5 Lessons Smart Passive Investors Need to Know From Ben Carlson | Ep 41

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and residence so that together we can build our wealth while improving housing. I'm James, and this is my wife, Jessi.

Hi, I learned this week. Well, I didn't learn it. I knew it. There's a difference between washers and nuts

James: There's a difference between washers and nuts. Yes,

and I learned this because we were doing a science experiment at church and The guy who created it I was kind of talking with him. I was like, yeah, I collected all the materials It's gonna be great got the washers got this and he was like, I'm out You got what?

I was like, I got the washers. It's gonna be great. He's like, no, no, no It's nuts. It, it matters , if you explained a whole science lesson of friction or something, and edges and so

James: what's the difference between a washer and a nut?

Well, apparently the nuts have edges and it's like, you know, it's like a octagon, octagon, octagonal.

Oh my gosh, I can't talk tonight. It, it's like a hexagon or an octagon uhhuh. So it like the way that it rotate, you put it in a balloon, you spin it around, it makes a zippy noise.

James: Yeah, it has thread.

Well, but the threads, yeah, yeah, the threads twist onto something, like, functionally they're different, but for the science experiment, the outside edge has ridges, and a washer is smooth all the way around, which just flops around in the balloon,

James: doesn't make a zippy noise.

And a washer is used either as a spacer, or to add more friction to whatever is

well, on moss and stuff. The washers don't work and I'm glad I had the conversation before.

James: Lock nut then lock washer.

Yeah. All right. A lock nut is like a net with it. That would have been embarrassing. Oh, Oh, it would have flopped hard.

Cause like I had, you know, we had, I had probably like 80 kids there on Sunday doing this experiment.

Jessi: Yeah.

So I would have, we would have like put the washer. They would have been like, it doesn't do anything. Miss Jessie.

James: Yeah. So nice. All right. Talk to the expert. So you learned a lesson. I did. That's what you're saying.

I learned

a lesson.

James: Oh, nice. Read the instructions carefully. Yes. I like it. I like it. Well, today I want to talk about some lessons as well. There's this guy, his name is Ben Carlson. He is a wealth manager and he's been doing it for 20 years. And so he wrote this blog post called 20 lessons from 20 years of managing money, which is super interesting.

They're good. I'm not going to go through all 20 lessons. Instead, I picked out five that I thought were relevant to passive investors specifically. And so I wanted to run through his lesson. I'll read it and then we can kind of talk a little bit about, okay, how does this apply to passive investors?

Perfect. I think cool. Love it. Yeah. It's like the highlights. Yeah. Yeah. Exactly. So his first lesson, it's also my first, and it says, experiences shape your perception of risk.

Jessi: Hmm. Okay.

James: So your ability and need to take risks should be based on your stage in life, time horizon, financial circumstances, and gold and goals, but your desire to take risks.

Often trumps all that. So depending on your life experiences. So, if you worked at Enron, or say Lehman Brothers, or AIG, or invested with Madoff, your appetite for risk will be forever altered. And that's okay, as long as you plan accordingly.

Jessi: Hmm.

James: So real estate equivalent that would be 2008 when the market crashed.

If you were heavily invested at that time, your perception and how you think about risk is going to be different even if your life stage says, no, you should do this different or your financial circumstances say the goal is kind of the kind of thought. And yeah, there is often risks that are associated with real estate.

But again, it's not just about your financial goals, or your time horizon, or your liquidity. But a lot of it is how you've weathered previous storms. It's going to impact. So, should you

try to counteract that? Because, I mean, it doesn't seem wise. Let's say you did go through that experience, and you lost a lot of money.

But now the market is different. Yeah, perhaps your life circumstances are different.

Jessi: Yeah,

and it would be beneficial for you to invest in real estate And now you're just so scarred from this experience that you're like, oh, I can't do it Like it seems like you should there should be a way to overcome that For you to realize like, no, this actually is good.

