By Marc Halpern, Part Time Investors LLC
October 5, 2022
© 2022 Part Time Investors LLC. All Rights Reserved.
Okay, you’re a successful real estate investor. Now what?
You worked hard and you worked smart. Over the years, you successfully accumulated a nice portfolio of single-family home rentals and/or small multi’s that now generate more than enough positive cash flow to cover your routine household expenses plus a cushion. At the same time, your net worth grew, passing 7 figures as your property values appreciated and your tenants paid down your mortgages.
Great! Now what?
Have you reached your endgame? Or is there more?
Do you enjoy managing the portfolio of tenants that is an unavoidable part of your portfolio of rentals? Alternatively, are you thrilled paying a property manager 6%-10% of your gross rent which is 20%-35% of your profit, when all the financial risk is on you?
Most smart real estate investors who started from nothing and become successful (like me and maybe you?) get to the point at which their net worth exceeds, or greatly exceeds, $1 million, which defines them as “accredited investors” assuming that the million dollars doesn’t include the equity in their primary residence.
Most of these successful real estate investors enjoy more than $10,000 per month of semi-passive income. Let’s face it, the reality of landlording is that the income is not TRULY passive income. I view landlording as semi-passive income, unless the investor-landlord is willing to give up one third of the actual cash flow to have someone else manage the rentals.
So, now you are in your 40’s, 50’s, 60’s or 70’s and you have a collection of tenants who are supporting your desirable lifestyle or you have a property manager who is managing 50% more rentals than you would otherwise need so both you and the property manager can enjoy a desirable lifestyle.
Is there a better way?
That is a question that I asked myself a few years ago.
My answer evolved into what I call the Ultimate Investor Endgame. I designed this strategy and executed the required logistics with the goal of achieving SIMULTANEOUS FINANCIAL AND PSYCHOLOGICAL FREEDOM.
Following are some key criteria and characteristics of the Ultimate Investor Endgame (some obvious, some not), ALL of which must be satisfied to achieve both financial and psychological freedom. THE FOLLOWING DOES NOT CONSTITUTE INVESTMENT ADVICE! This is only a description of how I manage my investments for my personal situation. Everyone has a different situation and you MUST consult with the appropriate licensed professionals about your specific personal situation before making any decisions or taking any action.
Psychological Freedom – Manage No One Directly: I decided that, as part of my ideal Ultimate Investor Endgame, I do not want to manage anyone directly! Successful investors learn how to manage people very well, including tenants, contractors, motivated sellers, property managers, code officials, loan officers, private lenders, note sellers/distressed mortgagors, etc. But I didn’t want to manage anyone anymore, if at all possible. I want to evaluate opportunities with deep due diligence that are identified and managed 100% by others who are highly qualified, can pass my extremely high vetting standards, have a great track record and are open to any and all questions I may have about the investment opportunity. The goal is not to manage people directly, rather I choose opportunities and manage the composition of a portfolio of very diversified investments that meet my disciplined self-chosen investment criteria.
Financial Freedom – Conservative Investments Invested/Purchased at Verifiable Discount: Just like in classical single-family home investing or note investing, the investments I make in the Ultimate Investor Endgame must be purchased at a verifiable and significant discount to then-current market value. This is very often reliably achievable in more than a dozen sectors related to commercial real estate. Typically, the investment generates positive cash flow, distributed as “preferred returns” and the discount must be such that if the market dropped by 30% or more, the investment would do no worse than breakeven. As an example, this discount is easy to identify and quantify in mismanaged large apartment complexes that have lower rents than comparable apartment complexes in that part of the city since rent is the major component of net operating income (NOI) and valuation is a direct multiple of NOI. Another necessary but insufficient requirement for these conservative investments is that they are extremely well-documented private placements, 506(c)’s, 506(b)’s, etc. that provide 70-170 pages of documentation for review that are compliant with SEC guidelines for raising capital which includes the opportunity to ask questions about any detail in the documentation before making the investment decision. If I feel uncomfortable with even one key detail, I don’t invest. As an example, I didn’t invest in a precious metal mine that appeared to be an outstanding opportunity, when an operating level manager refused to disclose the patent number of the technology the PPM claimed to constitute the competitive advantage. The reluctance to provide what should be public information was enough to kill my interest in an investment that met all my other investment criteria.
Psychological Freedom – Source of Deal Flow: In the Ultimate Investor Endgame, I am pitched high ROI investment opportunities several times per month, most often off-market deals, by highly credible syndicators, fund managers and project sponsors with verifiable track records on whom I have already, or will in the future, perform DEEP due diligence on two levels (top level and operational level). This means that I stopped prospecting for deals myself and my main activity is networking with syndicators and sponsors who target ultra wealthy individuals and family offices, typically with net worth of $10 million to $100 million or more. That is why I am on stage as often as I am invited (3 times in this current 12-month period) at prestigious Family Office Club events (https://familyoffices.com/). I recommend reading Richard Wilson’s book “Centimillionaire Strategies”, especially the typical strategic composition described on pages 31-32.
