for tax purposes, scalability, flexibility to lifestyle, what I promote here, investing for passive income. Everything in that category really, really, really fit for me. That doesn't mean it's the right fit for you. Quite frankly, a lot of people should probably just be employees, and maybe doing their 401K match, because their risk tolerance may not be as high. They may not want to do the kind of actively passive work that's entailed in becoming an investor, in other words, learning how to find properties, and underwrite, and do due diligence, and become a real professional investor; and rightfully so, I totally get it. But even in that setup, where you're a W2 employee with a brokerage account or paper assets or whatever, you can still be in real estate indirectly. We've talked about publicly-traded REITs, and things like that. So there's still ways you could potentially do that. Unfortunately, you just lose a lot of the tax benefits and things that you get in the private world. But still, if that's your thing, something to consider.
While we're on the topic of the Cashflow Quadrant, I'll explain a couple other things about it, because they just came to mind right now. I played in the S Quadrant too, which is self-employed or specialists. So I've been an entrepreneur in different ways, I've been a consultant, did things for active income in that role... So I'm a hybrid of everything, you guys, except for... I will say, I'm not a B, which stands for big business, which is 500+ employees of a business that you own or operate. I have never done that, and for reasons I pointed out earlier. 19 out of my 20 businesses failed. I didn't feel like I really had a great skill set for going into running a big business when I couldn't even run a one-person business, quite frankly. So just being candid with you... So it's a great book, if you haven't checked it out. It helps you identify what might be most suitable for you.
But the biggest disadvantage to the S Quadrant are the taxes. Just from a macro level, you tend to pay the highest amount of tax of all those quadrants, by the way, when you're self-employed, because you're paying all the social security, and the Medicare, self-employment tax, etc. So I digress from that... So that is all encapsulated in number one - you need to own a business, start a business, run a business or invest in businesses, or number two, invest in real estate.
This is a real estate podcast, so you know you aren't going to get out of an episode without me talking about real estate in some form or fashion. So here's the deal - at the end of the day, I'm just an advocate for real estate. I don't care if we're talking about wholesaling, or single-family, or house-hacking, or multifamily, or publicly-traded REITs. I'm just a fan of real estate.
Break: [00:09:25] - [00:11:12]
Travis Watts: Again, back to the Forbes 400 list. If you take a look at what these individuals have done, what you're not going to see on there are wholesalers, house flippers, house hackers, and duplex owners, unfortunately. There's nothing wrong with those strategies. I've done many of them myself back in the day. But again, for perspective, it might be something to consider. Maybe multifamily or commercial real estate could be the right approach for you, I don't know.
Something that I have learned over the years - I was never interested much in taxes early on. I never did the study around it; I found them boring, I found them painful, I never wanted to pay the tax, I just hated taxes. But I came to learn a lot of people are in real estate because of the tax advantages. That has gone throughout history, that's worldwide. If you look at the tax code in other countries, real estate usually tends to have some pretty amazing tax advantages. So what does that tell you? Well, the wealthy chase tax-advantaged opportunities. Whether it's solar, oil and gas, or it's real estate, or it's owning big businesses and hiring people, you get a lot of tax breaks from doing this kind of stuff. So that's why the big money tends to chase the tax code. That's why also you see these mega corporations relocate in other countries, because they are more tax-favored where they headquarter over there. Taxes are a big thing. Check with your licensed CPA to learn more about real estate and taxes and what that can mean for your situation.
On a last note, to wrap up that concept, it's why some of the biggest investors in real estate paid next to no tax, if not zero tax. Like the whole controversy around Donald Trump potentially not paying any tax, or Robert Kiyosaki, big multifamily apartment investor, zero tax legally. He's made a lot of videos on that. So not advocating that, I'm not saying that's always the case for everybody. I'm just saying that that's why they're in real estate, and that tends to be the outcome on it.