Yes, that happened. But here's why I can trust the market now. Yeah.

James: Like I've got a friend, he he was scammed out of his money. He invested in a real estate deal and the guy walked away with it all. Stole it all essentially. And so he's like, I don't invest with anybody anymore, ever again. And I'm just period.

And that's how he's done it. And instead he, he became an active investor. He's like, I will manage, I will be the primary owner of everything. That was kind of how he decided to deal with it. Yeah. So like that kind of stuff happens. You do compensate. Yeah. I would say like you still want to balance like that out with some market fundamentals and, and you can get, and you can do that by like looking at data.

And I think it's important to ask, and I wrote here, is the deal structured to weather downturns and does it account for macroeconomic shifts like raising interest rates and inflation? And so I think if, if you can. Acknowledge at first, yes, this thing happened. It's clearly coloring in my perspective and what I think, and then say, but at the same time, I realized this is a good investment.

And so let me, how can I structure this so that it takes account for the downsides? Again, my friend, the way he structured, it goes, well, I'll just be the majority owner of everything I ever buy. Sure. Problem solved. And, and so I think you could have those same kind of things. If you had a deal that didn't go South, it was like, well, why not?

Oh, I didn't have a reserve fund. All right, fix that.

Jessi: Yeah.

James: I had floating point debt. Okay. Fix that.

Jessi: Yeah.

James: It may limit the types of deals you can do. Your returns may not be as massive. But that's okay, as long as you're being explicit about it. Which, that's a good point, like. That's his thing, it's not about, for him, his thing was like, this is more about like, what's in your head.

Yeah. As opposed to the numbers and where you're at. It was like, these experiences, they matter, don't ignore them. Yeah, and I

mean, you do have to walk, walk that pathway of mitigating risk and thinking through what am I comfortable with or not comfortable with. Cause you don't want to make yourself miserable or anxious all the time.

Cause you're just like, am I going to lose all my money?

James: Speaking of all your money, this is lesson number seven for him. I got a question for you. Would you like winning the lottery

Jessi: or a better

James: question? Do you think winning the lottery would make your life better or worse?

It's an interesting question. I think I'd be annoyed because I have to pay so much in taxes.

All

James: right, whatever. I mean, yeah, but who cares, right? If you win 70 million dollars, even if you have to pay half of it in taxes, you still got 35 million.

Yeah, I think it would make my life better. Like, okay. All right.

James: His number

definitely opened up some opportunities for us.

James: Ah, he says here. Number seven, getting rich overnight is a curse, not a blessing.

Oh,

James: man. And he says, I'm convinced that the people who build wealth slowly over the course of their career are far better equipped to handle money than those who come into it easily. It means. More to those who acquired wealth through patience and discipline.

Well, I feel like your question was a little unfair because I'm like, yes, Of course, I agree with those principles.

Like if you if you learn the value of working hard and you know increasing over time You do you do learn better ways to manage and better ways to yeah

James: I think he's trying to help those people who are like they go. Well, I wasn't a trust fund kid I didn't have a massive inheritance

if you're using that as an excuse to say if only me I've won the lottery, then I could do X, Y, Z.

That's like, okay.

James: I've always, I've tended to think of money as a multiplier. It's whatever, wherever your heart is, whatever habits you have. Whatever your disciplines are or aren't, money will magnify that. So if you are a selfish, a selfish, yeah, selfish, greedy person, just having more money, you're going to isolate yourself against everyone.

Cause you'd be afraid that everyone's trying to steal this hoard that you now have. If you have always been a generous person, you will treat your money. With generosity, I think if you have never been wise with your money, you always spend more than you should. I think you will get yourself in a lot of trouble really quick because you will, you'll buy a house more than you should.

You'll go on more vacations, you'll buy a bunch of liabilities and then forget about the fact that you have payments later. Yeah. And so I think that's, I think that's it. I think the other thing though, to keep in mind from a specific real estate standpoint is. That it's not about trying to hit the jackpot with one deal.