Financial Freedom – Income: In the Ultimate Investor Endgame, the total TRULY passive income of the portfolio (NOT semi-passive income like self-managed rentals) must be greater than your routine household expenses plus a cushion (you choose the cushion of 10%-100% or more depending on your personal preference).
Financial Freedom – Liquid Net Worth: In the Ultimate Investor Endgame, the liquid portion of net worth must be sufficient to cover ALL of your reasonably anticipated special household expenses for the rest of your life (such as emergencies, luxuries, non-covered medical, funerals, vacations, etc.) plus a cushion of your personal preference.
Financial Freedom – Risk Management: In the Ultimate Investor Endgame, risk-management is absolutely crucial. I manage risk by diversifying investments in three dimensions:  multiple deals,  in multiple sectors,  with multiple sponsors. For example, my self-directed Roth 401(k) is currently invested in 10 deals with 5 syndicators/fund managers/project sponsors in the following sectors: apartment complexes, land development lending, student housing, self-storage, agriculture, resort units, high-interest bridge loan (for a neurocare facility in one case), conversion of underutilized hotels into affordable housing and more. This is just a snapshot since the composition of the portfolio is dynamic due to exits from time to time and redeployment of proceeds into the next deal and sector with the next syndicator/sponsor. A snapshot of my self-directed 401(k), Roth and pre-tax, in September 2022 is shown in the preparation notes for my presentation at the 9/15/2022 Family Office Summit shown at http://phasetransfer.com/k/criteria.pdf.
Financial Freedom – High ROI: Every investor sets their own investment criteria and for me the minimum stated IRR in the PPM (private placement memorandum or corresponding documentation for 506c’s and b’s) must be at least 15% (2X in no more than 5 years) and be extremely well justified and risk-adjusted to pass the my questioning during deep due diligence. The track record of these investments with stated minimum IRR’s of 15% are often 20%-35% in reality. Of course, there are NEVER any guarantees, but there is almost always collateral, purchase at deep discount and very strong underlying fundamentals that are confirmed during deep due diligence. When coupled with diversification in the three dimensions cited above, risk is minimized while returns are maximized. To be sure, RISK IS NEVER ELIMINATED! HIGH ROI INVESTMENTS SHOULD ALWAYS BE CONSIDERED HIGH RISK!
Financial Freedom – Balance Between Income & Growth Investments: Part of the diversification in the Ultimate Investor Endgame, is to choose each investment in the portfolio such that the total portfolio meets a mix of income and growth goals that is customized to the investor’s specific situation at that moment. For example, in my self-directed Roth 401(k), the land development funding, the agriculture and the note deals are primarily INCOME plays with small or no growth components, whereas the apartment complexes are primarily GROWTH plays with a secondary income component. The income and growth components are usually obvious when looking for the first time at the preferred returns and equity splits disclosed in the summary or term sheet.
Psychological Freedom – Legacy: Our adult children (and my wife) are fully trained on our estate plan and have access to all legacy documents (e.g., through well-organized shared family online folders) such as revocable living trust, will, powers of attorney (financial and healthcare), investment accounts, retirement accounts, insurance accounts, key person contact information, fully paid pre-need funeral arrangements, full documentation on every single investment, especially the PPM’s and more. Any of us can access all the documentation at a moment’s notice on our cellphones which will also be useful during a medical emergency. I update the investment documents upon each exit and redeployment. We meet once per year in person to update and make sure we are on the same page. Our estate plan was constructed by KKOS Lawyers (https://kkoslawyers.com/).
Financial Freedom – Tax-Free as Much as Possible: In recent years, I focused on transitioning my tax-FREE (NOT tax-DEFERRED) self-directed Roth 401(k) from single-family home investing to PPM Investing. I definitely needed single-family home investing to graduate from financial viability to financial freedom. But I needed something more to graduate to simultaneous financial AND psychological freedom. A good example of building a $1+ million 401(k) from zero as a part-time investor, exclusively through only 1-2 real estate deals per year (zero stock market), then transitioning into a reliable PPM Investment while doubling cash flow is the 3-deal sequence of “Track 1” described my article shown at https://www.parttimeinvestorsllc.com/single-post/i-built-a-1-million-self-directed-401-k-with-only-1-2-real-estate-deals-per-year. In this article, I show how I converted an initial investment of $82,000 of Roth money that funded the first investment in a single-family home, into compounded annual growth (CAGR) of equity of 26% per year PLUS cash flow dividends of 38%, based on the $82,000 initial investment. Those numbers are not typos! By the way, assets in a retirement plan enjoy a significant extent of asset protection. This is another compelling reason to focus on building a strong self-directed Roth.
