How to Make More Passive Income with Fewer Rentals (& ACTUALLY Retire Early)

Dave:
Hey everyone, Dave Meyer here from BiggerPockets. You’ve probably been hearing a lot recently about achieving financial independence through real estate. It’s the idea that you can buy rental properties which generate income as tenants pay you rent, and when that income matches the cashflow you make from your regular job, you can retire and live off your mostly passive real estate portfolio. Today we’re talking with an investor who has actually done it. Chad Carson didn’t need to accumulate dozens of properties or use any crazy strategies to totally change his life through real estate. He’s a long-term buy and hold investor who’s made smart decisions over a few decades, and now that he’s been patient, he has the freedom to travel to play basketball and only spend a couple of hours per week managing his portfolio. Chad was last on the BiggerPockets podcast for episode 1004 back in August, and that was one of our most popular episodes ever.

Dave:
So check it out. But I’m also really excited to share today’s fresh conversation with him about the different stages of real estate investing. There’s a starting phase, there’s a growth phase, and we’re going to dig into a new concept that I’m super fascinated within which Chad calls the harvesting stage. So we’ll talk about each of those phases, but we’re also going to not just talk about what they mean, but also the mindset that is required in each of those phases. How do you go from this mindset of growing all the time and getting deals that build equity to one that’s a little bit more passive and perhaps a little bit more cashflow focused? This is something I’m personally dealing with in my own portfolio, so I’m super excited to talk to Chad about it, and I think we’re all going to learn a lot from his really unique and honestly just very mature approach to real estate investing. So let’s bring on Coach Carson, Chad Carson, welcome back to the BiggerPockets podcast. Thanks for being here.

Chad:
Thanks, Dave. Thanks for having me.

Dave:
Well, you’ve been on the show a lot so people have probably heard your story, but can you just fill us in on your investing journey briefly?

Chad:
Yeah, I’ve been doing it 21 years, so been a couple decades, which a shock to me, but I’ve kind of gone through this evolution of where I used to flip houses and have wholesaling. I was full-time in the business and then I started planting seeds of rental properties over the years and fast forward to today, I have a 50 50 business partner, but the two of us are buy and hold investors. We’re in Clemson, South Carolina, we have 33 properties, plus or minus. We’ve sold and bought a few here and there, so a medium-sized portfolio. But really my focus has been on how do you build a portfolio that gives you lifestyle, that you have the cashflow, you have the flexibility, you have the time, and I don’t think all portfolios are built equally. There’s a lot of different types of properties, different sizes of properties you can buy. So I wrote a book, the Small and Mighty Investor for BiggerPockets, that’s all about that sort of business model, this lifestyle first and then work it backwards and figure out how you can build a rental portfolio, gives you time to travel and to do all these other things my family and I wanted to do.

Dave:
And you’ve done a lot of that cool stuff. If you don’t know Chad, he’s lived in different countries, he gets to travel, he follows his passions. You really in my mind have sort of done it right? You figured out the way to create financial freedom, but you’re not fully retired, you’re not doing nothing, but you’ve made real estate a means to open up other professional or personal interests, which to me at least has always been my goal as well. More than acquiring a certain amount of properties or hitting a certain number of doors or anything like that.

Chad:
Absolutely. I mean it’s a little bit more challenging because measuring doors is quantifiable. You can check that off on a list. But the struggles I’ve had, I’ll tell real quick stories. When I finally realized this was in 2007 and I was pretty new to the business five years in, but we were scaling and growing and buying a bunch of properties and I think everybody sort of borrows goals from other people when you first start. That’s a natural thing to do.

Chad:
But we had this kind of aha moment. My business partner was wiser than I was, but he pushed back on me. He’s like, Chad, why are we doing this? We bought 50 properties this year. We had 30 closings, 50 units, and we were just busy. It was also right before the great recession we’re like, okay, the economy’s changing. This is not good. But we did this exercise where we wrote down what do we actually want to do with our days? Specifically granular, here’s what I would do every day, and for me it was like pick up basketball in the middle of the day. It was hiking in the woods, it was traveling. I just got married that year, so my wife is a Spanish teacher. We wanted to travel. So I say all that, everybody’s got their list and I think that’s a really good exercise to do.

Chad:
But we finally realized that alright, the business we’re building right now isn’t actually getting us the time and the space to do what we want to do. And so you have to actually be deliberate about it. Otherwise it’s easy to get carried away. The natural default of business and real estate is to go bigger and 10 x and do all that. And that’s cool if you want to do that. I’m glad people do that, but a lot of us in the real estate business just want to have real estate be like this engine to do all these other things in our lives. And if that’s you, then you got to think about it a little bit differently and go with a different game plan.