You and I have done that, but that's not the goal. You're not trying to like go big. It's all about building sustainable wealth over time, getting those eight to 12 percent returns over and over and over again and letting those compound. That's a disciplined approach that will absolutely lead to to success and will actually be a blessing.

And I mean, you do have to acknowledge that. But it takes time and effort. You know, if you, if you, if you assume more risk going back to the first one, you might get better returns faster, but it's like a known quantity to be like, okay, we're just, we're going to stay steady and find good deals and, and get consistent returns.

Like that's going to lead down a good path.

James: Yeah. And I think too, part of it is finding the joy in the journey, like enjoying that investment process. Yeah. So I'm gonna, I, this is like, I haven't shared this with you. There's a home that is for sale.

Jessi: Mm-Hmm. .

James: Okay. It is. So, a few weeks ago we talked about our experience of our house on First Avenue.

Yes. The one that was across the street and over to when we were facing away from our house. Okay. To the left. Uhhuh. , where it had like, it was that yellow house. Yeah. That is going for sale now.

No word.

James: Okay. The,

and it was one, one of the ones they. Fixed up real nice. Is that no, no, no. It was the different

James: dad and the son, the dad worked at the rental yard.

It was on the corner. Okay. Yes. Yep. Yeah, yeah, yeah. But let's see, my point is so like, we have a story there. Cause that house was part of our investment. That neighbor was part of our journey. And that's part of the, like, that's part of the blessing was like. Getting to meet those folks and and just getting to know them and getting to know the neighbors and to see houses transform and change over time.

And you remember like Katie corner, like it was that older couple where they spent so much time in their yard. Like they were meticulous about getting the grass, right. But like, we remember that, you know, like, Oh yeah. And you know, yeah. And so I just think I think it's just appreciating that journey.

And that's one of the things that I actually personally really love about real estate is you get a bunch of stories like that. It's very tangible as opposed to a stock market or commodities. Like there's no cool story behind gold. It just sits there. But with real estate, like, no, there's people, there's stories, stuff is happening.

Yeah. I

think this is like a side point, but it's something to acknowledge about real estate is I think often people assume, Oh, it's just a, it's a business. You know, there's numbers and investments and, which is a good assumption, but it's really a people business. Like if you think about it, real estate either houses homes or businesses where people work.

And so it's like, you're going to interact with people and build these stories. You can't just go into it thinking, Oh, it's just numbers. You know, I can crush the numbers. It's going to work out. It's like, well, someone at some point has to do it. Interact with the people who are going to use this. Yeah.

Yeah, that's fair property.

James: That's fair. All right Lesson number nine or number three on our list. Yeah, okay says the biggest risks are always the same Yet different what? All right, let me explain Okay, the next risk is rarely the same as the last risk because every market environment is different so The, like the 2008 risk probably won't happen again.

The COVID risk probably won't happen again because the environment's different. But on the other hand, the biggest mistakes investors make are often the same. Timing the market, recency bias, being fearful when others are fearful, and greedy when others are greedy, and investing in the latest fads. It's always a different market, but human nature is constant.

Hmm.

James: Yeah. Makes

sense.

James: So again, he's saying like the biggest risk is the psychology. And your experience and how you're letting other people. So like for passive real estate investors, right? There's some obvious risks, right? You got vacancy, you got property values, not appreciating. You got repair costs, skyrocketing.

We're just the surprise ones, but the big ones are the psychological ones where you're trying to time the market. Let me buy this thing perfectly. And again, we've had some, we've sold on pretty good markets for the buying side of things. We're like, ah, whatever. Like when we got funds, we're finding a deal.

That part doesn't matter. Yeah. And then when you see a booming market, people might think like real estate's going on forever or like in 2008, right? It's just like, this is it. Real estate's over. It's like, no, it's, it's not. Instead, you got to look at those cycles and. Focus on fundamentals. Like I was saying, we don't necessarily care what the market's doing.

