Ep 570 Why Exited Founders Lose Money Investing with Justin Donald, The Lifestyle Investor

Speaker A: Hi there, and welcome back to another edition of Built to Sell Radio, a podcast designed to help you punch above your weight in a negotiation to sell your company. I'm executive producer Colin Morgan, and this is an after the deal episode where we look at life after the exit. Challenges and opportunities that come when work becomes a choice, not a requirement. And today, we're looking at what happens to the money once the wire lands and why so many founders who do everything right building their business, get it wrong investing the proceeds. Here's the trap. The quality that got you the sale, the optimism, the conviction, the belief you can fix anything with enough effort are the exact qualities that get exited founders into trouble with their money. Every deal looks like a good deal to someone who has spent 20 years starting from. Yes. Justin Donalds had watched this happen more times than he'd like. He built a mobile home park portfolio that covered his cost of living by 34, wrote a Wall Street Journal bestseller, the Lifestyle Investor. And he spent years studying how billionaire family offices actually allocate money. He's also made the mistake himself. He lost a million dollars in a deal his own lawyer told him to walk away from. Um, John asked him, what do you tell a founder who has reinvested everything in the business for 20 years is about to receive a $10 million check? And Justin's answer starts with the two hardest words for an entrepreneur to hear. Do nothing. Without further ado, here is Justin Donald. Enjoy.

Speaker B: Justin Donald, welcome to Built to Sell Radio.

Speaker C: Hey, thanks. Glad to be here, John.

Speaker B: Yeah, it's going to be a, uh, great conversation. I've had a chance to kind of get to know you indirectly through some of your content. So tell me, how did you kind of get into the world of lifestyle investing? I know you had some entrepreneurial experiences as a, as a young man, but then I, I think, uh, your start was in consulting, was it not?

Speaker C: Yeah, yeah. I mean, I. Early days, I really enjoyed, you know, sales consulting. Kind of built a consulting company. Um, but this whole notion of lifestyle investor, I mean, it was an evolution over time, but really like it, it came into fruition for me, um, back when I was, let's see, I was 34 years old, uh, 46 now. So I'm giving away my, my age. I'm getting older and older, but, uh, you know, 12 years ago, I took a, A, uh, year off and really just traveled the world. And, um, I didn't have to work at that point in time. We'd built passive income, and, uh, it gave me kind of a roadmap um, to actually what I should say is 12 years ago I officially had financial, ah, freedom. The trip was a couple years after that, uh, because I was trying to figure out what's next. And I think as an entrepreneur I just had the experience of this business that I say I'm an owner of, but really it owns me. Um, and there's getting out of the day to day can be hard even when you hire great people. Um, and so I just wanted to get to a point where I had financial freedom that had nothing directly tied to my time. Like, I wanted my time to be my own. I wanted to own my calendar. I didn't care how much money I made. I wanted to be a time billionaire. Right. Like own as m. As much of my time as I could. Yeah. Ah,

Speaker B: I love that expression. Take me back though. How did you make your money?

Speaker C: Uh, so early days it was in sales and consulting, um, you know, before that. Uh, so I, I did get started investing probably 26 years ago. So I've always had a little bit, uh, on the side where I'm, I've been earning from that regard. Um, I've started a number of companies over the years. Um, one of them was the consulting company, uh, and had a small, um, little exit, nothing, nothing major. Uh,

Speaker B: ballpark, uh, how big can you,

Speaker C: uh, uh, just under seven figures.

Speaker B: Okay, so that was the consulting company.

Speaker C: Yep. But it gave me the ability to um, really like had some seed money for the next thing. So I built a single, uh, family home maintenance company that really did well and took off. That uh, is primed probably to exit in next year in 2027. Uh, we raised VC money for that one. Um, I started a few other things. I bought and sold some companies. I bought and sold a dog training company. I bought and sold some, um, some other like mom and pop type businesses, some franchises. Um, but along the way, you know, most of my passive, uh, income came from building a real estate portfolio, specifically a mobile home park portfolio. And so I built a team, uh, and scaled that business without raising any money. I just made investments as I had the capital to do it. And the cash flow on those was incredible. And so it allowed me to continue to buy more. Uh, it allowed me to even diversify. So as the, the cash flow, you know, exceeded my cost of living, uh, my lifestyle income, I had all this surplus income that I could either buy more parks with which part of it went to that, or I could diversify, uh, or I could put some of that surplus to, towards impact know, to Doing good in the world. And so, you know, each of those three things kind of happen. And we continue to build the mobile home park portfolio, we continue to diversify into real, different real estate, um, then into private credit, into private equity. Um, really the, you know, alternative investment side of things. Um, and you know, today those are the areas that I'm most actively involved in investing in. So, uh, I've, I've had, you know, investments that have been kind of growing for 25, 26 years early, uh, days it was more on the public side of things. But 15 to 20 years ago, you know, is when I really started investing in the alternative investments.

Speaker B: Walk me through the economics of buying a mobile home.

Speaker C: Okay, well, a mobile home park.

Speaker B: Sorry, not a mobile home. A mobile home park should be clear.