Dave:
I imagine that was sort of a hard shift though mentally, right? Because you go from flipping an acquisition, which honestly is just instant gratification, which we all like, right? But you used a term when you were introducing yourself where you said you went to starting more planting seeds. So does that mean you sort of had to go from seeing instant reward for your work to being perhaps a little bit more patient?

Chad:
It is, yeah. The rental game is a very much a patience game and I literally use the gardening metaphor. I think that’s the best metaphor that when you flip houses, that’s like a cash crop. You plant that seed, you get some corn this year, you eat the corn, it’s like, oh, that’s very satisfying that you have the money right now. Whereas a rental property is more like I have some fruit trees in my backyard that it’s a blueberry bushes. I’ve been planting these fruit trees and these blueberry bushes and it’s taken five years or seven years for them finally to produce some fruit. And once they do, they start coming in for decades and it really, it’s a wonderful thing. And rental properties are the same way. If you think that in the next 2, 3, 4, 5 years it’s going to set you free, then that expectation is the trouble itself.

Chad:
And I definitely was guilty of that. I thought, alright, I’m going to live off this $200 a month in cashflow that I have on all these rental properties and then I had these spikes of expenses and I had these vacancies and I hit the great recession. And the point I think is really important to know is that when you have a leveraged real estate portfolio, which most of us start with, that’s cool. I did the same thing. We don’t have enough capital to go out and buy 2030 rental properties. You got to borrow money, you got to scale. But eventually when those plants grow up, you have more equity you can do. I can talk more about I think what there’s different stages of real estate investors. You get into this harvesting phase of being a real estate investor where you change your priorities from just growing to actually harvesting it and you maybe pay off some debt, maybe you do some different strategies at that point, then you can have cashflow, then you can have more peace of mind, then you can have more simplicity. But that growth phase is pretty hectic and it is hard mentally it was for me because you’re not seeing all those rewards right

Dave:
Away

Chad:
And yet you’re still feeding it and you’re working hard and you’re not getting the payoff yet.

Dave:
What helped you sort of shift that mindset so that you could start thinking on a longer timeframe

Chad:
Of it’s just natural optimism. So I think some of it’s just built in is acknowledge it. Yes, some of that’s delusional, but I think most people who get into real estate have optimism and I think we have a little bit of a control freak nature, at least I do like, alright, I can do this. If we didn’t have that, we’d probably just be passively investing in other stuff, which I like to do too. But real estate is very much a hands-on entrepreneurial game and you got to believe in yourself and you got to believe in the product. And I think beyond just a natural optimism is you got to look at examples of other people and I love stories of people who’ve done this for decades and for me, for example, there’s a guy named John Shab was a mentor of mine and

Chad:
He’s been doing it for almost six decades now. Started in the early seventies, is that five decades? And when you have conversations with people like that, they will tell you about the ups and the downs and they’ll tell you about the cycles and vignette. If you look at their lifestyle, I’ll give him for an example, he’s got like 25 single family houses. I think almost all of them are paid off. They produce hundreds of thousands of dollars in income every year and he flies his airplane, he travels, he does charity work. He’s just this flexible, amazing lifestyle. And so I started collecting examples like that. I’m like, okay, I’m not going to ever be exactly like one person, but you say that’s the kind of lifestyle I want and I want to emulate that through a business model that’s similar to that as opposed to the Elon Musk style of real estate is 10 x and get these big syndications and do all that. That’s cool if you want to be the richest person in the room. But that’s not the same as the people I’ve collected stories from who have the most time. They’re like time billionaires and flexibility billionaires. It’s a very different way of doing it. And so I think I got borrowed optimism from those kind of people during the times when you don’t really have the proof yet that it’s going to work.

Dave:
That’s great advice and hopefully stuff like Chad’s story as well for everyone listening or other examples that you see on the podcast, this is definitely doable for people. So cool about real estate is you’re not inventing something new, you’re not disrupting, you are following a path that if you have the right attitude, if you have the right perseverance, the right expectations, that you have a very good realistic chance of it. I think you’re saying you have this blind optimism, but I think that’s warranted in real estate because it’s so proven that it can exist. I want to ask you a little bit about the timeframe. You talked about the growth phase. Maybe you can just start by giving us an overview of what you mean by that, the growth phase and some of the subsequent phases and how long realistically you think each of these phases last.