If there's a property where the numbers make sense, we're in, like we're going to buy it. And so it's like, cause it's, it's based on those fundamentals.

Yeah. You know, over time it's going, it's going to even out.

James: Yeah. Yeah. And as a passive investor, same thing. Like look at the fundamentals, pay attention to the underwriting.

If those look good, awesome. Get in. If they don't look good, I don't care what everyone else is saying. I don't care if everyone says the next big thing or single or short term rentals, even if it's like, well, this, I don't know, even if it's a loser of a deal, we're losing money. Like, yeah, it doesn't matter because short terms are the best.

No man. Like, that's not a good reason to get in. Don't chase the fads. By the way, like for short term rentals, it's actually better to invest in markets where they've already passed laws against it. Because they've already passed laws that that unknown is no longer, it's now known. Whereas if you get a short term rental in a city that hasn't passed a law, chances are in the future, they will,

Jessi: and

James: whatever you were doing won't work and you could watch your property value drop.

But if you get a short term rental in a place where they're not allowed.

James: We're just heavily regulated. Oh, it's a different.

All right.

James: Yeah. Yeah.

Yeah.

James: Cause that's your biggest risk, right? You buy one and then they say they're not allowed anymore. You

can't do that. Oh no, you're

James: hosed. And even if you're still allowed to use it.

It may not be grandfathered in for the next person, so your profit value goes down. So So yeah, that's Yeah, it's all about, it's all about what's in your head. Yeah, markets and stuff change, but our, the way we behave doesn't. Again, focus on fundamentals. Don't get caught up in whatever the latest up or down is.

It's kind of, I mean, it's kind of like, what it makes me think of is like, kids. Kids in school, and they're, and it's like, Just, just run your race, you know, like do your, do your thing, worry about yourself, like, don't get influenced by all the other people around you going, Oh, the coolest thing right now is this, or you need to buy this thing.

Or you like, we're saying this word now, or like, you know, it's like, yes. Okay. There's going to be trends. You're going to be affected by some of those things, but just be smart. Like pay attention. It's not the end all be all like, you know, there's, there's good norms that you can stick to.

James: Yeah. Yeah. Like, to go with that example, it's, man, treat people the way you want to be treated.

Yeah.

James: Ultimately, be honest. Keep promises. Like, those are good fundamentals. No matter what the trends are, you will still have friends and they will still like you. Yeah. If you do those things.

There you go.

James: So, yeah. It's kind of that same, yeah, keep the fundamentals. Mm hmm. I, I've shared this, I, I've, I once did jiu jitsu, did it for a few years, and I remember we had a black belt visit, and And I remember the thing he talked about was like, he goes, he always taught the, the white belt class.

That was his thing. He goes, cause I want to repeat the fundamentals, do the fundamentals, do the fundamentals. And I remember people would ask him like, well, what about this crazy move? He's like, no, I don't do it. I do the fundamentals. He goes, and I win every single time. He goes, I don't have to do that stuff because I do the fundamentals and I wait for you to get bored and mess up and then I nail you because I do the fundamentals.

Yeah. And it's kind of that same, kind of that same idea. Right. I was like, yeah, man, just do with the fundamentals. It's it's what works. Yeah. Other story. I remember I was talking with the guy who had your job before you did. So there's a ministry pastor and he made some statement about like, yeah, we're just talking about like, you know, it's just basic theology and basics of how to be a Christian.

And I laughed and went, man, could you imagine like if you actually did what you're teaching, like you'd be the best Christian ever. Yeah, I guess that's true. I'm like, yeah, man,

Jessi: like fundamentals, like

James: that's the hard part. That's where we get, we get bored with that and that's a problem because then you go off the track and you get yourself in trouble, you get over your skis and yeah, every once in a while you hit a home run, you do something amazing.

Yeah, I get it. But if you stick with fundamentals, like only invest with sponsors who like they're going with the fundamentals, they've got good reasons for it. There's a good story, good numbers. There's, there's good protection for the downside, all that stuff. It's good. It's good. All right. Number 11 on his list.