Speaker C: Um, uh, yes, because each of them are completely different economics. But, uh, basically you're probably going to put 20% down, um, depending on your bank, depending on if someone's going to carry the note. If you can get some seller finance, maybe it's as little as 15%. That's the least amount I put down. Maybe it's as much as I think one deal I put down 35%, which isn't, uh, you know, that for me that wasn't ideal. But in order to get this deal done, that's what this bank kind of wanted. So that's a stretch there. Um, I generally like to buy parks with a three point spread. So the cap rate, uh, to the interest rate is 3 percentage points. Um, you know, if, if in a worst case scenario it's at 2%, but I can, I can add value, I can raise rents, I can build occupancy, and I can push it to a three. And inside that first year, um, I would consider that a win. I think it's hard to find that type of spread in most real estate, um, mobile home parks. We did it with virtually every single property that we did, which is around 20.

Speaker B: Explain to me what a cap rate is. I'm not a real estate guy, so I know nothing about that.

Speaker C: So if you bought a, uh, a park in cash, that would be the annual return that you would get.

Speaker B: The cap

Speaker C: rate.

Speaker B: Got it. You bought it for a million bucks and generated $90,000 worth of revenue, your cap rate would be 9%. Am I getting that

Speaker C: accurate? Yes.

Speaker B: Okay. And then if you're borrowing money at 6%, you've got that magic 3% Delta or what? That's what you were looking for?

Speaker C: Yeah. And I want to say today it's harder to find that it's not. But it is much harder to find that because interest rates are a lot higher. Right. Um, but you also have more baby boomers that own mobile home parks than any other real estate asset class. And so I just got, um, you know, early days, I got in this, I'm a little spoiled because there wasn't much competition when I kind of got going. And so three point spreads were kind of commonplace.

Speaker B: I'm assuming it's, I've heard, you know, people doing the same in um, storage, like, uh, what do you call it? The storage. Self storage. Self storage, yeah. Yeah. Similar deal where they're, they're looking for cap rate minus the interest rate.

Speaker C: Yeah. And let me just even break it down simpler.

Speaker B: Yeah,

Speaker C: if I have a three point spread, I probably have a, uh, 20 ah, percent cash on cash return or greater. So

Speaker B: explain that to me. 20% cash on what? What do you mean by

Speaker C: that? So if my down payment, let's say my down payment is 20% on buying this mobile home park, um, well, on those dollars, you know, let's say I put down $100,000 and I bought this park, uh, well, if I earned a 20% return on that $100,000, that's my cash on cash return. It's the cash I put in, it's the return I made on that cash. So that would be a typical marker, uh, that you would use to evaluate a deal.

Speaker B: Who guarantees the debt in a mobile home?

Speaker C: It depends. Uh, if you're going with a smaller bank, you know, probably the person does. So I have guaranteed plenty of debt. If you go with a bigger bank, you can do non recourse. If you do agency or if you do, uh, conduit cmbs, you can, um, you know, you don't have to guarantee it. It's all, you know, non recourse.

Speaker B: Got it. How big a portfolio of these things did you own?

Speaker C: Ours is probably top 75 in terms of size in the nation. What

Speaker B: does that mean in terms of like overall?

Speaker C: About 1500 units.

Speaker B: Okay. I have no idea what that means in terms of size value, but

Speaker C: yeah, well, it's different. You know, in apartments, uh, the number, you know, to be a top 100, the numbers can be much greater. Right.

Speaker B: M.

Speaker C: Uh, in mobile home parks, it's just less consolidated, less competition. Um, but around that 1500 unit, you know, you're for sure in the top 100 and you know, probably, um, closer to top 70 to 80, I would imagine.

Speaker B: So each unit would be like a bay that a mobile home could park In.

Speaker C: That's right.

Speaker B: Got it. And what do they pay to park? I guess it varies based on location.

Speaker C: Varies? Yeah, um, anywhere from, you know, 150, 200 bucks on up to 1,000 plus dollars, you know, if it's a hot market.

Speaker B: Per month.

Speaker C: Per month, yeah.

Speaker B: Got it, Got it. So, so this is a pretty big portfolio. Uh, did you syndicate these loans? Did you have other. Not syndicate these? There was just you then. Excess cash. So you've got this big, um, flow of incoming cash is there. So you're paying down the debt. And as long as the cap rate exceeds the interest rate, there's excess cash flow. I guess that's the magic of the 3%. Is that right?

Speaker C: Yeah. Well, and your cap rate, you're really going to kind of measure that more on, you know, um, you're selling it or buying it. I, um, mean, more than anything, you want to have like a, a good pro forma of what it's going to look like to cover the debt service. Like, what do all these numbers actually look like when it's said and done? So you build your model and you see if that's it. You know, you kind of check against it in year one, you try to make improvements, you try and grow revenues, you try and cut expenses and see what that looks like, um, for year two, I mean, in year one as well. But like, each year you're doing that. So for me, more than anything, I just, um, I want to have positive cash flow above and beyond the debt service. So I will never buy real estate where, um, I could be in a position where I would have to sell it in a bad market. I'm only going to buy things at cash flow enough to cover the debt service, give me plenty of surplus income, which gives me that buffer, um, just in case something goes wrong. But I've never been forced to sell. I've never been in a situation where I've even been close to having to sell. Um, and so it gives me the ability to time it the way that I want to time it. Right. I think most people, they invest when they have bad experiences in real estate, they're forced to sell in a bad market, they lose money. Now they don't like real estate. Oh, that was a bad deal. No, there wasn't enough cushion built in. Right. None, um, of us can predict a Covid or a GFC or anything. So. So do you have enough, you know, margin of, of error and enough, you know, extra cash flow to cover whatever could come?