Chad:
Yeah, I believe that we go through three phases. As a real estate investor, you begin as the starter and the starter is more or less one or two deals and you get your first deals under your belt and the whole goal of the starter is just to learn honestly. If you have the expectation of hitting a home run and doing everything in your first deal or two, that’s probably not a realistic expectation.

Chad:
The expectation is to learn and compound your knowledge, compound your network of people around you. And then also, I’ve been thinking about this lately, don’t make a big mistake on your first deal or two. I talked to people who they saw the flips and the fix and flips and all these big deals that people did that were kind of sexy and exciting, but they also had a lot more risk and they were more advanced deals. So as a starter, just be basic, do your house hacking, do your just really vanilla kind of deals and be okay with a base it as a starter. That’s part one. And then part two the longest, the grind that we were kind of talking about where you have to have optimism and is the growth phase or the builder phase, and I think it varies a lot on the timeline of that.

Chad:
For me it was definitely five to 10 years. Were definitely in my builder phase. It is like the ultra marathon. You really have to stick with it. You’ve got to be patient, you’ve got to be disciplined. I think this is where everybody falls out. Getting one or two deals is not easy either, but there’s a bunch of people who give up in the builder phase or they get impatient or they do different stuff. That patience is a really difficult part. And then you get to phase number three, which I call the harvester phase, which I don’t think gets enough love, it doesn’t get talked about enough and that was one of my goals in the small and mighty real estate investor book was to talk about those of us who are trying to transition from growth and building to actually living off of our portfolio.

Chad:
What does that look like? When should you do that? And for me it was, let’s see, I started when I was 23, so I was probably 32, 33, 34 when I really was. I’m like, okay, I’m definitely in the harvester phase. I got through the great recession, I had enough equity and that’s the way I measure it. I had enough equity that if I just redeployed my equity, it’s almost like a chessboard. You have chess pieces on the chessboard and I had the pieces on there, but I needed to move things around. I needed to refinance some properties. I needed to sell off a few bad properties. I call that pruning my garden, pruning back these bushes that are not that good. Sell some properties here and there, pay off some debt here and there and the end result is a harvester portfolio where your goals are not necessarily to get the most growth. I think that’s the big difference between the builder phase and the harvester phase is that you changed your game, you’re playing, you’re not just trying to optimize for return on investment and that’s why paying off debt

Chad:
And doing things like that from a growth standpoint, well, I’m paying off a 5% debt. Really that’s not the best way to grow. I said, well, that’s not my goal here. My goal is to make the most cashflow to have peace of mind so I can sleep at night is to simplify my life and reduce my hassle so that I can go travel and live for a year in Spain like my family did or live for a year and a half in Ecuador. Or if you don’t like traveling, maybe you want to try a different job that it’s just your dream job or your dream passion, but it doesn’t make that much money. You need to cash in your chips, you need to harvest your equity so that you can live there. And the timeline for that, we could talk about some specific examples, but I think a lot of people can get there in 10 to 15 years and because you get through one big real estate cycle of seven, eight years, I think 10 to 15 years is a pretty good goal for that.

Dave:
I’m so glad you said that because done this through experience. I am a nerd and I did this through math and I built the calculator. They both work, figure out how long it would take people on average and what I came up with was 10 to 15 years. For most people, if you just buy deals as frequently as you’re realistically able to, even using average market returns for today, even with 7% interest rates, it will probably take you 12 to 15 years depending on market you live in, what your savings rates going to be, but roughly that’s pretty good and that’s incredible, right? The average career in the US is so long being able to say that you can enter this harvest mentality and sort of move to an opportunity where you’re not necessarily, you don’t have to retire, but you have this total time freedom in 10 to 15 years. That is unbelievable. I really just don’t see any other industry maybe other than buying or starting your own small business that really could feasibly do that. So that’s what gets me and keeps me so excited about real estate even though conditions have changed in the market.

Chad:
A hundred percent. I mean just think about the perspective. Look at the average person in the United States, which is a wealthy country. They get to 65 and they have, I don’t know the statistics on this, but they’re not wealthy enough to retire. They’re stressed about it. And here we are talking about our game plan. If you’re 30 or 40 or 50 in 10 years, 15 years, you could be living off $10,000 per month for the rest of your life. Incredible. And I’ve been interested in studying psychology a lot lately and I think we all are susceptible to this as we compare ourselves and we compare our situation to the wrong thing many times. And so when you talk about 10 to 15 years, you’re like, oh man, I want to get out in five years or three years. I’ve heard somebody on a podcast who bought a hundred properties in three years and they’re out.

