Ep381: Travis Watts – Do Your Due Diligence and Keep Your Investment Simple

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risk but to win big, you've got to reduce it. And I bet you're exposed to investment risk right now to reduce it, go to my worst investment ever.com and download the risk reduction checklist I made specifically for you my podcast listeners. And that checklist is based on the lessons I've learned from all my guests, fellow risk takers, this is your worst podcast host Andrew Stotz. And I'm here with featured guest, Travis watts. Travis, are you ready to rock?

Travis Watts 00:44
I'm ready to rock Andrew. Let's do this.

Andrew Stotz 00:47
So ladies and gentlemen, Travis watts is a full time passive investor. He has been investing in real estate since 2009 in multifamily, single family, and vacation rentals. Travis is also the director of Investor Relations at Ashcroft capital, he dedicated his time to educating others who are looking to be more hands off in real estate. And for those people who are interested in following up with Travis, just go to www.ashcroft.com slash Travis Travis, take a minute and filling for the tidbits about your life.

Travis Watts 01:24
Awesome, I appreciate you having me. And thank you for the whole theme we were talking before the show. And sometimes I'm notorious for just kind of going into the pros of what I do, right, and then kind of forgetting the other side of the coin, and certainly the experiences I've had that have been not so pretty. So that's what this is all about. Travis watts, you know, quick couple of tidbits, I was raised by a couple of very frugal parents that taught me an awful lot about just budgeting and personal finance, but did not teach me a thing about investing, which is quite fine. But that's been kind of the journey of adulthood so far is learning the investing side of the coin. And like everybody out there, I've made quite a few mistakes. So real estate's really been the foundation since 2009, as you pointed out, and the quick bio, so started with single family doing it all on my own lead into multifamily, doing things passively. And the story I'm going to share today is kind of in the middle of that journey, almost the complete midpoint. So happy to get into it.

Andrew Stotz 02:32
And one one question before we get into that is, you know, what does it mean? Like I know a lot of people talk about passive income. And I know here in Asia, it I mean, like every single blog and every single ad it's all about, you know, making passive income. And it sounds pretty good. Because I mean, I'd rather be passive than active, you know, but tell me, what does it mean to you? And what does it mean? What should it mean to people out there that just hear it as kind of a buzzword?

Travis Watts 02:58
Sure, I use a few words interchangeably. Sometimes I use cash flow, I'll describe myself as a full time cash flow investor, that's more of a real estate reference there, meaning no collected rents and revenue from property. Passive income to me is not having an active participation or involvement in the business itself of whatever it is that you're investing in. So if you take real estate as that example, you're going to have a professional team, managing and taking care of the business side of it, I will just be a limited partner. So I will have very limited if no involvement or active participation. So you know, a lot of people who are into true passive investing and passive income are a lot of busy working professionals, you know, a doctor, a dentist, a lawyer, an attorney, a pro athlete, folks that are making money actively in their business firsthand, but then they're parking their money passively into other investments, whether that be the stock market, whether that be real estate, whether it means you know, private businesses that they themselves are not the CEO or an employee of.

Andrew Stotz 04:09
And if we looked at like, let's just imagine that I see an apartment building near my home, and I think, oh, that's pretty good. I think I'll buy that. And I'll manage that, you know, and I'll have some staff that are there or I'll have my plumbers and I'll have my little agent or whatever. And you know, I'll but I'll kind of be managing all that myself, taking phone calls and all that which disrupt my work a bit, you know, because I'm pretty busy. But you know, I just thought, Well, why not try it? Well, then I'm really running the business of that apartment building. And then I could, I'm providing capital, meaning I'm, I bought the building, and I'm running the business of the building. So my first step is stop running that business. In other words, hire an agency or company or an individual to say okay, you take care of all of that. All out. really doing is providing the capital? And then the second step of that is could be Hmm, well, maybe I don't want to provide all the capital for that one building. So I'm going to open it up to 10 other people, and we're each going to provide 10% of the capital into that building. And then, you know, I'm no longer responsible, let's say for that whole building. Is that the way we should think about the movement towards passive or is that not? How would you describe that?

