If you’ve been on social media in the real estate space, I bet you’ve come across a guy named, “Pace Morby,” right?
Pace Morby is the cohost of A&E TV series, Triple Digit Flip, and runs one of the largest real estate investing communities, SubTo.
He has a HUGE social media following and is an expert in creative financing for active real estate deals. BUT, I wanted to know his thoughts on PASSIVE real estate investing and if he believes it is possible.
Listen to today’s episode to hear his insights on what investments are passive, how you can invest in these, and what he thinks are good ways to become a passive investor. Oh, and…in a turn of events, listen to him flip the questions on me!
Want to create passive income for yourself to unlock true freedom? START HERE: https://bit.ly/48MUHLb
Listen on Apple Podcasts: CLICK HERE!
Watch on Youtube: CLICK HERE!
TRANSCRIPTS:
Speaker 1 (00:00):
Hello, my fellow Ripples. This is Chris Miles, your cashflow expert and anti financianal advisor.
Speaker 2 (00:07):
Chris Miles was able to retire twice by the time he was 39 years old, but he’s not content to just enjoy his own financial freedom and peace of mind. Chris wants you to have your own ripple effect so you can live free today. He’s not the financial advisor you expected. He’s the non-financial advisor you deserve. He’s jumping behind the mic right now, ready to make waves. Here’s Chris Miles.
Speaker 1 (00:37):
Welcome to the show. That’s for you. Those of you that worked so fricking hard for your money, you’re now ready for your money. Start working harder for you today. You want that freedom of cashflow now, not 30 or 40 years from now if you’re lucky, but you want that life that you can live and love today, a life that you can live with, those that love you, right? As well as those that you love. Hopefully they love you back, but ultimately it’s being with those that you love, doing what you love. But guys, we know it’s not just about getting rich because Rich is great, but it’s about living a rich life because as you’re blessed financially, you now have a greater capacity to bless the lives of those around you. Thank you so much for allowing me to create a ripple effect in your lives right now, and we are going on almost now, 10 years strong thanks to you.
(01:22)
So thank you so much for tuning in and binging and sharing this with others so that we can create a greater ripple effect through the lives of all of those around us. Hey guys. So I’ve got a special guest today here. Some of you, if you’ve been on social media, you might’ve run across Pace Morby, right? Pace is a huge real estate investor in the space. He’s done an amazing work out there, not to mention a very successful business owner and just an amazing, well, good servant, good hearted guy, which is one of the big reasons why we like to have him on the show. So today I want to really discuss with Pace, what does he define as passive income, being an active real estate investor versus how I define it, and let’s just really see what kind of conversation we get from this. So
Speaker 3 (02:00):
Pace, I love this. I love this topic. I think this is so good because I’ll get people that say, real estate investing is not passive, and other people will say things that are not passive, and I’m like, all right, what is true passive income, right? Because a lot of people jump into real estate investing and they go, this is going to be passive, but then you get a tenant problem, you have a this. Do you have a that? So I actually don’t know, Chris, do you feel like you have a really good definition of what you think passive income is?
Speaker 1 (02:27):
I think so, but it does require context because the sad thing is I’ve seen so many people talk about passive income as more of a marketing feature than an actual real phrase with that passive income is something where you are not doing the active work, but here’s the big. But with that, it doesn’t mean that your brain off. It doesn’t mean that you’re not a wise steward of your resource and your money, but to me it means passive means that you are hands off that it’s working for you rather than you have to work so hard for it.
Speaker 3 (02:56):
Okay, let’s go through this. Let’s go through a couple of examples. I feel like there’s really, really passive stuff, and I’ll maybe spit some of these ideas out. Number one, probably the most passive thing you could do would be to invest in somebody else’s syndication, like a big multifamily syndication. They find the deal, they manage the employees, they deal with the tenants, they deal with the collections, the problems, the issues, the upgrades, the rent bumps, and ultimately they even deal with the refinance or the sale of that property. That then gives you hopefully a large chunk of money to either roll into the next deal or not. I think personally, that’s got to be the most passive investment that you could do in real estate. Do you also agree with that or is there something more passive you see?
Speaker 1 (03:41):
Totally agree with that. Yeah, I mean, if you’re putting money with somebody else and they’re dealing with all the headaches, the tennis, the toilets and the trash and all that kind of thing, then yeah, to me that’s definitely more passive. But I would still say as that caveat, you still got to be a wise steward. You still got to manage and watch over your money because whatever you ignore does leave you. So if you ignore your wife, you can’t ever go passive in your marriage. If you do that, they’re not going to be around too long passive with your kids. They won’t be around too long either.
