TLP36: The Limited Partner Solocast #1 - The Origin Story with Jake Wiley

The limited partner shares in the potentially outsized returns of a well planned and executed investment, but as a passive investor and has the maximum leverage on their most precious asset, their time. And that is why we're here together. 90% of the millionaires out there built their net worth with real estate. However, 0% of the billionaires are hands on managing the real estate asset because there simply isn't enough time. My name is Jake Wiley, and for the past 16 years, I've been investing in real estate and I've learned a thing or two, but the most important lesson is how to leverage the expertise and time of others to maximize your investment potential. Welcome to the Limited Partner Podcast. All right. Welcome partners. This is a special episode. This is the first Solocast of the Limited Partner Podcast. In this episode, I'm gonna dive into the number one question that I've been asked over and over again why I started the show. Like, what's the purpose? Like, why are you here? So stay tuned for the origin story. This will be fun. Well, to give you a little bit of update, just kind of generally speaking where we are. So summer of 22, just wrapped up. We've been really following as a family, Jesse Itzler has got this Build Your Life Resume Program. And as a part of that, it's, you know, one of the things he talks about is summering hard and doing a bunch of things that you really typically wouldn't do. So this was that summer for us. We had intended to go to Ecuador. That was gonna be a big thing. There's six of us in our family, so my wife and I, and then we've got two kids. One just started middle school all the way through kindergarten. But, you know, two, couple days before we started planning or really packing for the trip we found out there's a bunch of civil unrest in Ecuador. Roads were closed. They were burning cars. Airports were closed. I think it was a lot of protesting for gas prices and all of those things. So, we decided to pivot. And you know, we weren't quite looking for a trip where we might just get kicked out in the middle of the road, in the middle of nowhere with bags. So, we pivoted and ended up in Kiawah Island. We recently purchased a vacation rental down there that needs a little bit of work. So, at this point in time, it wasn't occupied. So, instead of going to Ecuador, we ended up in Kiawah, which was great. And we just found out it was named the number two vacation island in the US. So, obviously it wasn't a terrible summer, but we summered hard. We had a great time. We did, you know, tried to get outside every single day, pool, beach, you know, other outside activities. But that's enough about me. Let's really get into what we're here to talk about on this show. Right. So, where does it come from? Like, like I said, I've been asked this over and over, especially from a bunch of my friends. It's like, what got you into podcasting. Why are you doing this? So I've had an interesting story, how I got here. And it probably goes back to when I graduated from college. I went and worked for a Big Four Accounting Firm and it was a great job. And I just distinctly remember I've started my career in audit and then I moved into deals and I was on this deal in the middle of nowhere in Louisiana. And it was an oil field services company. And there was four guys that had found this company that was run by a third generation family. I guess it was a ton of family members at that point in time and they had just taken all the cash out of the business. They weren't really interested in running the business. So like when the cash and the business totally ran out, they were left with a bunch of assets, which is like trucks and, you know, piping and all the stuff that they do for oilfield services. So these four guys got together. And they bought the company and we're gonna use some rough numbers here, because it makes it really easy. But this is about what it was. They bought the company for about a million dollars and they went to the bank and this was 2006's to 2007 timeframe. They went to the bank and they said, Hey bank, look, we've got all these assets. We've got these trucks, we've got this real estate. We've got all these things. That's worth more than a million dollars. We're gonna buy it for a million dollars and the bank was like, great. Here's the million dollars and they went and bought this business. And they ran it for let's say three years. And, you know, along the time they were paying themselves a salary. I think they had leases every single one of the partners and their spouses had leases on new vehicles. They all had like hunting lodges somewhere. Like this was all being paid for out of the business. And we were working with the acquiring company. They had hired us to go in and look at this deal and said, you know, go in there and figure out, you know, what's real and what's not in terms of like the business, like the revenues are probably pretty good, but we need to figure out like what is in the business now that shouldn't be. So there's a report called quality of earnings. And essentially it does just that, like the idea is you look at the income statement and you're trying to figure out like what does the business really do? So, if a new buyer is to take this over, what would their financial statements look like? So, you wanna pull out things that would not really be an ordinary business expense. So, like the leases on all the partners vehicles and, you know, the hunting clubs and the cell phone plans