Travis Watts 05:27
Yeah, I think that's a good depiction. So there's, there's the individual purchase, as you described, first, you're going to self manage everything, there's what's called turnkey. And that means that someone else has already identified this property, put a tenant in there, they've leased it out, they've already constructed you know those terms. And now you're just taking that over, maybe you have third party property management, but ultimately, you're still, in my opinion, inactive investor, because like you said, You're still You're like an asset manager, you still have to decide, do I want to use this property management company? Do I want to patch that roof? Or do I want to just replace the roof or, you know, you have to still make decisions. So you're still actively involved, you could get with a few buddies, as you kind of pointed out, some of those could be called jayvees, or joint ventures where you've got a few people actively participating, but only in one portion of the business. So maybe you're only responsible for, you know, whatever one portion of that apartment building, not every single component, every single thing. And then there's what I refer to as true passive, which is what I do as a limited partner, where I have no decision making rights, I'm literally giving my money over to a team who has found the property underwritten the property, they're going to hire the property management, they're going to hire the construction crews, they're going to decide when to sell it, they're going to decide what that property needs. I'm literally just investing for the ride, as you would in a stock, you know, in a publicly traded stock in the market, you have no role there, you're not going to be calling him up and saying I think it's time you guys ought to change your business. That's not what your role is. So yeah, that's a good depiction of it.

Andrew Stotz 07:07
Hmm. Okay. That's cool. And the last thing is that it's interesting that you talked about, before we turn on the microphone, was that, you know, we were discussing kind of about the volatility and the stock stock market, you know, you've got this sentiment factor that can be massive. Whereas in real estate, you know, the cash flows pretty, somewhat predictable, more predictable, probably than a typical stock. So first, you have that kind of solid underlying cash flow asset, that you can pick a value. And then, you know, you could go through some, you know, terrible times for the economy, you could go through some terrible times for a particular building, or, you know, an area, and you know, you may get a little bit of a chance to buy something cheap, but generally, you're buying things pretty much at kind of fair value, would that be correct? Or is it really a lot of deals going on all the time, you know, like cheap things, you're able to buy below the value of what the cash flows worth?

Travis Watts 08:04
Yeah, there's, there's another hot word that gets thrown around in the real estate arena, which is off market, everyone's looking for that off market deal, right? It's not publicly listed. So you're gonna buy it at a discount? I think mostly, in my opinion, that's somewhat of a myth, you may buy something that's not on the MLS, the multiple listing service, you know, at least in the United States, that's what it's called. But often what's happening is, you know, sellers are, are are not stupid. They know, approximate values of what their properties are. And the thing to do in large multifamily is to get a broker, you know, who's going to take that to their network, whether that means publicly listing this property or saying, hey, I've got, you know, a few groups in mind that may be interested, let's see if we could get them get them to purchase this off market? Well, you're still in competition, usually, a broker isn't bringing it to one person at one price and calling it good. They're bringing it to three or four groups off market, and then you're bidding among a smaller pool, but you're still bidding. And often those deals still go above or at market value. So yeah, to your point, the beauty of the stock market is that sometimes things are really at a discount, and they really are on sale based on the fundamentals of the company. But oftentimes, it goes the other way. And things are astronomically overpriced, and it's just outrageous. So you got to do a little self study there to know what you're buying and making sure that you're buying at a good price in the public markets. But yeah, most stuff privately is market value, for the most part.