Speaker 3 (04:07):
So you’ve got to find maybe a really good operator, a good syndicator, somebody that’s out there doing successful deals. If you’re like, Hey, I want to be truly passive, or I just check in on this, A smart bet would be to make sure you’re investing with an operator that knows what the heck they’re doing, right? Yeah. Another passive investment that I’ve found is maybe not so passive, and there’s varying degrees of this, so being a private money lender, so for example, if I have a buddy that’s fixing and flipping and he goes and gets a hard money loan for 80% of the money he needs, but he now needs a gap funder to come in with 20%, well, I didn’t have to find the deal. I didn’t have to qualify for the hard money. I don’t have to manage the contractor. However, the challenge with that, this is kind of the lower rung of the totem pole, is I would say that now that money’s going to be turning probably every 90 to 180 days, which becomes now, it’s not very passive working on now finding the next deal, and there’s some active elements to that that would be on the lower end of it.
(05:08)
The higher end of it would be, I’m going to lend money on somebody’s rental for five years or so until they refinance and get my money back, would be probably the higher rung of the private money lender ladder in terms of passive versus active. Any thoughts on that? Yeah,
Speaker 1 (05:25):
I definitely agree with that. I think that timeframe is a good point. I’ve had some clients that they do short-term hard money lending, and then all of a sudden they’re like, oh man, I just got paid back, which was awesome, but now we got to find the next deal again. Even if we have a whole network of passive investments, they could do, they still have to go and move that money and do something else with it again.
Speaker 3 (05:45):
Yeah, and they’ll say to me, well, I pace, I charge 12% interest only for my hard money. And I go, but you’re not taking into the equation the dead times where your money’s not in a deal.
(05:59)
And it could be a week, could be a month, could be whatever. But if you aggregate and you bring that all together and you normal, not normalize, but average that out, you’re probably making more like an 8% or a 90% return, not 12. And so when you’re active and you’re getting that money sitting in the bank account, it’s dead money. So now here’s where I think people get tripped up. They think I’m going to get into real estate because I want to be a passive real estate investor. And what they do is they end up becoming their own. They become their property manager as the landlord, they’re exchanging toilets and light bulbs and doing all that kind of stuff. I imagine you probably have seen people on social media saying, Hey, be a real estate investor. It’s passive income. And you’re like,
Speaker 1 (06:42):
Yeah, it’s technically true by an IRS standpoint, but it doesn’t mean it’s actually passive if they’re dealing with tenants and they’re dealing a lot with that stuff.
Speaker 3 (06:50):
What do most people in your audience want to do as a passive real estate investor or passive investor at
Speaker 1 (06:56):
All? Not to speak for everybody, but I would say a lot of people that I know, we talk to the listeners that come out of this podcast that talk to us personally, it’s usually this. It’s not quite set and forget it, but pretty close. They want at least somewhere they can have reliable, predictable income coming in that they don’t have to work so hard for.
Speaker 3 (07:15):
And what kind of deals would those be
Speaker 1 (07:18):
To them? They automatically think it might be having a rental, but then they’re like, but I have to be a property manager versus saying, no, you could put your money with other investors, like you said, a syndication or into a lending fund or something like that where they’re able to get returns and not have to do anything for it.
Speaker 3 (07:36):
Yeah, I do both, and I’m invested in people like Vena Jetty or Brandon Turner or other multifamily operators. I’ll just cut them a check as an LP or as a limited partner because I trust in them and I trust in their judgment, and that’s really passive. The challenge is I also own, we just counted up the numbers. There’s little over 1800 rentals in our portfolio, which is crazy. Now that’s 1800 doors, 1800 properties, about 1500 of those are multifamily doors, so a lot less transactions, bigger assets, and about 300 single family homes. And when people go, man, it must be really nice to have that passive income, I look at that and I go, you know what? It’s really not that passive because I have massive teams. I have not just main a primary asset manager, but I have two or three depending on the time of year, traveling asset managers that are traveling around the country visiting the property managers, and the property managers are then underneath them.