Speaker B: I'm, I'm glad you Brought up Covid, uh, and gfc, because I was, I was thinking that, I was thinking you've got great geographic diversification because you've got these mobile home parks in different parts of the country. But if, if everybody stops cruising around in a mobile home, nobody needs to park them. Did, like, I guess. How do you think about, uh, um, concentration, risk, as an investor? On one hand, I could see mastering a category like mobile homes is unique than self storage is unique than multifamily. But it comes with the quid pro quo that you are concentrated in that sector. Like, how do you think about specialization versus risk? Do you know what I'm asking?

Speaker C: I totally know what you're asking. And, um, I also know that you probably have less exposure up in Canada where you're based to mobile home parks. And there are mobile home parks up there, there are RV parks, There's just a smaller percentage of them. Um, but I just want to clarify, you know, RV parks are very transient. You know, people come and they go. Mobile home parks, people just stay for. As a general rule, it's very.

Speaker B: I didn't, I didn't understand the difference. Okay, that's super helpful. I was thinking RV park. You're actually describing a mobile home where they. It's actually a physical. That's right. You're not picking it up and moving it every five minutes. I got it and

Speaker C: I've done both and I've got parks that have both, you know, in one. So there is some overlap for sure, but mobile homes aren't really mobile, you know, and so, yeah, you really have, um, you know, kind of a captive tenant base because the cost to move just doesn't make sense. But you're also the cheapest form of, of rent out there. So it's, you know, it does create a win, win there across the board. But to answer your question on, you know, like, when I think about, you know, I've been studying family offices for, you know, over a decade now as I've, um, you know, had a number of exits over the years and have a lot of, you know, free cash flow every month. Um, and so we've been building this out for ourselves. And as I study the data, as I study what my friends are doing, you know, I have access to a lot of single family offices, to a lot of multifamily offices. Um, I've hired them before, I've used them. Um, and so one of the things that's very clear, that's very evident, is that most people make their wealth via concentration, right? Their business, their real estate portfolio, whatever it is. Um, but the wealthy really grow that wealth, um, with diversification. Right. So that's kind of the key. And so for me I was over concentrated early days in mobile home parks. I didn't have um, the diversification and other things. That's why I started diversifying into, you know, self storage and office and retail and land. Some of these I don't like as much because they don't cash flow. So I, I got a taste. I either liked it and kept doing it or didn't like it and stopped doing it. But uh, did some multifamily, did some industrial. So the things that I was pretty heavy in, I, I did a ton of mobile home parks and I've done, you know, I had a stretch of about 10 years where I did a lot of multifamily. Industrial's been a really big win for me. So you know that, I mean between mobile home parks and industrial, that's probably, you know, my biggest two holdings. I know it's most certainly my biggest two holdings with um, I don't know that I'm in much multifamily anymore. I got out of most of it uh, early on as I felt like the, as I looked at the spread, it was a negative spread and I could not wrap my head around any of it and I just stopped investing in it and all for the better.

Speaker B: Help me square something. You know, even the name, uh, lifestyle investor. I guess I'm, I'm thinking there does these layperson, not a real estate guy coming at it, saying doesn't sound anything enjoyable but managing a bunch of mobile home parks, my, my mind goes to oh gosh, like, who tells the dude with the like stereo too loud to turn it down after 11 and what are we gonna do with the clogged Toilet and Bay 3? Like all of it sounds headache beyond the mat. Like and then you talk about industrial and thinking like all of the zoning, it just sounds like a massive headache. The opposite of what I think of passive investing. So disabuse me of this, make me feel better about the hassles of real estate.

Speaker C: Yeah, I think there's two different camps here that we'll talk about. One of them is going to be like, you own the property, it's deeded, it's in your name. Um, and for that I've just always built teams and I've built systems and protocol and this stuff runs without, um, I have not been involved in, you know, for the last 10 years I've been um, you know, I don't know that a month goes by that requires more than a couple of my hours. Okay, um, so you can build that, right? You can build the system. I don't think you can do it that well or that cleanly. In every real estate asset class, um, mobile home parks is, tends to be a lot easier to manage. Between that and self storage and industrial are three of the easiest to manage. Um, then you flip over here to the LP side, the limited partner side, where you find best in class that are the sponsors or the general partners that run it and you're investing in the deal. Um, and that is a very passive thing. So I basically took the side that could be active and built systems and teams for it to be passive. And then I've diversified into a lot of LP positions so that I'm not doing the work. The work for me is a one time deal that it's me vetting the sponsor, it's vetting the deal, it's vetting the fund or vetting the um, you know, the asset that we're looking to invest into. And I, I put plenty of time into it one time, but it's a one time thing. Once I'm done, it's done and then I move on to the next deal. Um, so that's been pretty lucrative for me having, you know, the goal was to kind of diversify. So I went from having one stream of income to about, you know, close to a hundred streams of income from different, uh, investments that I've done over the years.