and all of that stuff that needed to be stripped out. And then, you know, I think they paid themselves all like really nice salaries on top of that. So, we were going through this and then aside from all of that, they were paying, you know, the deal price was now 12 million, right? So, four guys, $12 million. They put a million dollars into it in the beginning and it was completely leveraged at the bank. Right. So I was just like, oh my gosh, these guys are gonna be millionaires. Like it wasn't a tough couple years for 'em, you know, like— So, aside from the work that I was doing, I asked them, I was like, I gotta ask you. How did you do this? Tell me what it was and really what they said, which stuck with me for forever and quickly led to my leaving Big Four Accounting at the time was you just had to be willing to take a little bit of a risk and then do what you set out to do. So for them, they said we were willing to take a little bit of risk on the deal. The business itself, like fundamentally was gonna be fine. They just needed to actually call and try and sell work. Like a lot of their customers didn't even know that they were still in business because the previous generation, the third generation had just stopped calling on them. And then they found a business that was backed by tangible assets like if everything went to crap, these guys still had all of the assets that they bought. And then they just operated the business. So like each one of the four partners had their own little area. One was marketing, you know, one was dealing with existing customers. One was operations and one was back office. Right. And like, they all had their little areas of the business and they just did it. And they didn't work really hard and they were gonna be millionaires. Right. Each one, one was gonna walk away essentially with $3 million when it was all said, and and I was just like oh my gosh, like I could do this. Like, there was nothing overly special about these guys. And I don't mean that in a derogatory way, but like, there are just some guys that said, hey, we're willing to take a little bit of risk and go out on our own. And yes, it could go poorly and nothing could come of it. But again, they were backed by assets. So, I was in a position at that point in time where real estate was really one of the only things I could feel really comfortable working in, because in those Big Four Accounting firm, there is tons of restrictions on what you can and can't invest in based on the clients of the firm, the office location, it gets really complicated. But real estate checked all the boxes for me and you know, it was, it's a tangible asset. It's gone up in value over time. You know, nobody could really tell me like which pieces of property I could and couldn't buy. Shortly after I left that project, I read Rich Dad, Poor Dad by Robert Kiyosaki. And if most likely, if you're listening to it, you've either heard of the book or you've probably read it. If you've listened to the show at all, you realize that 80% of the guests I have on this was like the catalyst for their careers and their jump start. And it was for me as well. So, I read this book and I was like, I can do this. Right. I can save up a little bit. I can start investing in real estate. I can grow some assets, refinance, keep going, and like, just build this empire. And, you know, one of the things that was also really, and truly amazing at this point in time is I just had this awesome partner and my wife who just, you know, was totally supportive, probably thought I was stronger in all of these aspects than I was. And she just. You know, we talked about what I wanted to do and what we wanted to do as a couple with our lives. And she just like slammed her foot on the gas and she was like, we're doing this. So, she went out and found like several properties right off the bat. And all of a sudden, you know, it goes from a thought and an idea to like, you know, we're out there and we're doing this. And, you know, I think about that as being the catalyst for a big change in my life where I was willing to jump off. And do something on my own and take the risk and it was gonna build this massive empire of rental properties. And that's really what I thought I was gonna do. And, you know, let's fast forward to today. Here's some skills that I have now which I think are super amazing. I can rewire outlets. I can connect PEX and PVC plumbing. I can replace toilets. I can snake a toilet. I can handle sheet rock. I can hang it. And I can install doors and windows. I've held both real estate licenses and builders license, like, I mean that's pretty impressive, right? Like in all, just kind of jumping off and doing this, you know, I've also, you know, like I said, I've had to snake toilets. I've sealed leaks on the roof, in the rain, right? Because obviously you never really know it's leaking until it's raining and then it becomes a catastrophic issue if you don't fix it. So, I've been hanging off roofs with roof ceiling tape in the middle of rainstorm, dealing with that. I can meet perspective tenants. I can sign leases. I've waited in my car for a prospective tenant to not show up for hours. I've sat outside the Section 8 office, trying to deal with some of those issues. I've canceled a lot of vacation plans to deal with a supposed emergency. That always seems to happen. The moment I'm getting ready to go out of town, just when we get out of town or on the weekend. I've blown insulation into 130 degree attics because I've had air conditioners that just simply couldn't keep up