Number four on our list. Okay. It's a little bit tongue twister. A product is not a portfolio and a portfolio is not a plan.

Okay. I'll

James: read that again. So a product in a single house, a single investment, a single stock is not a portfolio and a portfolio is not a plan. So he says, the longer I do this, the more I realized that personal finance and financial planning are prerequisites for successful investing.

And so for passive investors, I think it's easy to get fixated on individual deals. Right. I know I've had this one. I've had deals brought to me go, Oh, this is super cool. This is a really interesting thing. You're doing something really cool here. And I can get distracted. I can get sucked into the interesting mess of the deal.

Does that make sense? Yeah, I think so. And it doesn't matter if it's a duplex or multifamily or storage. I've okay. How about this? I've had a lot of people tell me like, Oh yeah, storage is awesome. I want to get into that. And, and I think that's people confusing the portfolio for a plan, you know, instead, what you want to say is like, well, how does the, say a storage unit or whatever fit in with my overall wealth building strategy, chasing a high cash on cash.

Yeah. You make, you make the plan. first, and then you, and then you work towards it, which I could see it, I could see it either way, you know, cause it's like, I don't know. It's kind of like if you, if your plan is to find good deals and it's like, okay, here's another good deal. Like let's go that direction.

Here's another one. Let's go that direction. So it's, there's some nuance there to like, yeah. Okay. What? Figuring out what you're actually wanting to invest in or what you're wanting to accomplish with investing first. I feel like that's what he's trying to, to pull out of this. Yes. It's like, don't just go out there and chase deals.

Like actually think through where do you want to end up five years from now, 10 years from now, 20 years from now? Well, and I think

James: yes. And he would say, and even if you have a bunch of deals, don't think like you're like even just chasing multiple good deals. In and of itself, you go, that's quite enough.

You got to really say like bigger picture. Like for example, when we first got started, our plan was really straightforward.

Jessi: Cashflow. We

James: want things to cashflow. We want it to replace our job income. Like that was the plan. That was the strategy. And we pursued therefore a portfolio that

matched

James: that, which meant we pursued products or properties that fit that portfolio.

Jessi: And

James: then once we hit that. I went, okay, does it make sense to shift that plan now to looking a little bit beyond if I'm not as worried about the cashflow because I'm already paying for our daily stuff. Now I can shift it to more of an appreciation type of thing. By the way, I would say if you're younger and you like your job, go for appreciation.

Don't go for cashflow. Get the big wins, get a chunk of change, and then convert that into cashflow and real estate When you are in your mid thirties, mid forties, stuff like that. Maybe my advice. And again, I would say if you're older and you have a bunch of capital sitting around, think more about those appreciation plays.

Like it's a weird, it's a bell curve. I think when you're, if you've got cash flow from somewhere, either a job that you're okay with or from real estate, I would focus more on the appreciation. That's what I would do. And, and when you reach a point where you go, okay, I've got a bunch of capital built up, that's when you want to.

Turn it into cash flow. That's kind of my That's kind of how I think about it, I think. If you hate your job, I don't know. Go for cash flow. I think that's something that would have changed about how we did it when we first got started.

Yeah, that's what I was just thinking. We didn't do that.

James: I know, I like And I would have changed that, I think, because I liked my job.

I genuinely enjoyed it.

Jessi: And

James: that paid for everything. We didn't need to do the cashflow thing. I think we would have been better off, better served to do the appreciation game, to get a big war chest of, of money and then like do some big deals. And I think our cashflow today would probably be two to three times the size of what it currently is.

Yeah.

Huh.

James: Yeah. I think it was

a, I mean, It worked either way. Clearly it's

James: fine. But but yeah, yeah. So most of the deals I'm pursuing now are cashflow or our appreciation deals types of deals, because that fits with my bigger plan of going on more vacations and doing house projects requires cash. Yeah.