Speaker B: And so you do the diligence up front, you make the investment. And then in the old days, it sounds like it's been an evolution. Tell me if I'm wrong, but you began buying these as really the operator of the mobile home park, the standard operating procedures, hiring the general manager, all that jazz. But over time it's evolved to even getting out of the running them. And now just being a limited partner investor, I'm assuming the returns as a limiting partnering investor are lower than if you were running it yourself, but obviously much easier. Is that, uh,

Speaker C: fair? I would say there's a total set of pros and cons on each side, right. And so if you have time and, and for me, I was trying to replace active income, right? So when I built the mobile home park portfolio, I was weighing do I want my time to be connected to making money or do I want asset income? Right. And so for me it was an upgrade for me to spend my time doing these parks and building those out as Compared to, you know, uh, doing consultancy or, you know, different things like that, working, you know, doing gigs for different companies. Okay, um, so that was good. But, um, if I wasn't good at building systems and hiring people and creating like SOPs, I probably would have moved over to LP investing a lot faster. Um, I happen to thrive there. And part of the reason that I did well, even on the consulting side with a bunch of companies, is that I think very, uh, methodically and systematically because I want everything to be replicable. Right. And I want to be able to plug and play, move people around, but have the system work. So I stayed in IT as an operator. And when I say operator, I'm going to use quotes because I didn't spend much time in it, but I had a dashboard that I would track the key things. So I was involved, but from afar. And if something needed to happen, well, we can reach out. Hey, I noticed that the tracker here has a red, you know, mark instead of a yellow or a green. Right. Uh, so that was big. Running it through the numbers. But today, um, really most of my investing. Cause we're not really adding more over here on the real estate side of things, we're just adding LP positions. Uh, and really I want to model our family office after a single family office. So, uh, what is a family office? Well, it's the organization that people use to basically run their life, run their investments, run their state, run their taxes, run their legal, whatever it is. So a single family office is, is an organization that a billionaire, uh, has built to manage their affairs. Um, I study all that single family office data and so I want our portfolio to be as representative of that as possible because that's the playbook that consistently wins across the board. So we talked about concentration early on and I noticed, hey, I'm pretty heavy in mobile home parks. Great. Well, why don't I diversify into some other things? So something I noticed early on is that most of these single family offices only had 15 to 30% of their net worth in the stock market. And I had been told differently by, you know, financial, uh, you know, gurus or by the market. And so I was like, oh, that's, that's interesting. And the more I trailed that data and even looked at it from center millionaires to demi billionaires, and you know, even well above when you're talking about 10 bill plus family offices, um, the data is very consistent. And then 50% of the net worth of these family offices is in alternative investments. So real, uh, estate, private equity and private Credit and a few other things here and there, but they're smaller percentage wise. And I could even break it down based on the percentage in each asset class. But that is what I've used to model what we do for our family and our investments.

Speaker B: So many questions here. Love it. Go back to. You had the two models. One, uh, let's just focus in on the mobile home for a second, um, home park for a second. And then I want to go to family office. Uh, because you raised that, I think it's a great thread for us to pull on with the mobile, uh, home parks. What would you expect to get in the way of a return on an annual basis if you put your money in an operating mobile home park that you were going to operate, you were going to bring in a general manager and write the SOPs versus, uh, write a check to it to a G general partner to be an LP in a similar vehicle. Like what kind of returns would you. What are we talking about here?

Speaker C: Yeah, usually if something cash flows on the LP side of things, you know that you're going to get what's called a preferred return where you as the investor are getting paid these profits first before the sponsor takes any. There may be a catch up where they get caught up at 100% where you don't take anything and then it goes to some sort of a waterfall. So let's call it 8 to 10% is really typically what you see. Maybe even, I mean if you go back into the heyday of multifamily, you'd probably even see 8 to 12% of a preferred return. Uh, and then overall you would probably see, you know, a total irr, uh, over that period of time, in the mid teens, maybe up to the high teens. So let's call it like 15 to 19%, 15 to 20%, 14 to 20%, something like that.

Speaker B: That takes in consideration the capital, the, the cash flow you're receiving, as well as the capital appreciation on the back end when it sells. Is that correct?

Speaker C: Correct.

Speaker B: It's the combination of those two.

Speaker C: Yeah. So once the deal goes full cycle, you'll figure out what that, you know, IRR

Speaker B: look

Speaker C: like or what the MOIC look like. Right, the multiple on invested.

Speaker B: Multiple on investable invested capital. Uh, okay, that's. I took a sociology degree and I left early, so

Speaker C: you

Speaker B: got to go slow with me and, but I'm, I'm following along so far. So multiple uninvestable invested capital, your internal rate of return includes both the cash you receive on an ongoing basis as well as the capital appreciation on the back end.

Speaker C: Yeah.

Speaker B: So that,

Speaker C: that's a real estate LP deal. Now, private credit over here would probably be closer to 10%, maybe, maybe 8 to 12%. There's a few outliers that are maybe 14, 16%, but generally probably 8 to 12%. Um, so private credit generally is a little bit lower than real estate, uh, in terms of total return. Uh, private equity, sometimes that could be higher, Sometimes it cash flows, usually it doesn't. Cash flow, uh, kind of just depends what they're investing in. So, but for me, if I'm going to do one of these investments, and by the way, if you just study the data on this, I mean, really, you know, private equity began in the 80s, and if you track it from back then to now, uh, the annual return, uh, is at about 15.4% over you know, all those decades. So it's a much higher performing return than like, let's say the s and P500 over the same timeframe, you know, is about 9.2, 9.3%. Um, I mean, take a look at it over a hundred years. It's virtually the same thing. So you've got, you know, a 60% greater return on the alternative investment side than what's happening on the public equity side. All right, so that's the LP side you asked comparatively to my portfolio.