with Southern heat. Learned how to evict a tenant. I've learned how to hire skip tracers to try to find people that skipped out on me. Loaded dumpsters. I've done a lot of this stuff. And to be honest, a lot of what I just mentioned is just extremely exhausting. And you get to a point I did with, we had 11 properties, I think in five different states. And I mean, my hair, I felt like was gonna turn white at any moment because you just never know when the next shoe was gonna drop. And it was just a ton of work and it was stressful. And there was just something wasn't clicking. We got to 11 properties, and I know there's people out there that say they could grow this thing infinitely. But for me, what I found was that when you operate a small real estate project, so we're talking like single families through like small multi-family and at the end of the day, anything less than four units is considered a residential property. So, if you got a quad, a duplex, a triplex and all the way down to a single, those are considered single family. And that's important. Now I'll get into that in a second, but the point is when you run a small project, At the end of the day, the problems always end up in your lap, right? Even if you have a great property manager. If there's an issue at a property, let's just say the air conditioner stopped working. Like the tenant's gonna call the property manager. The property manager may or may not respond to that very quickly. They may or may not send somebody out there to check on it. But generally what happens is they call you, and they say your air, conditioner's dead. What do you want to do? and they have a guy that can go out there and it's always an egregious price because for some reason, you know, they sweat it out during the week and then they're like, I'll just deal with it on the weekend, which is if you ever have a property emergency, like that's when you get emergency rates. And it's so expensive to get out there. You got roof issues, appliance issues. Like they always call you. In addition to that, not only are you having to deal with it, but like you have to make the decisions and you are responsible for the tenant, not the property manager. Right? So, when we owned properties, like we wanted our tenant experience to be great. Like, we weren't slum lords. So, we wanted our tenants to be happy. We wanted to be responsive and a lot of times the best way, and the fastest way to be responsive is like, I just had to deal with it. And like, there would be times when I'd have to drive across a state line to deal with something that just seemed so stupid. And, you know, sitting here thinking about my life and it was like 90% of all the millionaires out there made their money in real estate. And I was like, so I'm in real estate. And you know, like maybe the balance sheet is trending in the right direction, but like, there's something wrong here. And then I realized, what are billionaires doing? And billionaires, aren't doing this stuff. Like, there's no way that a billionaire is dealing with tenants, toilets, and trash. Like, there's just not enough time to put a million dollars in the bank. And I've been doing all of this stuff and it took me 16 years to really get out of my own way and understand that, like, it's just not working for me. You know, again, like. I have a CPA license. I have a Master's in Accounting. I've been very successful in multiple jobs, been the CFO of renewable energy company. And then like on weekends at nights and on my vacations, I'm, you know, snaking toilets or climbing on roofs or looking in attics or trying to figure out how to get appliances delivered to properties. And again, like, I'm sure there are people that are better at it than I am, and, you know, have found a way to scale that up. But for me, there was never real scale. And then two, like the other thing about it is that I found is that when you have a major issue at a property, there's not significant enough cash flow to like absorb one of these major issues. So like, if you have an air conditioner go out, and appliance go out, roof issues, painting, flooring cabinets turns like all of these things erode, all of your cash flow really quickly. So, even if you're making a couple hundred bucks a month on these properties, like at the end of the year, you're probably just shooting it right back out. And it took me 16 years to just be like, I'm staring at the answer. It's right in my face. And the answer is it's commercial properties. And you're thinking, well, hey, I don't have enough money to get into commercial properties. And which was like my initial barrier. Like that was the gap. Is that, how am I gonna get into a commercial property. Like it's just too big. And the short answer is it's like syndications, right? Getting into a deal where you have a piece of the pie and you jump into a larger deal where all of these things are handled at scale. So let me just give you a couple examples of what that means. So, when I was paying a property manager who was a glorified, I will collect the rent and make sure a lease is signed from your tenant 10% of the monthly rent. Versus when you do this on a commercial scale, that number was, is closer to 3%, right? So there's an arbitrage of 7% of the rents just because you're doing it at scale. And again, you cannot do that singles and doubles, right? Like no property, manager's gonna take it because it's just that hard. But if you've got a hundred-door, apartment complex, you've probably got somebody on site and it works out to about, you know, 3%. It might