Chad:
Well, the difference is they were an entrepreneur, they were a business person, they started a business, they used a lot of leverage. They probably scaled with a lot of risk and that’s cool if you want to get there faster, that’s possible. But what we’re talking about here is the boring style of investing, just planting a seed, buying a long-term rental, maybe you mix a few short-term rentals in here and there to get some extra cash flow, but this is the vanilla standard way of investing in real estate. And if you want to go faster, cool. If you’re an entrepreneur and you’re always available to you, but what we’re talking about here is even if you are an entrepreneur, you should probably parallel do this steady path because what happens if you go through those big roller coasters and the biggest travesties and entrepreneurs used to have 5 million bucks and you’ve kept betting it all and now you’ve lost it all and you have nothing left. You should always have this slow and steady path is your foundation. That’s like your fortress that you don’t ever want to have to lose that because you’ve worked so hard to get there.

Dave:
I think that’s such a good distinction because you can go faster if you want to be doing off market deals, if you want to be calling direct to seller and doing all this stuff, you can absolutely accelerate it faster than 10 to 15 years. Even if you want to do stuff like value add investing, you can move it up significantly, but it’s up to each individual investor to sort of find that right balance. I think, and I know for me, I like working because it allows me to invest in real estate where it matters to me, but it almost doesn’t matter if my real estate goes slower for a year or I don’t acquire something for a year. It doesn’t really matter to me because I’m trying to do this for 15 years from now and I have a high degree of confidence it’s going to do that.

Dave:
If you want to be an entrepreneur and you want to be in it, you have to do a certain amount of deals every single year, even if market conditions aren’t great, even if inventory’s low, even if something happens in your life and you’re busy, you have to maintain a certain volume and pace in your investing. That can be difficult and for some people it’s right. For me, it’s never been my personal goal, but that’s just sort of the continuum or the trade off or the balance that you need to find as an investor. I think you and I sort of skew on one side of it, but I have a lot of friends, most of my friends who are in real estate actually skew to the other side of it.

Chad:
Just knowing yourself, I think ultimately what I’m hearing you say too is a self-awareness thing. Real estate is so cool because there’s a lot of different ways to get into it and you don’t have to do it the same way somebody else did it, and if you compare yourself to somebody else, it’s going to make you feel bad that, oh, I did one deal this year and I did one deal last year. That could be amazing over the 10 to 15 years, right?

Dave:
Yeah. I did two deals in my first four years. That’s just how it works. Some people, not everyone is going full heart into this, and I know on social media and stuff it looks like that, but that is honestly pretty rare for people to be doing it that aggressively. All right, Chad. Next I want to ask you about how to optimize your portfolio for that harvester phase, but first we have to take a quick break. Thanks for sticking with us. Let’s jump back into my conversation with Chad Carson. I want to shift to the growth phase. You talked a little bit about the starter phase. I think we talk about that on the show a lot, but if your goal is to get to this harvester phase where let’s say 10 to 15 years from now, you have time freedom, you have financial freedom, all this great stuff, how should you structure the growth phase to position yourself to get to a successful harvester phase?

Chad:
There’s going to be two buckets here at builders, the people with a lot of capital but not much time, and the people who don’t have much money but have more flexibility and time and are willing to do that. I was in the more time camp. I didn’t have all the capital, so I had to be more scrappy. I had to find deals that I could partner with other people, so I would go to people who had the capital and say, Hey, I’ve got this deal. I think it’s a really good deal, but I have no money to buy this deal. I’m all tapped out. Could you put up the money and we’ll partner together on this deal? And my mentality was, I call it the sweet potato pie principle is like, I have no pie right now. I’m not eating any pie and I have no money to buy the pie. Dave over here has some money and I say, Hey, Dave, I’ve got a pie on sale here. It’s usually cost 20 bucks and I could buy it for 10 bucks. Would you put up the 10 bucks and we’ll share the pie? 50 50?

Dave:
Yeah,

Chad:
That’s great, right? I get to eat. You get to eat.

Dave:
Now we both have pie.

Chad:
Yeah, and so I think a lot of people, they’re not willing to share a pie and so they eat no pie and that’s kind of crazy. So the builder phase is really distinguishing are you the person with the money and not much time or are you the person who has no money or you’re out of money and you need to figure out how to match up that strategy to grow from there. That’s how I see just the basics of the builder phase.