Andrew Stotz 09:41
Yeah. And that's, you know, for the listeners out there, what you're really buying, you're buying cash flow. And yes, you're buying the predictability of that cash flow. And you're, you know, you're discounting cash flow by some discount rate. Now, that means also that you've got to come up with the money, you know, you're not going to get you're not going to you're not going to create wealth, buying a cash flow. In fact, the creation of wealth probably is a step before, let's just say you get a salary of $300,000 a year, and you only spend 100. Okay, you've created 200,000 in wealth, that you could then invest in a cash flow asset. But that's step before. Now, you could be that your excellent property and you bought a empty piece of land, and you sold it, you know, for big pricing. But still, that generation of the capital or the initial capital is out there. But I think this is a great explanation of kind of the passive aspect. And what does it mean, when you're buying a cash flow?

Travis Watts 10:42
I appreciate you bringing that up. I'd say in my opinion, again, about 80% of investors are probably focused on the equity side of things and income generation through a business or through their, their w two are their active income. And very few are out there talking about cash flow and passive income in the way that we're talking about it here on the show. Anyway, as you mentioned, it is a buzzword, and I think that gets confused a lot people think I'll have, you know, 25 single family homes that I self manage, and this is passive income. I would argue that that's not my definition of it anyway. Yeah.

Andrew Stotz 11:17
It makes me think that, you know, really, sometimes when people are talking about passive income, they really think what they're thinking is passive wealth creation, like, I'm gonna get rich passively, whereas what you're talking about is a steady cash flow, steady income, that you're not, you don't have to control. So I think there's a lot of clarification from that. So I really appreciate it. I mean, I don't know a ton about real estate. So you've taught me a little bit today as I rethink it. So Alright, well, now it's time to share your worst investment ever. And since no one ever goes into their worst investment, thinking it will be. Tell us a bit about the circumstances surrounding that and leading up to it. And then tell us your story.