be a little bit more, it might be a little bit less depending on the scale. You think about, you know, appliance, like all of these things. They're reserves, like they know the roof's gonna go out. Like we know that like the appliances are gonna go out over time and there's a reserve for it. And it's built into just the ongoing operations of this facility. So, like a hot water heater goes out. Boom. Okay, we'll get another one. We'll fix it. Like it's no real sweat off the back because when we think about the cash flow of this larger property, like it's already built in and then, you know, the next piece of the puzzle is that there are professionals that do this all of the time, right? When you get into these larger scales, so that the property managers, this is what they do. You know, they're used to running apartment complexes. They're used to dealing with leases. They're used to putting a game plan together. They're used to executing on all of these plans. So like the owner's not getting called on that. That's just part of, you know, it's part of the playbook. And then there are professionals for going out there and finding these deals, right? And this is the other area that I got stuck on with doing these onesy twosy deals is that, you know, I could find a deal. For example, in South Carolina, we found a deal just north of Charleston, small single family house. We bought it $50,000, right. We put $15,000 of renovations into it, have been touched, need a little bit of landscaping, but it was just a clean up. And, you know, we did a little bit of work, fixed it up, made it look really nice. And we sold that thing for $110,000 call it four months later. Right? Like you just look at those numbers and you're like, man almost made $50,000 in four months. Like you just can't beat that. But the reality is like when was the next time I found a deal like that? It takes a while. And then as you get into larger deals, yes the numbers go up, but it's really, you know, it gets really lumpy and your money's not consistently working. And like the magic is actually in compound returns. Not necessarily like, do you strike gold once or twice a year? Which is like, where I thought, like the best use of my time less. So, when you get into these larger deals, you've got professionals that go out and they find these deals. The typical hold on an apartment complex is generally five to seven years. So at any given point in time, every apartment is trading, you know, five to seven years. Now that's not a hundred percent of the time. Yes. There's some mom and pops that have owned these apartment buildings since, you know, the beginning of time. But just think all of these apartments are trading every five to seven years. It's kind of like homes. But there's a lot of apartments out there. So, you've got somebody that's finding these deals. You've got professionals that are going out there and operating the property way better than you could, and then way more cost effectively than you could, if you were trying to do it on your own. And then as a Limited Partner, So this is the real juice of the squeeze. Is that with a Limited Partner, you have zero operational responsibility. Zero. And that means that like, if there's a tenant issue or roof issue or whatever, you're not gonna get a phone call where you have to drop everything and go get it. So, aside from the fact that you don't have those responsibilities because these professionals that you're working with are better at finding deals, better at forcing appreciation, better at operating the property. The returns are actually probably higher than you if you did it on your own. Plus you get all of your time back and because these properties continue to churn when you get out of one, you can move into the next one. There's always another deal. It may not even be with the same partner, but it may be with somebody, you know, that's in a different asset class, but there's another deal. And again, like you can continue to have your money working all of the time, which means that like you're getting the real power of compound returns as opposed to like a lumpy here's some, there here's some there and that's, you know, it, like I said, it took me 16 years to like really clear this up, but I don't want you to just like, completely take my word for it. I actually have a post that gentleman I've just interviewed for the podcast, Arn Cenedella wrote he's with Spark Investment Groups. It was the Limited Partner podcast, number 31. So, here's his post. I'm gonna read it to you verbatim, because I really love it. If I'm a general partner, why do I invest as a Limited Partner also? So the answer is, this allows me to invest in other markets across the country that I like, but I don't know. So, that's excellent. This also allows me to receive a steady monthly distribution via ACH deposit. And I don't have to do anything to receive that passive income. I get a solid 15% returns with no effort on my part. That's pretty cool. I want to keep my capital working for me at all times. This is just what we were talking about. Investing in other deals allows me to do this. As I look for other opportunities, it sparks two primary markets, which were Greenville and the triad in North Carolina. And it's even sweeter when the property is sold, such a sale just occurred in my returns as an LP are this a 2.2 times equity multiple. So what that means is 2.2 times what you put in. So he invested $50,000 and got back $110,000 on less than two years. An internal rate of return of over 60%, an average rate of return of over 