Speaker B: Yeah.

Speaker C: Um, so my portfolio generally was operating at a 20% return or greater, um, depending on, you know, sometimes year one might be even bigger, better than other years. I mean, I had a deal where I got all my money back. Like I had 106% cash on cash return. So I got my entire down payment back in year one. Um, that doesn't happen all the time, but it certainly happened.

Speaker B: And 20%, to be clear, was that IRR number that took into consideration both the cash flow you got as well as the capital appreciation on the back end.

Speaker C: Yeah. And so it's tricky. Until you sell it, you're not really going to know what the IRR is. Right. But you can model out what that, what your return looks like. You can model it based on the cash flow you take versus, you know, what you're reinvesting back into the business. But you know, for me, it's, it's generally been 20 to 30%. So there, there is a bigger jump, um, when you own it yourself, but there's a lot more that goes into it. You might have to personally guarantee something. You're certainly managing it. You're managing the team. So it's, I always Tell people it's, you know, it's, it's pros and cons. Like, do you have the time? Do you have the desire? Do you have the skill set to do those things? Great. Well, you can earn a higher return. That doesn't mean it's better. But for certain people, it could be, you know, in my life today, I don't really want to do any of that. So I, I, I will sacrifice the return to still make what I consider a good return. But I'm not on the hook for it. I'm not on the hook for the time. I'm not personally guaranteeing it if something goes wrong. So I'm okay taking a 17% return when over here, maybe I, maybe I knocked it out of the park and I got a 30% return. That's okay. I don't need these. I'm not trying to, you know, hit triples or home runs. Like, I just need a bunch of singles, maybe a few doubles here and there, and I'm just fine.

Speaker B: What's the difference between being an entrepreneur, operating a company? Most of our listeners are doing that today. Right. Versus being first and foremost an investor. And I'm not trying to diminish being an investor because I'm sure there are entrepreneurial things that you're doing, but you're not hiring employees every day or, you know, m collecting receivables. I'm assuming, like, there. It's like, what in your mind, help again? Uh, our listeners are entrepreneurs, and some of them will be switching to becoming investors.

Speaker C: Yeah,

Speaker B: I'd love for you to sort of try, in your best way, to describe the difference between the two.

Speaker C: I would love to. And by the way, this is our avatar. This is who we work with all the time. This is, you know, like, our audience on the lifestyle investor podcast is very much what you're talking about. It's people that want to make that transition, have made that transition. What's the difference? And by the way, I would argue that, um, okay, so there's different skill sets here, and I want to touch on that, but I would also argue, like, there's an aspect of it still being pretty entrepreneur. Right. So, um, I went from operating a company to operating, you know, our family investment structure. You could call it a family office. You could just call it, like, you know, our family investment, you know, team. And so I've hired people to do that. I've hired people to, to kind of do these things. So maybe I'm not tracking accounts receivable. I'm certain it's certainly tracking, tracking cash flow and, uh, returns and pro forma. Are you, you know, are you doing what you said you would do? So there's very much like an entrepreneurial ass aspect to, um, you know, investing and building your investment team. You could do it yourself. Most entrepreneurs are, are going to be ill equipped for that. Um, there's a reason for it. Entrepreneurs, the reason that they're able to figure it out and, and, you know, do as well as they do. And obviously, only 4% typically go, uh, the distance. Right. Four, um, percent, I think, make it past five years. That's it. Um, so you're already in a small tier if you have an exit. I mean, you're less than 1% of all entrepreneurs out there. So, I mean, it's like, it's, it's hard to do that. There's, you have concentration, risk every single day of your life until you have an exit. Right. Um, so celebrate the heck out of it if you do. But entrepreneurs tend to live in this world of, like, you know, hey, we can. It's like total positivity. Like, we will figure it out, we will pivot, we will raise more money, we will hire more people, we will change the concept. Like, there's just this world of, like, we're gonna get it done. Uh, that is the exact opposite that you think that you want to do with investing. Like, in investing, you can't go into it and say, hey, this person is gonna figure it out. And they, you know, you can't do that. You actually have to think the exact opposite. Like, I remember when I first started investing, and I was like, ooh, this sounds like a great deal. Uh, because as an entrepreneur, everything sounds like a great deal. Okay? You're like, oh, I can see that angle, but you gotta train yourself. Cause I would go into these deals and I'm like, okay, this is a good deal. Let m me see if I can prove any reasons why it's not a good deal. But, like, I think it's a pretty good deal. I'm already starting from a yes. A, uh, good investor is gonna start from no. They're gonna say, this is not a good deal. This is, in fact, a horrible deal unless I can prove otherwise. So, like, just that distinction is a huge difference because you want to say no more, way more times than you say yes. So you've got this optimism of the entrepreneur that needs to be kept in check over here as an investor. And I could give you a whole bunch of other, you know, categories, but, like, that's the main thing, how do we protect the entrepreneur? And I see it all the time where they lose most or all of their money investing in high risk stuff that they don't even think is high risk because they are optimistic about how it's going to go or about the founder.