Dave:
I completely agree. You have to bring something to the table, and that’s the cool thing about real estate is you don’t have to have a lot of each of these resources. You don’t have to have a ton of time and a ton of money. You got to have one I think, or an amazing skillset that you can bring to a deal if you’re a contract or something like that. I guess that’s also time, but in my experience, this changed for me. I started in sort of the time no money thing. I was driving around finding deals and I needed money. My net worth was negative when I started investing in real estate and I didn’t have a lot of cash to put down Over time, just the way my career has gone, I’ve almost shifted in the completely opposite direction where I limit my own investing to 20 hours a month.

Dave:
I’m just like, I can’t spend more than that. I work full time. I have a family of friends that I want to hang out with, and so I’ve gone the complete opposite direction, but I do find it super valuable to periodically take stock of those resources and say like, here’s what I’m willing to put into my portfolio this year or for my next deal, and it might shift if you just had a kid, you’re probably going to want to shift for the next few years. If you’re young and single, you might want to just optimize the period of your life where you have a lot of time flexibility. It doesn’t have to be rigid. You don’t have to be one or the other, but continuously just thinking about the best resources you can inject into your portfolio has at least helped me a lot deciding what deals I should be doing and when a

Chad:
Hundred percent. And acknowledging too that within that 10 to 15 year growth cycle that you’re going through that it’s natural to have these two to five year cycles as well. For me, I’ve gone through a bunch of these little, you work hard and push hard for the next 2, 3, 4, 5 years, and then you take a break and you kind of ease off the gas pedal a little bit.

Dave:
Totally.

Chad:
For me, because I’m a type A personality and I’m like, go, go, go, go, go. We actually left the country so that I could actually take my foot off the gas. I’m like, all right, I can’t buy any more properties because I’m in Ecuador right now. Sorry, call somebody else, but whatever it is, the whole world is seasonal. You have night and day, you have winter and you have summer. People go through seasons of life and just acknowledge that and say that right now I have no money and I need to hustle my tail off because that’s all I got, but later on I have more money in less time phase now I’m spending two to four hours per week on real estate right now, but I’m investing capital.

Dave:
Exactly. I love what you were just saying about cycles within your investing career too, because it’s not going to be linear, whether it’s your own personal circumstance or external conditions or something else that’s going on. It’s going to ebb and flow. I stole this term again from Scott Trench who used it in the context of BiggerPockets, but apply it to real estate investing is that I see financial independence as a process and not an event. I don’t have this one day where I’m like, I’m going to be financially free, yes, free. My goal every year is to move a little bit closer to become more financially independent. I don’t know exactly what my end goal number is. I have an idea, but it’s probably going to shift and change and how I want to allocate my time, how I want to allocate my money. It’s probably going to keep shifting throughout the rest of my life.

Chad:
And

Dave:
So my goal is just to keep making good financial decisions. And some years that means buying less real estate. I’ve given this example before, but in 2015, a great time to buy real estate. I decided to go back to grad school and I put money towards my tuition rather than buying real estate. That slowed down my portfolio for several years, but when I graduated grad school, I got a big raise and I could use my money that I had then to start accelerating my investing career. And I think that’s sort of, again, it’s sort of the long-term mindset of just trying to figure out what you’re trying to do and not trying to hit a certain cadence that you can’t maintain through a 10 or 15 year timeframe.

Chad:
Speaking for myself again, I kind of got ground into losing my imagination about what I wanted to do in the future is like, oh, it’s just this number and I got to do this thing. My whole life is a spreadsheet as opposed to five years from now, I want to give the future Chad the ability to make choices on whatever he and my wife and we want to do five years from now. That’s the gift that investing is to your future self. You don’t want to put a straight jacket on yourself. You want to give yourself flexibility and freedom, and as long as you’re doing that, that process is definitely successful.

Dave:
I love that. You mentioned leverage, which is great, that allows you to compound your growth really well in real estate. You didn’t mention cashflow in the growth phase. Is that deliberate?

Chad:
I think cashflow in the growth phase is a tool is not the end itself. And I missed this early in my career and I went after deals that were a hundred percent cashflow and I wish I wouldn’t have missed the big picture as much that my goal here in the growth phase is to grow. That’s it. I want to build equity and if I had to boil down the entire growth phase to one metric is what is your net worth today and what is your net worth 10 years from now? So if you have $50,000 today, you want to get to a million dollars 10 years from now and cashflow, it helps you defend the fortress. So it is really important. You don’t want to have negative cashflow. I would rather put a huge down payment on a deal than have negative cashflow, personally,

Dave:
A hundred percent.