Travis Watts 12:01
Yeah, exactly. So as I mentioned, my foundation is in real estate. So from 2009 to 2015, what I was doing is, nowadays, what the term is called, as is house hacking, that's how I started, which means simply renting out a spare room in your house used to just be called having a roommate. So that's what I did for my first property. And my second and my third is I would rent out spare bedrooms for extra cash flow and for passive income. So that was my first door opening, if you will, to this idea that, hey, what if I had a bunch of these passive income sources, and then that could offset You know, my lifestyle expenses, my own rent and mortgage and insurance and food and travel and all of this. And so then I got into for some reason, don't ask me why I got into fixing flipping properties. And I was doing that for a little while. So buying something low and selling high. As I mentioned, 80% of people seem to be kind of in that alignment of buy low, sell high and nothing wrong with that. But that's what I did for a while to build some equity. Also, to your point earlier, I worked in the oil industry, and I had a six figure job. And I live very, very frugally. As I mentioned, my parents taught me frugality and coupons and buying the clearance items. And that spending money, I didn't have all these great lessons. In hindsight, looking back, didn't always like them. When I was a child, I realized what they were getting at it at one point in my life. So I'm going through all these steps. And I got a little obsessed, I would say and I still am, quite frankly, with this concept of passive income and something I call time freedom. It's just this the ability to be passively participating in all these different things and all these income sources rolling in. And then now I have flexibility over my time. And this is what I try to help people understand how that works. And you know how you build this up? Well, I got maybe a little too into this concept we'll say. And I started the Segway by 2016 into some experimental investments that were non real estate related. I started joining some real estate meetup groups and then some other just general investing groups and some, you know, startup capital groups, all kinds of groups. And there was a deal that was presented as having over a 20% per year cash flow component to it. It was primarily cash flow focused and I thought, well, you know, a lot of my real estate isn't cash flowing 20% and this supposedly is and I knew a couple people who had made investments with this group didn't quite frankly do a lot of due diligence on the group just met the people face to face look through their operating agreements and things and thought Alright, well Whatever, it sounds kind of fun, right? If I could, if I could average 20% a year, I'd be, you know, it'd be a heck of a deal. So I dove into that deal. quite heavy, I put probably about three to four times as much into this deal in particular that I would have any other real estate deal. And the idea behind this was to average out my cash flow in the portfolio, I had some properties cash flowing it 678 9%, I'm thinking, Well, hey, if I could balance between 20, and you know, eight, then you know, have a happy medium, double digit, all this good stuff. So this was like, in February, I made this investment. And like I said, I went real heavy, real hard, had some liquidity just sold one of my homes that I lived in, and I thought, I'm just putting it all in this. And this was a quarterly distribution, frequency investment. And so by June, or July, I got my first distribution. And it was exactly as promised, it was, you know, an average of about 20%, if you broke it down, you know, divided by four or whatever. And, like, yeah, like a 5%, return that quarter. And then it was about September. And I remember distinctly, I got an email, but it was kind of it was a weird time for him, you know, for this email to come that this particular group didn't communicate very often. And it said something to the effect of urgent, all investors read immediately something like this, you know, it's kind of it almost seemed kind of spammy for a second, and I click on it, and the bottom line is it says, hmm, we've just revealed that a portion of our investment fund that you're invested in, has been deemed a Ponzi scheme. It's fraudulent. And there's approximately 35% of this portfolio allocated to this particular Ponzi scheme fund. And, obviously, I mean, your heart sinks in this moment, right? I mean, you just you go flush, and you just think that, you know, is this spam? Is this really happening? Who do I call, I got all these questions, I just start kind of panic mode and freaking out. And then they announce, of course, you know, distributions will be stopped here moving forward, till we figure out, you know, what we're gonna do and what's going on. And in this, every email update after this, they did an investor call that was kind of pre recorded and submit your questions, all this stuff. And it just got worse than it was, you know, we're moving into receivership. So we're no longer going to be the managers of this fund. And then it's we're liquidating everything in the fund. And so you're gonna have no kind of yield or return on investment. And it just it got worse and worse and worse. And it was an awful feeling. And, and this is still ongoing for anybody who's been, you know, and part of these receiverships, these litigations, you know, where the FBI is involved, and the courts are involved. This can take years and years and years, and your money's locked up. And there's mostly no distributions during this period. At least this is how this is, you know, panned out. And it was just a heart sinking feeling that everything started flying back into my mind woulda, coulda shoulda Why did I go so heavy in this? Why didn't I do my due diligence in the sad part was the people who I invested with directly they were not the Ponzi scheme. They've turned out to be completely legit. But it was a partner firm that was part of their overall fund structure that was in a completely different state, and completely different operations. That's what ended up happening. And then the whole complexity, you know, trying to break down how exactly does all of all of this work and the change of hands and Oh, my goodness. So it's been a learning process for sure. A lot of lessons learned throughout this, but you know, you like you said, You never go in thinking anything's gonna go wrong. And I think most investors and no matter what we're talking about, tend to be optimistic, maybe overly optimistic about projecting forward and how things will be and then you forget that, you know, these are projections, number one, and sometimes things definitely don't go as planned. So that's kind of what happened in the private placement space. And

Andrew Stotz 19:27
what was the time period like that from when it started? And you were saying it's still still being resolved?

Travis Watts 19:34
Yeah, so this was, I want to say it was like 20 2016. You knows when I got on so here we are. 2021 certainly don't have you know, our capital back have a portion of it back. But But yeah, there's a big chunk, they're missing and it's still a wide unknown and

Andrew Stotz 19:52
sucks and in a bankruptcy of any company. What's happening is the receivers running it. It's under court jurisdiction in most cases so that the assets are liquidated. And let's say that it had a value a stated value at the time of 100, they may only be able to get 30 of that back. And then that 30 gets distributed to shareholders evenly, as opposed to the reason why we do bankruptcy is because, you know, if there's one shareholder, this super powerful bank or another, they may try to take that 30 ahead of the other people, you know, and so, okay, so tell me, what lessons did you learn?