Speaker B: That's such an interesting, uh, really, really poignant difference. Starting from yes, we can bend the shape of the universe to like your default is no. Do you find like uh, what impact does that have on your day to day psyche? Um, I'd imagine, you know, tell me if you think I'm wrong on this, but I'd imagine the entrepreneur whose default yes runs pretty hot and cold, like when it's going well and they change the course of the world. Like there's nothing better than making that sale, doing that deal. You just feel on top of the world and at the same time you crash hard when you get a no or the employee leaves, the customer says no. Whatever. I'm imagining the life of an investor is a little more muted, a little more vanilla, a little bit more steady, uh, emotionally. Uh, tell me if you think I'm wrong. What, what are your thoughts as it relates to the emotional disposition of the two?

Speaker C: Yeah, I uh, think as a general rule that's probably accurate. Like short term, as an entrepreneur you're going to have a lot more roller coaster. Right. Highs and lows. And like this person didn't show up, this person quit, they left, they took their team. Oh my goodness. You know, like that sort of stuff is going to happen in like a shorter timeframe. Right. So the frequency is greater. Whereas as an investor it's not that you don't have that because uh, you're going to have good deals, you're going to have bad deals. It's probably spread out a little longer. It takes a little longer for these deals to go. But having a background as an operator gives you some good insight as well as you're looking to invest in companies that have operators and have systems and all these things. So there are definitely some like advantages to it. But I mean there's as an investor you're going to lose money. It's just a matter of time. It is inevitable. Most people don't realize that. They think that they're better than they are. Entrepreneurs are the worst at this. Right. They, they literally think because they were so successful over here, especially exited entrepreneurs.

Speaker B: Yeah, they're

Speaker C: what's up 1% or whatever.

Speaker B: Yeah, yeah.

Speaker C: Uh, and they don't get that it's not as easy or as, ah, like, predictable as their story. Like, you know, we just. We see a lot of people fumbling there. So, uh,

Speaker B: what's your worst. What's your worst deal? Like, do you mind sharing? Like, when you got a

Speaker C: fell flat on your face? Yeah, I've got a few of them. Um, uh, the first big deal that I did. Poorly, I invested in what turned out to be a Ponzi scheme. I didn't. I didn't realize it. And by the way, for years, it wasn't actually. This company was in business for 27 years before it was officially a Ponzi scheme. So in, you know, in. In fairness to my underwriting, um, they were good when I invested, but I didn't. The. The return sounded so good. So it was. It was such a sexy return that I. I stopped paying attention to other important details and I let my emotions take over.

Speaker B: What is this? Well,

Speaker C: one important detail is my attorney told me, don't invest with these guys. I don't like it. I think their legal is subpar. Their legal, like. Like, even their forms, um, aren't clean. Like whoever they're using for their law firms. Not good. Uh, he didn't. He. Anytime that, um, a group has, uh, any sort of, you know, the word guaranteed anywhere in there, uh, that should be a huge red flag. And I saw it, and I knew it, and I looked past it. My attorney, actually, I think this could be a Ponzi scheme. And I was like, whatever, you know, so, like, I literally, like, scoffed at it and was like, I'm doing it anyway.

Speaker B: How much did you put in?

Speaker C: Because I knew better. Right. Well, it started with, like, a couple hundred thousand, and then I. And that went really well. And then I put like 400,000 more in, and then that went well. So then I put it like another 400,000 in. So I was at. I was right at a million bucks. And then everything stopped. The cash flow, the monthly cash flow stopped. And, um, because I was early and took good notes and had all kinds of, you know, I just keep all my documents. Um, I. I ended up working with the sec, with the feds, went to, uh. I mean, I literally flew to Chicago to be, you know, in the courtroom testifying day one against this guy. It was really, really crazy. A crazy experience. And so this guy ended up, you know, going to prison. Ah. For a long time. I think it was like. Did

Speaker B: you get any money

Speaker C: back? Years. Uh, we got 10%. Roughly 10% of it back. So, you know, when this happens, you hire a receiver and a receiver has to get paid. And so as they do this forensic audit, this financial audit to figure stuff out, a lot of the proceeds go to pay these, um, these receivers. And so there's not a lot of money left afterwards. And then you try and sell the rest of the assets and all that. So, um, generally they don't work out well. And yeah,

Speaker B: that was, that was a painful

Speaker C: one. A million dollars was, I mean, at that time, I mean it's still a lot of money, but at that time it was very meaningful to me.

Speaker B: It sounds like, you know, the key insight there is having a lawyer that's seen a lot of LP documentation before and can kind of say no, this doesn't smell right because there is some market terms are pretty common and in an LP document that it sounds kind of boilerplate. This one didn't and your lawyer picked it up. Interesting. That's really fascinating.

Speaker C: Yeah, there were a bunch of other red flags and I just, you know, I was too excited about the return. I mean there was enough info there that I should have seen it. Even though technically when I invested it wasn't yet a Ponzi. There, there were things that just weren't right or that should have raised flags or that showed it could be in trouble in the future.

Speaker B: Imagine you're talking to an entrepreneur who has spent the last 20 years building a business and they've been successful but poured it all back into the company. Tons of concentration, all the cash. They've kind of reinvested. Reinvested, reinvested. And ah, they're going to get a check for $10 million tomorrow. Um, what advice would you give them? I'll just stop there. What advice would you give somebody who's about to, for the first time have real money?