Chad:
So I’d rather have a low return on investment than have negative cashflow. I think cashflow is really important, but cashflow in the builder phase for me and cashflow in the harvester phase are two different things because the goal in the builder phase is just to reinvest. Reinvest. If you do make cashflow, leave it all in there. It is like a container that you don’t ever want to take that cashflow out of. You leave it in there to compound and grow. So cashflow is a legitimate strategy, but I think given where we are today, I know you’re talking about this in the last couple episodes, given the shift in the market, many markets are not cashflow centric markets with a 7% interest rate. So the name of the game is getting from 50,000 bucks to a million bucks. How do you do that? Well, there’s lots of strategies, but one of the most important strategies is just buy and hold. Buy a property in a good location. I call it buying pretty properties in the path of progress. And if you buy a nice property quality property that attracts a good tenant who wants to stay for 5, 6, 7 years, and you’re in a place where demographics are good and you pay attention to Dave’s metrics on which markets are interesting, I listened to all your stuff on that, that you buy markets that have good demographic tailwinds that over the long run your rent’s going to grow, your prices are going to grow, your debt’s going to pay down, and then you’ll have this equity that you can redeploy once you’re in the harvester phase.

Dave:
Chad, you are known as Coach Carson, so I do want to ask you for some personal advice that I’ve been wondering about in my own investing and how to transition more into this harvester phase. We’re going to do that right after the break. We’re back. Here’s the rest of my conversation with Chad. That brings me to my selfish set of questions here because you are Coach Carson and I could use some coaching if you’re willing.

Chad:
Let’s do it.

Dave:
Alright. Well, I feel like I’m sort of caught in between the growth stage and the harvester phase. I have a very similar philosophy to you. I’ve found deals that at least break even cashflow, and I’m talking about real cashflow like after CapEx, after everything in good areas where I think they’re going to appreciate and I have a lot of equity and that’s great, but my current properties, I don’t consider myself financially independent because they don’t put off enough cash to replace my current income. So how do you start repositioning your portfolio to get into that harvester phase?

Chad:
I love it. This is fun. Let’s talk about some tools in the toolbox for a harvester, and I think people will be familiar with ’em, but they’re a little bit different than the growth phase. So number one tool I want to throw out there is something I’ve been playing around with lately called the 6% rule.

Chad:
So in financial independence, retire early movement, people talk about the 4% rule with stocks. I’ve been playing around with the 6% rule, which basically if you look at your net worth, and this is currently net worth or if you’re a beginner looking at your future net worth approximately, I shoot for having about a 6% cash return on my equity in my portfolio, plus or minus. They don’t have to be exact, but this is a way to measure where you are and what I’ve found, people who are late in the growth phase, somebody I worked with had a bunch of properties in Austin, Texas that had appreciated like crazy, but the rents had not kept up with the prices. People in California myself too, even in South Carolina had a lot of equity, not as much cashflow. And the reason for that many times is that you have these amortization of debts that you’ve owned the property for 10 years and the payment’s the same as it used to be, but you’re starting to pay down a lot more principle with that debt payment. And then the price of the property has gone up. So what has started off as an 80% loan to value is now a 50% loan to value, maybe even a 40% loan to value. That’s sort of a sign of a late growth phase investor. And so you can use the 6% rule just to say, all right, I have a million dollars in equity, I should be making about 60,000 bucks per year on that, but I’m not, I’m making 3000 bucks.

Dave:
So

Chad:
You could say I have some moves to make. I have some redeploying of equity. So let’s talk about some of those moves. What could you do? The first one I like to do is I like to list all of my properties, and this is what I was talking about earlier called pruning my portfolio. And I want to look at all my properties and say, are there any properties that are obviously not good long-term investments? Here’s some good reasons to sell a property. There’s some bad reasons too. The good reasons might be the location has either stayed the same or gotten worse. It’s not quite as good as the rest of my properties. It’s not appreciating as much, it’s not attracting as good of tenants. I’ve had some properties that I wanted to sell because the maintenance was a huge headache. It was a really old property. I’ve had properties with 15 trees all around the property. The roots kept getting in a septic tank, which is another bad thing. I like to have a sewer instead of a septic. And so you could start making a checklist of what are all the things that create more hassle and more costs for me as a landlord and I want to put those properties on my hit list.

