MB 081 - The Passive Income Investor - With Tim & Tom Black

There’s more than one way to skin a cat, and though we spend a lot of time on the podcast addressing aspiring syndicators, there are other routes to financial freedom via real estate investing. High net worth individuals who are interested in getting a little skin in the multifamily game should consider the benefits of passive investing. Regardless of approach, the end game of apartment building investing remains the same: Permanently replace your income and get out of the rat race for good!

Dr. Tom Black (also known as The Passive Income Physician) was working as a busy emergency doctor in a high-volume trauma center. Yes, he was making good money, but he was working insane hours and he rarely saw his family. Tom was financially secure, but far from financially free—and he was fed up with sacrificing his time for money. Already enamored by the cashflow potential of real estate, Tom purchased several single-family homes and even tried his hand at commercial real estate before stumbling into his first multifamily deal, a 305-unit in Arlington, two years ago.

Tom’s brother, Tim Black, enjoyed a 32-year career in entertainment, retiring as the COO of a large hospitality company in March of 2016 when the business was sold to private equity. Eventually, his brother convinced him that multifamily was the best means to making your money work for you, and together they started Napali Capital. The firm has grown quickly, and the Blacks currently have 1,000-plus units in assets under management. Today Tom and Tim explain why multifamily is the best choice for passive investors, how to assess the risk profile of a multifamily deal, and the characteristics to look for in a potential syndicator. Listen and learn the returns a passive investor can expect from multifamily, the skill set necessary to become a successful investor, and the staggering tax benefits afforded by the platform.

Key Takeaways

[2:41] What prompted Tom’s involvement in real estate

• Poor student in HS, gained confidence in Navy
• Top of class in medical school
• Couldn’t sell house after finishing residency
• Rented to incoming resident
• Enamored with cashflow
• Busy doctor in high-volume trauma center
• Making good money, but sacrificing too much time
• Bought land in east Texas for commercial development
• Resigned from practice and moved to pursue real estate

[5:51] When Tom identified multifamily as a ‘way out’

• Bought foreclosures in Houston during downturn
• Single-family was hard work
• Studying economies of scale
• 16-unit commercial development offered buffer in budget
• Multifamily could take him to next level

[7:23] Tom’s shift from single family to commercial real estate

• Cashflow limited to specific markets, required travel
• Single-family very competitive
• Saw vacant land, wanted to be ‘master of own destiny’

 [8:19] Why Tom wanted out of full-time medicine

• Concept of security vs. freedom
• Medical practice not sustainable
• Doctors in their 70’s still working

[9:25] Tom’s first multifamily deal

• Moved to Dallas for medical directorship
• Attended real estate investing lectures
• Stumbled onto 305-unit off-the-market deal in Arlington

[10:29] The difference between commercial development and multifamily

• Developing is rough, many working parts
• Multifamily offers formula for success, mitigated risk
• Evidence-based reasoning appealed to Tom as doctor

[13:31] Tom’s advice around quitting your day job

• He continues to work in medicine one day/week
• Don’t be in a hurry to quit until achieve cashflow

[14:34] How Tim came to work with his brother

• Poor student, but excelled at leadership
• 32-year career in hospitality/entertainment
• Retired in March 2016 (COO of large hospitality company)
• Started Napali Capital together, capitalizing on each other’s strengths
• Firm has grown rapidly, responsibly
• Education is foundation of their business

[16:54] Why multifamily is the best choice for passive investors

• Money works for you (cashflow, appreciation, depreciation, amortization)
• Lack of affordable housing, cultural trend to downsize
• Multifamily is stable and tangible

[19:22] How to assess the risk profile of a multifamily deal

• Depends on syndicator, underwriter
• Napali Capital is very risk averse (2% raises year-over-year)
• Tim & Tom don’t offer huge returns (9% cash-on-cash)

[20:41] The returns a passive investor can expect in multifamily

• 9% cash-on-cash
• 90-100% return in five years
• Napali always exceeds projections
• 130% in 24 months on 305-unit

[22:22] The skill set necessary for a passive investor

• Ability to read P&L
• Knowledge of underwriting
• Understanding of costs (rent rates, insurance)
• Consider a mentor

[23:58] The Black’s advice around choosing a syndicator

• Look for trust, integrity
• Communication is key
• Transparency (share financials)
• Invest alongside you

[25:54] How to pacify the passive investor’s fear around risk

• Trust the track record, pedigree of the syndication team
• Stock market presents much greater risk

[27:06] The staggering tax benefits of multifamily

• Stock market, mutual funds require payment of capital gains tax
• With depreciation, taxed income is either substantially less or zero

[30:10] Tom’s final tips for aspiring multifamily investors

• Get off the sidelines
• Dip your toe in the water (crowdfunding)
• Get educated

[31:09] What the Blacks are excited about

• Growth of firm
• Dynamic of relationship

Connect with Tim & Tom Black

Napali Capital

Email Tim: tim@napalicap.com

Email Tom: thomas@napalicap.com

Resources

The Passive Income Physician Blog

The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth by Thomas Black MD

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