Travis Watts 20:29
I think, first and foremost, you know, you always have to do your due diligence, I was I was definitely skimpy on this, I did look in somewhat to the to the folks that I, you know, was doing business with directly as far as communicating with, but what I failed to do is ask about all the different partners, you know, this, this particular fund structure, had to switch hands about four to five times for the money to circulate around and then get distributed to investors. So the more complex, you make something right, the more likely something could go wrong, you know. So the second lesson, I would say, is just, you know, invest in what you know, and what makes sense, I can honestly say that I knew everything about this, or that it made sense, at least not at the time of investment, it made sense later, as I uncovered how this really work. And then, you know, just keep it simple. For me in investing, find a philosophy you subscribe to that resonates? Well find a you know, an asset class or type of investing that you do that is just simple to you, you know, something simple to someone else may be crypto, but to me, crypto isn't simple, for me personally. And so that's not something that I dabble with.

Andrew Stotz 21:47
Those are great lessons. And it reminds me also of Warren Buffett talking about, you know, tech and saying I don't really understand it, so I don't invest in so Warren Buffett and Travis white say that, ladies and gentlemen, just listen up and follow what they say. So maybe I'll summarize what I took away from what you talked about. First of all, you know, the seductiveness of a 20% return is pretty powerful. And for those people that don't know, to use the rule of 72, it's a shortcut to say if we take 72, and we divide it by the interest rate, in this case, 20%, we end up with, you know, three and a half or so, percent, three and a half years that the money would double. So if you put 100 in, you would have doubled your money within three and a half years. It's a pretty seductive thing. And so, and that, that, I would say it's somewhat high, when I look at returns, and so, you know, one, you know, the range of returns, that's the first thing is to, you know, question really high returns, that I wrote down two different words. One was liquidity, you know, it's so hard in real estate to get in and out. Now, once any company, whether it's this in, in the stock market, or its real estate company goes into bankruptcy, it's over, you can't do anything. But the minutes the days before is your moment, you know, to do it. And that brings me to the concept of public markets. And one of the advantages as an active analysts, providing research to active fund managers all my career, part of what we are trying to do is assess the financial performance of a company on, you know, a regular basis to say, okay, there seems to be trouble brewing here. And try to anticipate that before it happens, and then the share price starts to fall, before it happens. And then people have to make their judgment of whether they want to get out or not. And so, generally, that would be you know, that aspect of the public markets, there is some value in that, that you would potentially have a chance of getting out. And so there is value in that, that part. That's not always the case, because sometimes some people are so good at fraud that nobody really detected it. And then the last thing is this idea of complexity that you're mentioning, I think that's just such an important thing. You know, I'm a reasonably smart guy, I can figure stuff out like most people, you know, when you get presented with something, you're excited to really understand it, and then you start studying, you're thinking, I don't really understand this. Ladies and gentlemen, if you have that feeling, stop. Yeah, you know, and just take a moment because, you know, there are some things that are worth trying to understand. And there's some collateral complexity. But if it starts to really feel complex to you, it either is potentially being made complex by somebody. And usually that's there's a reason for that related to trickery, or fraud or whatever. Or it just is, it's outside of your wheelhouse. So unless you really want to commit yourself to learning blockchain or whatever that thing is, then you know, it's probably better to stick with something that you understand and as I say, If it's if Travis watts and Warren Buffett both tell us look, stick to what you know, then I'd say that's pretty good advice. Anything

Travis Watts 25:08
you would add to that? Mostly listen to Warren Buffett? Well, I

Andrew Stotz 25:15
would say that, you know, one thing, Warren Buffett hasn't come on the show yet to talk about his worst investment ever. But Travis watts has, so I appreciate that. Because, you know, the fact is, is that talking about our worst investments can really help us also to strengthen our thinking process, but also helping so many other people. So speaking of other people, based upon what you learn from this story, and what you continue to learn what one action would you recommend our listeners take to avoid suffering the same fate?