70%. And he's like these numbers, aren't smoking mirrors, not sales nonsense, but actual returns. Now of course, every deal is different and some may not go as well as this one. And yes, the market may slow, but this provides an example of what passive investing can do for you. Double my money in two years, without the risk of crypto or stocks. Doubling my money in real assets. We all understand real estate. A necessity of not blinking light in some mail room, computer buried a hundred feet under the earth. So that was ours post. And I just wanted to like really highlight a couple things. So at 2.2 times, equity multiple. So we invested $50,000, he got back 110 in less than two years. An IRR of over 60%. Again, like these numbers are pretty high, but like, these are real returns that he's gotten operating in the Limited Partner space where he actually is a general partner. He's doing his own deals, but when he has cash sitting on the sideline, he's putting it into other deals because he can, and that again is the power of the compound interest. So, I wanted to give you a third party. It wasn't just me telling you like what this looked like. I wanted to give you somebody else's example. So, you know, I think you might be out there thinking how do we even find people, right? Like it's super simple and I'll give you a little bit of a free exercise. If you just even want to try. Go to LinkedIn. And just type in the search bar, passive real estate, that's one search term or multi-family syndicator or self storage syndicator, just pick an asset class, office, whatever. You'll be surprised how many people are doing this. Like, these are people that you can talk to. You can then sort by your geography. If you want to go talk to somebody in person, but just go out there and give it a shot. Just see how many people are doing this because most people think like to find a deal, it's just gonna be very hard to find one. But like I said, if all of the apartment buildings are trading, you know, every five to seven years, like we're talking about thousands in your local market. And I mean, that probably seems mind blowing, but that is a real number. So in conclusion of this first solo cast, hopefully that's really helpful to kind of help you understand. It took me 16 years to figure out why or how to do this without like burning myself out because that's where I was. The options are abundant. There is a ton of stuff out there if you like apartments because home is the new office and there's housing shortages. And that's great. If you rather do self storage or you think office is coming back or mobile homes, like you name it, there are so many options out there for you. They're right there. And every one of these deals is funded by Limited Partners. Which is fascinating is that the operators and the syndicators of these deals need you. They can only go to the bank and get, you know, currently in summer of 2022, about 65% of the deal in debt, they need another 35% from equity holders. And that's you. And if they're growing, like they can't just do that all on their own. They're looking for you. It's out there. Now, obviously you have to be safe and you gotta find the right partners, but that is what we are doing on the show. We're talking through all the different reasons, you know, where you can invest. We're also talking about how to do it safely, how to be smart, how to think about what's timely right now that you need to be thinking about that might be different from the past. So, understanding the investment framework. You know, there's a pretty simple framework out there where we're talking about like markets, we're talking about operators, we're talking about asset classes, and then we're talking about geopolitical. some micro macro situations, but for a lot of you, and another thing I've heard is that there's a lot of interesting terminology or lingo that's thrown around on the show. For example, cap rates, like, what does that mean? Debt. You know, what does that look like? Equity, LP, Limited Partners, General Partners. How does that play together? I have also created a cheat sheet of the top 26 terms and concepts that I think will help you understand the lingo. So, if for some reason you don't think you understand well enough what's happening in this whole process or like when you're listening to the conversations on the show, I think if you can read and understand these 26 concepts, like you'll be golden. So, I've put that out on the website again, it's free. It's just trying to help educate here, but go to thelimitedpartner.com/lingo, L-I-N-G-O. And just put your name in there, I'll email that to you. But I would love to get your feedback on one, does a show, does it help? Does it clarify some of the reasons that we're doing the show and then two, what else do you want to know? I wanna do some more of these episodes, and I want to hear from you. So reach out to me. You can go to thelimitedpartner.com and my contact information's there. Or just go, if you want to email me directly, it's jake@limitedpartner.com. Thanks. And we'll talk soon. I hope you've enjoyed today's episode and I'd actually love for you to contribute to a future episode. If you have a question you'd like answered or a topic or a guest to bring on the show, please email me at jake@limitedpartner.com. Now I realize. There is a lot of lingo that's thrown around on these shows. So I've created a cheat sheet for you with the top 26 terms that come up most often, head on over to thelimitedpartner.com/lingo for the list. Enjoy. And we'll see you next time.