(08:38)
Then I’ve got bookkeepers and a CFO and all of these other things associated with it. And I look at that and I go, man, did I get myself into somewhat of a prison? Because I feel like sometimes it’s the golden handcuffs of how big that thing can create wealth. However, I’m tied into constantly dealing with managing people, and there was a point in my journey there was kind of a sweet spot where it was like 30 properties was the sweet spot where I didn’t need an outside asset manager. My property management company probably bothered me once a week and I was like, oh, if it’s working at 30 units, it’ll be good at 300 units. But I didn’t realize it was just so much banking and so much issues. And then property management companies, as you said, if you ignore them, they leave you. And if you’re not constantly staying on top of your property management company, then they start forgetting to fill your properties.
(09:30)
At one point, at the beginning of the year, I had 21 vacant properties in all my portfolio and 21 vacant properties that I have payments on was like a $40,000 loss every single month because of those vacant properties. And the reason that happened is because my property management company was not being babysat. And so I look at it, I’m like, I kind of feel like there’s a sweet spot in all of this. At least in my journey, there was a sweet spot of 30, maybe 50 properties was kind of the sweet spot. Five to 10 was challenging because there wasn’t an economy of scale. Having a bookkeeper and having these types of things was a little bit more expensive than I needed for a five or 10 house portfolio. But when I got to 2030, oh my gosh, it was so easy. I could outsource. I had money to do the thing. And I felt like my involvement on a 30 to 50 unit portfolio was less than an hour or two every single week. Good point. Do you have many of your listeners that communicate to you or share ideas of, I feel like I came into this trying to be passive and it now owns me? And if so, what are those things that they’re struggling with? Is it delegating? Is it mindset? What do they primarily juggling?
Speaker 1 (10:47):
At least with our clients, it’s not so much been the problem, but I have had people that have been in that place, especially because I want to ask you this question. Do you think that one of the traps is that there’s almost an overemphasis on how many doors I own? Do you see that as being a big problem? I hear somebody saying, once I get to a hundred doors, then I’ve made it. Or once I get to a thousand doors, then I’ve made it, right? Do you think that’s kind of
Speaker 3 (11:14):
Big trap? There’s a lot of machismo in all of that, right? There’s a lot of macho. I have more doors than the next guy type of thing. And I can tell you, I definitely have been a victim of that mindset of I’d be in a room of other people and they would say, oh, I have a hundred doors. I’m like, oh, dang, I guess I’m not that successful because I listened to how many doors you have. And that more is the goal. I guess I just would continue to do more. Right now, one of the things I’m trying to solve in my business, because I have a lot of active income, we have lending businesses, we do fix and flips. We have a virtual assistant company, we have construction companies. We just bought a company on creative finance called the Plant Guy. So I have that active income coming in.
(11:55)
So I have a lot of businesses that pay me active income, which means now my stress every day, and this is maybe a warning for some of the people, my stress is, oh my gosh, I cannot stand paying the IRS any money. So what I do is I then go, how do I go and deploy this into real estate so I can offset in 2022? I have no tax burden, 2021, no tax burden, probably 2023. I will probably, I think we’re right on the cusp of not having a tax burden. Why? Because I continually buy real estate, use the depreciation to offset my income in other businesses that I’m an investor owner in. And so for me, I kind of chased that depreciation dragon for such a long time that I just caught myself a week ago going, why am I still buying real estate?
(12:41)
I have enough real estate, I could be done. And I find taking my, today, I’m taking my daughter to school, but I had to block it out on my calendar in order to do that. And so sitting here talking to you and how you talk to your clients and what you’re setting up, I’m like, I’m rethinking, man. If I just jumped into a time machine, I probably would’ve gone back to myself three years ago and go, there’s a point where you can stop. You don’t need to be the guy with 2000 doors. You don’t need to be that. It will still give you an amazing lifestyle, but what are you doing? And in my mind, I love what you said in your intro, in my mind I’m thinking, well, if I keep going, then my nest egg will be bigger. And it’s the old thing of the goalpost.
(13:25)
Every time I score a touchdown, the goalpost moves. And so then I find myself spending a good amount of time with my family and doing fun things, but it’s like I’m having to schedule them rather than having the free will to go, I’m going to change. I’m literally just going to cancel everything. Or better yet, I don’t even have anything on my calendar because my income is literally just passive and I can just spend 14 hours a day with my wife and my kids and dropping them off and doing the things and coloring books. And I’ve put myself in a lot of ways in a prison, the golden handcuffs of I’ve built such a big machine that it now requires so much of me. So if you were to rewind a couple years, yeah. What’s that? I was just going to ask you, if you were to rewind a couple years, what would you have done differently, you think?