Speaker C: Well, I think, um, the first thing I would do is I would say don't do anything with it. Like there's going to be this, this pressure, this, this people are going to pressure you to like want to give, move the money to them and to do this and do. And I would say just pause, just hit the pause button. Let's not invest in anything. Um, the goal here is to understand uh, what this next season looks like. So for anyone in our community, whenever we have someone that exits their business or just their business is kicking off a lot of cash, we say, hey, first, if you want to become a lifestyle investor where your, your passive income exceeds your cost of living, um, you need to have a, um, an investment criteria or your buy box for when you do make an investment. When you don't make an investment. And so it's figuring that out. Like, I'll only invest with people that have been, you know, in, in a certain industry for over 10 years, over 20 years. I'll only invest with people that have gone through GFC so they know what a downturn looks like. I'll only invest with people that their last five deals, uh, exceeded their pro forma or, you know, whatever. Like, there's tons of. I only invest in cash flow. If, if this, you know, then, you know, it's a no. Like, anytime I feel pressure and it's too urgent and I don't have time, it's an automatic no. It's like, build that out. Because when you're an emotional state, it's easy to make poor decisions. So create, while you're in a good state of mind, your investment criteria so it becomes easy to say yes or no later. And then, um, I would say allocate, like a family office does, figure out what the wealthiest people are doing. This is the stuff that we share all the time. I share a ton of this, you know, for free. We really dive in deep, deep, uh, in our community. But it's like, hey, I can tell you, you know, for the last five years that most of, like, if you go across the board of your, your billionaires, your single family offices, uh, you've got generally about 10 to 20% of, of these wealthy people's net worth in real estate. You've got 5 to 10% in private credit. You've got 20 to 30% in private equity. You've got 4 to 10% in venture. You've got 1% in early stage. You know, you've percentage in secondary, which would actually be carved out from, from private equity. So I won't do a subcategory. You've got 5 to 10% in cash, 5 to 10% in bonds. Um, you've got 15 to 30% in the stock market. In public equities, um, you've got 1% in oil and gas. You've got 1% in collectibles. You've got 1% in commodities, you've got 1 to 5% in Bitcoin. Like, that's it. Like, that is the. You've got, you know, 1 to 4% in hedge funds. Like, that's the asset allocation of a typical billionaire. And so why not use their playbook? Like, my goal is to democratize what these billionaires are doing. And there's a playbook, Follow it. You don't have to have a billion dollars to follow It. Right. But even before that, um, we didn't talk about this. And if this was someone that was coming into our community, even before what you do with the money, it's, what's your tax bill? There are ways that we can strategize and professionals out there that can help lower the tax bill legally. We're not saying anything out of bounds. Like all stuff. You know, most people don't look at the tax code as a playbook for what the government wants and what they're willing to incentivize. You know, what does the government need? Agriculture, uh, energy, housing, business. Like, we could go through the list. So you do those things. There are tax breaks, you get tax credits, you get deductions. And so most people end up overpaying in taxes. They tip the government. And I don't believe the government's doing a good job with our money. I don't. There's probably very few people that do, uh, whether it in Canada or in U.S. um, so I really just, you know, we want to help people first and foremost understand that tax strategy. Figure out, um, you know, park money over in treasuries until you know what to do. Right. 3.5% versus making some horrible decisions where you lose money. Like we just, we want em to hit pause and then figure out your estate plan and how that coordinates with the tax strategy. Like all these things matter.

Speaker B: One of the things that triggered for me was when you were going through the billionaires sort of pie chart, 15 to 30% in public equities, certain amount of bonds. I think people can get ahead around. Okay, I could, I could set up a, uh, a trading account and buy an ETF or whatever to get the public stocks. But when it comes to like, how do I invest in a hedge fund and how do I invest in, uh, alternatives and this thing called private credit. And I've heard that that's all, you know, going sideways because I'd read the Wall Street Journal, whatever. Like, how do they figure out where to invest in some of the alternative stuff, uh, without making the same mistake you made earlier, which is like investing in a crappy deal.

Speaker C: Yeah. I think you need to get around other people that are doing that. There are family offices that you can hire, but you can also just put in your own time and learn it. Right. I mean, this is what lifestyle investor does. We love teaching and educating. And so, um, to me, it's like you get around the people that are, that this, they need to do this anyway. They're doing this research. They've got data to support the decisions that they're making. And by the way, you know, you made the comment about all the headlines for private credit. You see a lot of these negative headlines. What most people don't realize is there are a lot of subcategories and most private credit is fine. And if you have anything that has collateral, uh, you're doing just great. I mean my portfolio on private credit is absolutely crushing it. And I, I stand like I'm not in a risky asset class. Like these things have so many protections depending on who you go with, what their track record is, what the leverage is, what's collateralized. But like it's one of the best asset classes for cash flow. And it's been wonderful for me. But a bunch of the stuff that's going bad doesn't have collateral to cover it or has some gating issues or uh, I mean so, so not all private credit is bad, but there is certainly risky private credit out there that you would stay away from. But these are things that you want to learn so you get around the people that know what they're doing. Industry experts. So you get in the good deals, not the bad deals.

Speaker B: You quickly brushed over the definition of lifestyle investor. And I think it's probably you live it every day. So I'm sure it's second hat to you, but it basically is where your IT passive income exceeds your lifestyle requirements. Am, uh, I getting that right? That's what you would refer to as a lifestyle investment.

Speaker C: That's right. You don't have to work, you get to work, but your life doesn't change whether you work or you don't work. Right. Work becomes optional. Your passive income more than covers or at least covers what it costs you to live today.