As an aside, if you want to keep up to date with the latest information on Roth investing, I strongly recommend binge listening, then routine listening to the podcast at https://directedira.com/podcast/. I have listened to every one of the 71 episodes to date (through early October 202) and you should to if you are serious about building a minimum 7-figure Roth.
Five years ago, I wrote an article called “How Passive is Passive Income?” in which I defined QUANTITATIVELY how to determine the “passiveness” of any type of income from Social Security benefits during retirement (100% passive) to hourly work on the factory floor (0% passive) – see article at https://www.parttimeinvestorsllc.com/single-post/2019/02/07/how-passive-is-passive-income. As I graduated into a higher level of financial freedom, I decided to take my own advice and perform the simple 5-step exercise I recommended near the end of the article. The result was my current version of the Ultimate Investor Endgame.
While, in the future, I might further optimize the current version of the Ultimate Investor Endgame to be even more passive and even more reliable, I feel that once I complete the 5-10 hours of due diligence on the underlying fundamentals of an opportunity (reading every single word of the PPM and related documentation) and complete the due diligence on the two levels of the team executing the deal, the investment is totally passive from my standpoint. I enjoy  the periodic automatic deposits of the ongoing preferred returns (once they start after stabilization) and  the automatic deposits of big chunks of money upon refinance, exit or other type of liquidity event distribution. That’s pretty passive, MUCH more passive that in my earlier investing life. I am enjoying very passive income and growth with high ROI. Could that change in the future and could I lose everything by poor decision-making? Yes. But that is why I have so many risk management mechanisms in place that avoid poor decisions and the inevitable market cycle changes.
In other words, in the Ultimate Investor Endgame, the investments are truly 100% passive after performing the deep due diligence and wiring the money to the investment’s entity (usually an LLC set up for the exclusive execution of the specific opportunity or fund).
There are additional components and criteria in the Ultimate Investor Endgame as I designed it (for example, investing/gambling a small fraction in higher-return higher-risk private equity deals), but the criteria described above cover most of the key characteristics of the Ultimate Investor Endgame that I have been executing as I have been transitioning from financial freedom to financial AND psychological freedom.
In my upcoming lectures, I will describe in much greater detail the specific opportunities in which I have been investing (and exiting with impressive results) using the funds of my self-directed Roth 401(k), which is a key component in my Ultimate Investor Endgame. In these lectures, I also describe how to get access to these private placements that are usually not available to the general public of non-accredited investors.
Be on the lookout for my upcoming lectures in your area (DIG In October 2022; SJREIA in November 2022) or online to learn about the transition from financial freedom to the Ultimate Investor Endgame.
At the moment of writing (October 2022), I have transitioned nearly entirely into “PPM Investing” and I have only two single-family rentals remaining in my LLC. I sold the last single-family home rentals in my self-directed Roth 401(k) and pre-tax 401(k), in 2021. All the proceeds were redeployed into PPM Investments and notes to date, though a portion will likely be allocated soon to private equity deals in technology (most likely life science and ESG ventures).
Some of you have excuses for not achieving simultaneous financial and psychological freedom. Please be aware that I started under the federal poverty level on my 30th birthday with a wife and son with no external; financial support and I didn’t start investing in real estate until age 50. So, age or starting point are not excuses. I had no inheritances or help and even when I started investing in real estate, it was ALWAYS part-time. I never wanted to be a full-time investor and I still don’t want to be a full-time investor. I value my time way too much to be overly focused on money. My first priority is my family and my second priority is self-actualization through my primary occupation (see www.PhaseTransferCatalysis.com) and hobbies (see www.NowBeHappier.com). My point is that you can supplement your financial life with part-time investing, like I did without driving myself crazy and achieve whatever Ultimate Investor Endgame you customize for yourself to enjoy simultaneous financial and psychological freedom.
If you are interested in 1-on-1 coaching with me or purchasing my Smarter Investing home study course (https://vimeo.com/ondemand/smarterinvesting), please reach out at https://www.parttimeinvestorsllc.com/contact-us. If you want to receive my newsletter and a free copy of my eBook “Which Real Estate Investment Strategy is Best for YOU?,” sign up at www.PartTimeInvestors.com.
I will end with my wish for you which is to live the rest of your life in good health with simultaneous financial and psychological freedom in any way you see fit (that is legal and ethical of course).