(14:09)
I probably would’ve said less is more. And there was a point, right? There was a point where it was probably about 50 rentals. I had 50 rentals. They weren’t cash flowing a lot. It was the first year I bought them. And they obviously, I can raise the rents every couple years and whatever else, but I would’ve said 50 rentals is more than enough. Most human beings on the planet will never have five, right? That’s true. And so I would’ve probably stopped closer to 50, manage that and still continually worked on my active money and putting money to the side, putting money to the side. But what I did is I did the opposite. I did more. I bought more, and I made more thankfully. But what I did is I then created more businesses that created more employees, that created more streams of income, that created more active income, that created the need to go buy more real estate. So it becomes a vicious cycle. The more properties you buy and the more businesses you do. And you wake up at 40 and you go, I got a 16-year-old kid boy, 5-year-old girl, 2-year-old girl, and a brand new baby on the way. And I’m like, I have enough money.
(15:19)
I definitely have enough money. Why don’t I have more time? And it’s because I followed the machi mode, the macho people of like, you have to have thousands of doors in a private plane and this, that and the other. And it’s so funny. The other day we spent, I dunno, this is really stupid. Hopefully you don’t mind me being really transparent. I spent $5,000 on my five-year-old daughter’s birthday party. She had 40 of her friends came over, we fed everybody, we bought them little gifts, we decorated with all the Barbie balloons and all the things, and she had a great time. She really loved it. And then a month later I walk into the living room and my wife is sitting there in the living room with this massive box, and I’m like, where are the kids? And she looks at me, she goes, and she points at the box and I’m like, oh, the kids are in the box. Cool. So I walk over and I go, rah, and I open up the box and they’re just in there. One of ’em is in their diaper and the other one’s covered in marker pens all over their face, and the inside of this box has basically become their spaceship. And I’m like, isn’t it freaking hilarious that they are having the time of their life? Yet as a parent who makes a lot of money, I assume that what my kids really wanted was a $5,000 birthday, but what they really wanted was a $5 box.
(16:46)
And so the older I get, the more I learn this stuff of I’ve created a very active lifestyle for myself that doesn’t necessarily benefit every aspect of my life. And so your intro is so good, and so maybe this episode is a warning to a lot of people are like, guys, less is more efficiency is way more important. Get your assets to provide the lifestyle for you rather than I have to right now, I’m going to rethink a lot of this stuff. I have to chase my depreciation and I have to supply all this work and effort on a weekly basis. I work more today than I ever did at a nine to five job, and that is not passive.
Speaker 1 (17:24):
It even makes you wonder, you think, man, why am I trying to save all this in tax, right? Am I only doing this just for the tax savings? Am I letting the tax tail wag my dog or save? That’s a really
Speaker 3 (17:33):
Great way to,
Speaker 1 (17:33):
How do I build a portfolio that I actually enjoy? Give me the lifestyle that I want?
Speaker 3 (17:39):
Yeah, I think it’s like winners win and you get addicted to that feeling of like, I accomplished, I accomplished, I accomplished. And so I think it’s just rewiring the brain of, hold on. There’s a phase of life where the winds are no longer what they were in last phase, which was accumulating maybe 50 rentals or 20 rentals or 12 rentals or whatever it may be, because some people, like a seller, I bought a property from two summers ago, his name is Mario. He had a 43 unit multifamily. He owned it his whole life. And I go, what’d you do for your living? I bought it from him on seller finance. He goes, this, I’m like, this is the only asset you own. You don’t have any other job. He goes, Nope, this is it. I just collected the rent off this one thing. And I’m like, wow. My mindset was so you don’t have teams and an office and a building and this and that. And his answer was, what do I want a death sentence? What do I want a prison sentence? What? And then internally, I was like, oh, dang. Actually, the way I looked at that asset when I bought it, San Angelo, Texas, 43 units, $3 million purchase price, no money down, 4% interest. And the seller gave me seller finance for 50 years.
(18:48)
That property cash flows net $11,000 a month. And so most people would look at that 11 grand and go, dude, I’m going to spend way more time with my kids. You know what I did? This is the craziness of me. And I got to rethink. What passive really means to me is I looked at that 11,000 as, oh, I can hire another high level person in my organization to go start another company. Crazy, crazy how the mindset is different. And just your intro, the way you did your intro at the beginning of this episode makes you really rethink. What are you doing? Stop moving the goalpost, just score the touchdown and consider that you’ve won the game.