So fair or not, the way the government looks at it, they need things to be done to have a functioning economy, one of which is having housing provided to people. They're not in the business of building and constructing housing and renting it out and being a big landlord, so they incentivize you and I, the private citizens of the country, to go do that for them. And if you do that, they will give you tax advantages per the tax code. Again, not any kind of tax advice, but just food for thought.
Another thing I've learned over the years is how scalable passive investing in real estate really can be. I didn't find that active investing was that scalable; probably why you don't see people on the Forbes 400 list that are home flippers and wholesalers and everything, because there's only so much time in a day, or you can only do so many transactions in a particular market at a particular time. There's only so much money to be had in those kinds of things.
So when I learned to shy away from the vacation rentals and the flips and the things I was doing into becoming a limited partner in a real estate private placement with someone else doing all the work, I became a passive investor. In the same way, you could look at buying stocks of companies. If you're a passive investor, they're the active team, that company, the CEO, their VPs, they're going to go run the show and do what they feel is best. You're just along for the ride.
But what's nice about that, if you use stocks as an example, because everyone knows stocks - it's easy, right? You go do whatever you do for income; you can go be the house flipper or whatever, you can go be a general partner and run your own syndication, you can go be a doctor, dentist, whatever... And then you're making money, and then you're parking it and these other income streams that are kicking back passive income to you. This is how you're expanding and compounding the growth of your income.
Instead of having to rely on an employer to say, "Hey, this year you get a 3% step-up in your pay" and inflation runs at 8%, and really you're just falling further behind, you're able to continually expand your income through passive investing, even if... I like to point this out - even if you're active in real estate, even if you're a general partner; even, even, even. Yes, you'll probably be investing in your own deals, but you can also invest in other people's deals as a limited partner, or in stocks, or whatever.
The last thing I'll say about real estate is we have been behind and keeping up with the amount of housing we need in this country since about the year 2000. It got worse through 2008, 2009 and 2010, when builders stopped building. Got worse during COVID. It's still worse because of supply chain issues. We are just millions of homes behind right now, so there is a lot of demand and a lot of need. And I like to invest in things where it's an actual necessity, it's an actual need. They're not making any more land, and at the end of the day, it's supply and demand. That's what's pushing up values.
So personally, I feel good to be an investor in a business where we can provide affordable housing to middle-class Americans at just average, middle-of-the-road prices. We're not trying to push to high end and the luxury and see if we can gouge people's wallets all the way to the top. And I'm not talking about the very bottom with the Section 8 housing stuff, because there's some additional risks you need to be aware of with that type of investing. Nothing wrong with that, just saying; that's a whole nother subset, a whole other conversation.
I'm just talking about a two-bed, two-bath apartment unit in middle America, in the Sunbelt markets, wherever, that rents for $1,400 per month. That's the kind of asset that I like to invest in. And ideally, one that's been outdated when we bought it, that we're going to fix it up and improve it, and then we're going to sell it hopefully at a profit to another investor down the road, when we're finished with improving the property, the amenities, and quite frankly, just the lifestyle of the residents who live there.
So I'll point out just this one last disclaimer - you can always lose money in business, you can always lose money in investing, so I'm not here to paint the rosiest picture to say, "It always works out and you're going to do phenomenal and this is how you get rich quick." That is not at all what I'm saying. This is educational and informational; this has been my personal experience, it has been the advice from the mentors I've spoken to, this is factual per the Forbes 400 and how people really became billionaires.
So it's just some food for thought, and I'm only here to share perspectives with you. Some may resonate, some may not, but my goal is to simply add value to you. And I suspect that's why you're here listening to this episode, is because you're looking to get value out of this episode. So I hope I made these 10, 15 minutes of time worth it for you.
Thank you so much for tuning in. Let's connect if we haven't already on social media, if I can ever be a resource for you. LinkedIn, my name is Travis Watts. Instagram, Facebook, @passiveinvestortips. You can email me at travis@ashcroftcapital.com, I'm always happy to answer any questions and connect. Thank you, guys. Have a Best Ever week and we'll see you on another episode of The Actively Passive Investing Show.
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