Chad:
Those are the properties that I want to prune off. And so let’s say if you had 15 properties, maybe there’s like 3, 4, 5 properties that are on your hit list. And so you strategically work on selling those three to five properties. And at that point you have two options. They both can work. One, you could replace those properties with a new property and do a 10 31 exchange. And so at that point, you’re not going to decrease your leverage anymore though. You’re going to kind of be at the same leverage level or maybe higher, but maybe you can buy properties that are more cash flow centric. Your property now has a lot of equity, but it does have much cashflow. So maybe you go from a single family house to two duplexes that have more cashflow. And so the most important thing is my cashflow position increasing on these properties so that I’m getting a better return on my equity.

Dave:
I love that. It’s so hard to give up the equity upside. I mean, ideally you find the right one, but it’s also hard because the cashflow like 6% is good, but it’s not super attractive. And I think it’s just another thing where you have to be patient, right? Because the yield is going to go up over time.

Chad:
Well, hopefully you do better. I’m using that as a portfolio level analysis. When you’re making this move from this one property to the two duplexes, for example, if you could make a 10% cash on cash return, your cash that you’re investing would be better. So you shoot for better than that. But on a whole portfolio level, if you’re not getting 6%, you’re underperforming a little bit for a harvester. I think that’s, at least that’s my metric and it is psychologically, I don’t like selling. I’m a buy and hold investor. The reason it’s hard to let go of those is in the growth mindset. We’re like, all right, this could keep growing, but if you can replace that with something else that increases your cashflow from two or 300 a month to a thousand a month. Now we’re talking. So I guess long story short, you evaluate your portfolio, you sell a few properties, some of them you do 10 31 exchanges, some of them, and everybody get ready here. Some of them you actually take the equity and you pay off the debt on some of your other properties. And that was hard for me to do at first as well. But the overall goal for me as a harvester is to take my loan to value of my overall portfolio from like 40, 50% down to my business partner and I are like 15% now today in our portfolio, something like that. And that fluctuates a little bit, but my read was if you look at mature investors in the stock market, like Warren Buffett style investors in the real estate market, the most mature investors with a mature portfolio don’t have a bunch of debt.

Chad:
I know there’s exceptions. I heard Robert Kiyosaki’s borrowing a billion dollars. Okay, that’s fine. But most of us mature investors have less debt because number one, it reduces our risk, it makes it easier to sleep at night, it increases our cashflow and it gets us to our goal, which is to be able to live off the income. That’s the bottom line.

Dave:
That’s such good advice. So yeah, I think it’s two different things here. One is repositioning and then the other is what I would call de-leveraging, right? Over the course of your career as you enter this harvesting phase, you either pay off existing debt or when you make a new acquisition, you perhaps either buy for cash or start at a lower LTV.

Chad:
Yeah. So two more harvester tools you just mentioned. One is like, let’s say you have a bunch of properties with three point a half, 4% debt and you’re like, I’m going to pay all that debt off. It would be okay to just save up your cash and then pay cash on the next property because overall you’re still reducing your portfolio level debt to asset ratio. So that is a way you can stair step your way into this. And then the other thing is don’t forget about refinancing too, because sometimes it’s the debt is actually reducing our cashflow because the terms of your debt are really what controls the cashflow of your portfolio. And if you have all these properties that used to be 30 year mortgages, now you have 15 or 20 years left on them, the payment is a lot higher than it needs to be.

Dave:
I had been considering something you didn’t mention, it sounds like your buy box where you live, you do single family primarily.

Chad:
Small multi, yeah, single family, small multi.

Dave:
I’ve been thinking about almost consolidating. Part of me is like, why wouldn’t I just sell everything and buy one 50 unit and just that’s my life. Have you ever come across people who do that?

Chad:
It’s tempting. The only issue, I compare it to two boats. If you have one big Titanic and you have this big Titanic, it falls hard and it’s hard to steer. It is hard to change things. This is just me. I mean, I think that it is tempting to go from all to one, but I think there’s some value in having diversification among neighborhoods even within one city. The other thing is from a financial strategy standpoint, I was just talking about selling one or two properties and pruning your portfolio. It’s a lot harder to do something when you have everything in one. It’s harder to manipulate it, it’s harder to sell it. It’s harder to do everything. I would rather have 10, 15 single family houses, small multifamily houses, that’s the lowest management load. It’s the lowest hassle. It’s the easiest to finance. You can sell off a piece here and there. That to me is like a good harvester portfolio rather than one big apartment complex.

Dave:
That makes sense. Yeah. This is just in my brain, I’m like, oh wow. Managing one property, one set of books would be so nice.

Chad:
True.