Speaker 1 (19:30):
Yeah, it’s true. Well, and I know I get caught up in it too, even though I’ve created more of a simple life in a sense, even though the thing is I go to mastermind groups like you and I go to, and then it’s like, oh, well, I should be scaling up. I should make everything bigger and better. But I usually have to come back and detox to get to the point of saying, well, do I really want it bigger or do I just want it better? Can I do it simpler? I think of Leonardo da Vinci’s quote, which is simplicity is the ultimate sophistication is how can I make this simpler? How can I make it easier and more efficient? And that’s where I get happy when I come back and I end up just trying to tear up the world and I’m just running a hundred thousand miles an hour that never seems to work for happiness for my own life.
Speaker 3 (20:11):
Yeah, I’m reading a book right now from Dan Martel talking about Buy your Time back. Yeah, good one. Really great book. And he was over here in my studio a couple months ago, and I actually, I believe in coaches and all that kind of stuff. So I hired him to spend some time with me. And it was interesting. He said, you are stealing from yourself. And I was like, what do you mean? He says, you’re addicted to chaos. Because at some point, most entrepreneurs that are high level entrepreneurs, they had some sort of chaotic upbringing and they had to fight through that chaos to become successful. And so your brain has now been convinced that the only way to have a triumph is to create chaos before and then have another triumph and fight through chaos. And he goes, that’s what you’re doing. You’re constantly creating more chaotic moments for yourself that you have to fight through because you think that that’s the phase that you’re in. He’s like, we got to erase that. You don’t need that anymore. You needed that 20 years ago. You don’t need that anymore. I’m like, oh my gosh. Sometimes you just need somebody else to tell you how stupid you are.
(21:15)
So true.
Speaker 1 (21:16):
Yeah.
Speaker 3 (21:16):
So hopefully people are watching and listening to this episode, just me being transparent about, yeah, I’m a really big real estate investor. That’s really great, but these simple moments of watching my kids enjoy a $5 empty box was more impactful to my children than a big Barbie thing. And it was watching them hang out with each other and love on each other and write markers all over each other. It was like, how do I have more of those moments? Well, I have more of those moments by creating more passive income rather than focusing so much on chasing the depreciation dragon and having the tax tail wag the dog as you put it. So hopefully this has been helpful for people to hear my folly. I love this. This is great.
Speaker 1 (21:58):
It’s been a great conversation pace. Really appreciate that. Hey, if people want to follow you better or follow you better because they suck at it right now, people want to follow you right now, what’s the best way for them to do that?
Speaker 3 (22:09):
Just YouTube. We get about 5 million views a month on YouTube, and we do about a video every day, and it’s, sometimes it’s just whiteboard breakdown. So if here’s a deal I bought, here’s why I bought it. Hey, I bought a deal here and here’s how I solved the seller’s problem. So an inside look into my business, a lot more non algorithm happy, which means to me, a lot of people are trying to make the algorithm happy to get a lot of views. I just put what up? Why put stuff on there that makes me happy that I wish I knew when I was starting out. So my YouTube channel is completely free, obviously, and go enjoy that. We do a video almost every day, six days a week.
Speaker 1 (22:46):
Awesome. Yeah, I know you put out great content there, so we’ll put that in the show notes, just make sure people can connect with you. But no, this has been a fantastic conversation pace, definitely a different change of, no pun intended, a different change of pace than some of the other interviews we’ve
Speaker 3 (22:59):
Done. I think after this, there needs to be a change of pace. I need to focus more on passive stuff. So I appreciate your time, and this is awesome. This was a good therapy session for me.
Speaker 1 (23:07):
Well, I appreciate that as well, man. Well, everybody go follow pace on YouTube, but great, great points here, right? What is it ultimately that you really want in your life? How do you want your life to look? Just know that sometimes you might get caught into that trap of thinking that there’s a certain method to get you there or a certain strategy to get you there when sometimes the strategy may not be as complex or as a labor intensive as you think it might be. So really of that, especially as we’re going to this new year right now, really figure out what you want in your life and how you want your life to look. Design it the way that you for a life that you love versus the life that runs you and makes you a slave. Guys, make a wonderful prosperous week. We’ll see you later.
Speaker 3 (23:49):
And so then I find myself spending a good amount of time with my family and doing fun things, but it’s like I’m having to schedule them rather than having the free will to go, I’m going to change. I’m literally just going to cancel everything. Or better yet, I don’t even have anything on my calendar because my income is literally just passive. And I can just spend 14 hours a day with my wife and my kids and dropping them off and doing the things and coloring books. And I’ve put myself in a lot of ways in a prison, the golden handcuffs of I’ve built such a big machine that it now requires so much of me.