Oh yeah. It's awesome. Okay. Last one. You ready for this? Ready. This is number 19 on his list, but number five on ours. Optimism should be your default. Yeah. I thought this was an interesting one. It saddens me to see an increasing number of cynical and pessimistic people every year.

Jessi: I

James: understand the world can be an unforgiving place and things will never be perfect, but investing is a game where the optimist wins.

Shocker. I liked that one. I thought it was an interesting actually listened to on a podcast. That's how I found out about this article. And then I went with, went and read the article and a statement he said on there was, he goes, You would only invest if you're an optimist. Otherwise you wouldn't invest in it.

So inherently you have to be an optimist. And so you have some sort of, um, mental gosh, what's the term for that? It's just like a disconnect where if, if you're investing, that means you must think of do better. But at the same time, you're like, the economy is going down. Everything's going to pot.

You're like, yeah, that's just like, yeah, there's a dissonance there that is like, Yeah. I can't work. So it's gotta be like,

because when you're investing in something, you've, you've got to see the upside, otherwise, why would you do it?

James: Yeah.

Like it doesn't make any sense.

James: So I think it's helpful to in some ways, ignore the headlines or think of it this way, these headlines are indicators of things like everything's never going to go all the way down.

That's just not a thing. They will dip down. There are cycles, they will go up. And so the question is, instead of. Having a cynical attitude, be like, no, I'm an optimist, things will be good. How do I capitalize on whatever's happening right now? You know, if things are falling, okay, there's opportunities there.

Jessi: Yeah.

James: Somehow. Like for me, right? Interest rates rose up considerably. And I was thinking about this the other day, where I was like, yeah, I've got some Commercial properties and my interest rates reset to higher rates. I was kind of like, yeah, you know what? I don't need to be upset about this. Like that's the game I got into.

This was the risk I took. It's fine. Yes. My cashflow is a little bit less. It happens. Thankfully I had enough margin. We're okay. But at the same time, looking at current deals today, the cashflow just, it tends to not make sense. And so that's where I went, okay, I got to switch. I got to take advantage of this.

There's an opportunity here to go. I can buy and fix up properties, not worrying about the cashflow, worry about the appreciation game. And then eventually they will not go all the way back down to where they were, but they will fall back down again. In which case that will be an awesome opportunity for other people to come in and buy those because they're like, cool, now I can afford it.

And that's where I'm going to get that appreciation bump out of it. So I think there's like,

Jessi: yeah,

James: I think, but it's that attitude of in the long run, everything will be okay. Real estate does tend to go up. So, even if it's going down, or interest rates aren't what I want, or inflation, whatever, like, how do you take advantage of that situation?

Well, it all works together, too, because if you're, if you have mapped out your plan, that you're like, okay, this is our goal, this is what we're trying to accomplish, and you're finding deals that fit within that, you'll feel comfortable with going, okay, yeah. I feel good about this. I, I realize I might be making sacrifices over here, but it's going to work out over here because I've worked through it.

I know the numbers, I know the market, like I'm, I'm good with this.

Jessi: Yeah.

So it all, it all works together.

James: Yeah.

Yeah,

James: I like that. So those are the five lessons that I think if you're smart, you will heed those. Yeah. As a passive investor. And I think Ben has clearly a lot of experience and so I appreciate him sharing his thoughts.

Yeah, I'm kind of curious to

know what the other 15 were, but,

Gotta go read the article. Yeah, exactly.

James: I will, I'll try to remember to link to it in the show notes. So that you can find it cause it's good. But yeah, I thought those were awesome. And how you can apply them to passive investing.

Nice.

James: Very good. Sweet. So if you enjoyed this podcast, we would appreciate it if you left a quick rating and review wherever it is that you listen to it so that we know that you thoroughly enjoyed it. And if you are interested in taking the next step in investing with us, you can do that by checking out furlo.com. So with that, thanks for listening and have a great day.