Speaker B: Got it. And when I think about how your compensated based on the increased returns over and above what you'd get in the stock market. Let's imagine that a public equities portfolio over the long run makes 10% just I know it's 9.2, but just for round numbers, let's say you're on 10% and you are getting in some of these deals in private credit and private real estate. 17, 18, 19, 20% IRR your time, you're valuing your time effectively at the Delta between those two numbers. Like you could put it into an ETF and go to the beach and do nothing for 50 years and get nine points or 10 points, but you're getting 17, 18, 19, 20%. And so the delta is what your time is worth to you. Am I getting that? Roughly?

Speaker C: Yeah, yeah. I mean there's a premium that you're going to get if you decide to stop outsourcing your financial literacy and education to someone else and decide to like take some ownership as to what it would look like. I mean a number that will blow your mind is. And I, I love tracking against this. So my goal is to have you know, a, a 20% or greater annual uh, uh, CAGR. Like lifetime CAGR. Um, and so like if that is, if I can get 20% every year, $10 million at a 20% CAGR for 30 years is $2.4 billion. So the numbers get crazy. So if you wonder like, why do the wealthy invest so heavily in alternative investments? Well, because the, because the delta between what you get in the stock market and what you get in these alts is so much greater from a compounded standpoint. It's like an exponentially different number and you could just take 1% difference and draw it out over 30 years and it, we're talking millions, tens of millions. I mean depending on what the starting point is, maybe even hundreds of millions. Right. Um, so what happens when it's 5% greater, 10% greater. Right.

Speaker B: So fascinating. And, and it begs the question, I guess for me a little bit as to. Mhm. What are you personally going to do with the money? You mentioned your family and you've used we in many cases when you're talking about we as a family, make these investments. Um, how are you thinking about that stuff?

Speaker C: Yeah. And when I say we as a family, I, um, didn't come from money. My parents worked very blue collar jobs. My dad has fixed appliances or sold cars most of his life. My mom worked at the church. Um, she was a teacher. So I mean it's like, like that's what my parents did. They're retired today. Technically I have, uh, hired my dad part time as our house manager. All right. Um, but more because, you know, it's, it's income that they can use

Speaker B: than

Speaker C: anything else. Right. Um, so when I say we, I just mean my wife and my daughter and I, and I am managing, you know, what we have built on behalf of them. Um, and so I think you have to be very careful of money, um, from the standpoint of like, money corrupts. Like if, if you don't understand money and you don't see it as the tool that it is and you see it as too high on the totem pole, that it like, is more important than people in relationships, more important than, you know, all these different things. Right? Your. Your faith, what, whatever. Like. Like, to me, money is more likely to corrupt than not. So I'd rather the legacy be around what I teach and values and even what I teach around money, um, to my family, like, that, to me, is important. And so I want to be in a position to be able to help my daughter with her first home or with her first business. Um, but I don't ever want her to be in a position where she doesn't have to work that. To me, I think that would be. I think that could be detrimental. Um, maybe it can be taught and instilled the right way where it's not. I think the odds are pretty good that it will be worse than better. Um, so ultimately, what I want to do is I want to build, um, a trust. And what we've done is we've built our version of a private foundation that was technically not a private foundation, where the corpus continues to grow every single year, and it kicks off more cash every single year. And we can do good work in the world and do right by people, help give people a leg up. Um, you know, for us, in my family, our faith is very important to us. And so, you know, we want to do things that are going to, you know, help with the Great Commission and help people find faith. And so that's really important. But there are other things also that we believe in, like, we want to fight human trafficking. I think it's one of the worst evils, uh, out there. And so a lot of what we do goes towards that. And there are these Christian family camps that we. We love and appreciate, and we want to be able to support those. And so, to me, like, that is the end goal. Like, why? More. More impact.

Speaker B: Such a great way to end our conversation. I could talk to you for literally hours. I've. I know your time is precious, and you've got a, uh, you've got a bolt. So, uh, Justin, just remind people where they can learn about lifestyle investing. Is there a URL or a. A Instagram feed? What's the best place?

Speaker C: Yeah, if you go to lifestyleinvestor.com, you can find everything from the book to the podcast newsletter, blogs, all the stuff, masterminds, master classes. We've got everything. I love teaching. And for anyone that says, hey, I just want to figure out how to move from, like, where I am to this next point, um, we do these consultation calls, these strategy sessions that are generally $500 per person, but for your audience, John, I'd love to just do it for free. So anyone that wants, you know, some strategy call to figure out, like, hey, how do I create more passive income? Or how do I move from here to there? How do I transition? How do I, you know, figure out the next steps? Just, um, go to lifestyleinvestor.com consultation.

Speaker B: Amazing. We will put that in the show notes along with the books and the podcast and all the bits and pieces that, uh, you've got. It's an incredible story and I'm so grateful you shared it with me. In particular, the difference between an entrepreneur and an investor. That's really going to sit with me tonight. Uh, I really appreciate you sharing.

Speaker C: I love it. Thanks for having me, John. It's been a fun convo.

Speaker A: And there you have it for today's episode between Justin and John. For show notes, including links to everything referenced in today's podcast, you can visit the episode page over at Built to sell dot com. If you enjoyed this episode, be sure you hit that subscribe button reminder. You can watch these full interviews over at our YouTube channel channel Built to Sell. Special thanks to our group of advisors who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, head over to valuebuilder. Com. I'm Colin Morgan. I look forward to talking to you again next week.