Dave:
But you’re right. To me, the big risk in real estate is the lack of liquidity. I don’t really worry about the market long-term doing anything bad. I’m like, I want to be able to get my money if I need it. And having one big multifamily would just be the opposite of that.

Chad:
Exactly.

Dave:
There’s limited demand. Imagine if you had that right now it is hard to sell a multifamily property right

Chad:
Now.

Dave:
You’d be in a tough spot if you wanted to reposition your capital right now. Now, if you needed to raise Chad a couple hundred grand, you’re maybe not going to get top dollar depending on what’s going on in the market, but you’ll be able to do it in a couple months if you really needed to. For sure.

Chad:
I’ll give you an example. One of your 300,000 houses, if you came to me and you’re like, Chad, I’ve got this opportunity. I need money this week. The reason I need, it’s because I have another deal that I can buy for 50% cents on the dollar. If you came to me and you were like, can I borrow 50% of the value of my property? I know you Dave. I know I could look at the property within a week. I could give you 150,000 bucks with a single family house or a small multifamily. Even within your circle of investors, you could raise 150, 200,000 bucks today and then you could pay it off later. So it’s so much easier to get the money you need on a small property.

Dave:
Alright, well this has been great advice. Thank you, Chad. I really appreciate it. I want to just ask one more line of questions before we get out of here. You have this great mindset. How do you stay in this business and talk about real estate all the time and still not get over invested in it in terms of time? What is the trick to you? Because I hear everyone on social media being like, I’m going to retire early, I’m going to fire this, fire that. And no one retires. Everyone just keeps working. And so you’re kind of the exception to that rule. You still do work, but how have you been able to maintain that discipline?

Chad:
Well, I think I have a new career. First of all, real estate used to be my 80 hour a week kind of thing when I was flipping houses. And then I told you today, I spend on an average week, two to four hours per week on my rental portfolio. Now, if I’m acquiring a new property or something, that’s different. But for me, my new career has been a couple fold is one. I like teaching. I enjoy the content business. So it’s like for me, reading and learning and studying and writing an article or creating a script for a podcast or YouTube videos. I like storytelling. That’s just my passion at the moment. So the answer for me has not been retiring and sitting on a chair somewhere. It’s been like, what do you want to be when you grow up? And I’ve just turned 45, 10 years ago. I was like, what do I want to do now? What a good question. It’s kind of terrifying, but what do I want to do? And when I thought about, it’s like I love being a student. I read, you can see all these books I have in the background. The question I like to ask myself is, if you had a Saturday or a day with nothing planned, what would you naturally do?

Chad:
Just because it’s fun. And for me it’s learning. I like to collect ideas, I take notes. I underline books. That’s what I do. So what career could I do where I could have fun and add value to other people underlining books and doing that, that’s teaching. And so that’s been my answer. Everybody’s got a different answer. I’ve also left space too for the seasonality of life. I have kids who are 13 and 11 right now. So coaching, volleyball has been kind of fun. Cool. I didn’t know anything about volleyball. I coached that some, my kids have started wanting to work out with me, which is kind of fun. So we’ll go to the rec center and do workouts together. Your life is a cup. You have this time that you can fill up. The only question is like what do you fill that cup up with?

Chad:
And it used to be real estate a hundred percent of the time. Now it’s a lot of teaching and content creation. It’s also parenting a lot more actively. I know when they go to college and they’re out of college, like, Hey, my cup will go back to more time in my cup again. So right now parenting has been a big part of that, travel, that kind of stuff. I feel like we all have the equivalent of that. We have, whether we’re parents or we have elderly parents we want to take care of or we have some kind of nonprofit. I feel like financial freedom is not only finding your passion to work on, but also what can I give back to the community? So in a way that we, entrepreneurs, we solve problems. How can I solve problems in my local community, whether I make money or not? It has nothing to do with returning a profit. It just has to do with making a difference and using these skills that we have to solve problems. And I think that’s fascinating. And I think so many of us in our BiggerPockets world could be doing that. We have passions that we could work on. And having optionality and having the money solved gives you that cup full of time to go pour it out wherever you want to do

Dave:
It. What a cool mindset and what a cool story. Chad and I find it so inspiring. This was exactly the conversation I needed today. Thank you for joining us and hopefully everyone listening, it feels the same way. That to me, this is the most relatable real estate story you can have where it’s just finding ways to pursue the life that you want and you’ve broken it down in such an actionable and useful way. Chad, thank you for sharing it with us.

Chad:
My pleasure. Thanks for having me.

Dave:
Thank you all so much for listening. We’ll see you next time for the BiggerPockets podcast. I.