Travis Watts 25:48
You know, I've always been big into self education. I love this quote, I think as a Jim Rohn, quote, you know, formal education can make you a living, but self education can make you a fortune. I just love that a lot of people have heard that quote, but, you know, I, I failed to have mentors. And to have a wide array of perspective, when I first started, because it was a little bit of ego, it was a little bit of being naive, it was a little bit of, I have self discipline and drive and motivation, I can do this myself, I don't need other people to be helping me big mistakes all around, you know, so get educated, that's the takeaway, or self educate is another way, or the thing very few people talk about is get perspective. And I'll give you an example of that. When I finally got mentors in my life, people who were 10 2030 years beyond where I was at doing what I do today, they opened up to me, which was fantastic opened up their their portfolio to say, here's the pros and the cons, this was a deal that went bad. And this is what happened. But this was a deal that went great. And that's what that looks like. And all the time on social media these days, I'm bombarded by these sales pitches of all of these kryptos and different things of people saying, you know, make 100% returns every week, and I'm thinking, you don't understand the risk profile. You know, if you're really thinking you're making 100% a week, you know, for all year, and then for the next decade on top of it, you know, it is possible to of course, buy a penny stock and it doubles overnight. But it's also tremendously risky. And so it's important to understand your own risk tolerance.

Andrew Stotz 27:31
That's great. And I think that reminds me, you know, as, as the host, the worst podcast hosts of my worst investment ever listening to so many stories. One thing I can say for sure, people only talk about their winners. And that's an in particularly when it comes to sales and marketing. So you know, ladies and gentlemen, you know, that are listening in, be careful, because all these people are doing is talking about the winners. And you know, some of the best investors of all times have tremendous stories of loss. And so to hear some, you know, 26 year old kid say he's a big winner in crypto, you know, jury's still out. So do your research. Alright, last question. What's your number one goal for the next 12 months?

Travis Watts 28:17
You know, Andrew, on the topic of mentors, I tried to be a resource for passive investors in the space because I didn't have that person up front, I realized now the importance of it. And number two, when I jumped in from single family to multifamily, what I recognized very quickly, everything is marketing and sales for the active side of investing, right? Become a general partner on a deal fix and flip a house. This is all the TV shows, this is all the programs. This is most of the podcast, not many people out there, we're talking about, well, what about the folks on the other side of the coin that just want to invest passively in these kinds of offerings, and so I try to be a voice for that. And I just want to continue being a mentor of sorts, for folks that just want to bounce an idea off or get a second opinion or perspective on it.

Andrew Stotz 29:09
Great, fantastic, well, listeners, there you have it another story of loss to keep you winning. My number one goal for the next 12 months is to help you my listeners to reduce risk in your life. So go to my worst investment ever.com right now and download the risk reduction checklist and see how you measure up. As we conclude, Travis, I want to thank you again for coming on the show. And on behalf of East Arts Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Travis Watts 29:46
I think the goal as an investor is to find a risk adjusted return that helps you meet your needs and your goals. So yes, I would say you do have to take on some risk. Obviously we've talked a lot About that, but not risk that's unnecessary to take, you know, for what your goals are. And you may, you know, for the folks that do invest in the speculative things, and the blockchains, and the kryptos, and the penny stocks, so be it. But, you know, hopefully you understand that as much as you can double your money, you can lose all your money to overnight. So make sure that that aligns with what you're trying to achieve. And does that help you accomplish that?

Andrew Stotz 30:27
Ladies and gentlemen, that's really great advice, particularly this idea of don't you don't have don't take unnecessary risk. It's a little bit like jumping into your car and driving as fast as you can and deciding you're not going to wear your seatbelt? Well, we all know the risk reduction and your risk reduction ability of a seatbelt is almost, you know, irrefutable, but yet, you may decide down to where it doesn't make sense. Wear that seatbelt. Just like you would also try to reduce the other risks that you can reduce in your investing because remember, the world doesn't care. If you don't wear your seatbelt, you will be seriously hurt, injured or died because of that. So don't take unnecessary risk. I think those are some of the best advice that we've gotten on the show. Well, that's a wrap. On another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast hose Andrew Stotz saying. I'll see you on the upside.