203. When and Why to Diversify in Real Estate with Pascal Wagner

Summary

Real Estate Investing School Podcast – Episode 203: When and Why to Diversify in Real Estate with Pascal Wagner

Release Date: October 21, 2024

In Episode 203 of the Real Estate Investing School Podcast, host Joe Jensen engages in a comprehensive discussion with guest Pascal Wagner, an experienced investor specializing in building diversified passive income portfolios through alternative investments. This episode delves into Pascal’s journey from active real estate operator to a proponent of diversification, the challenges of property management, and the nuanced differences between passive and residual income. Below is a detailed summary capturing all key points, insights, and conclusions from their conversation.

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1. Introduction to Pascal Wagner

Joe Jensen begins by introducing Pascal Wagner, highlighting his expertise in venture capital, his successful deployment of over $150 million, and his strategic shift that led to passive earnings of $265,000 annually through a curated real estate portfolio and private placements. Pascal manages 12 properties in Atlanta, Georgia, housing over 104 tenants.

Pascal Wagner [00:00]: “You know, you build your wealth through concentration and you keep it through diversification…”

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2. Pascal’s Career Journey: From Operator to Passive Investor

Pascal recounts his entry into real estate at age 24, starting with house hacking alongside his best friend Diego. Initially focused on active management, he transitioned to a more passive role as his wealth and responsibilities grew. This shift was driven by his desire to free up his time and reduce the risks associated with having all his investments concentrated in a single asset class.

Pascal Wagner [02:38]: “I want 100 different investments to be generating cash flow, not one.”

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3. The Importance of Diversification in Real Estate

A significant portion of the discussion centers on diversification. Pascal emphasizes that while concentrating on a single asset class can be profitable, it also poses significant risks. His pivotal moment came when he recognized that his entire net worth was tied to one asset class—co-living with single-family homes rented by the room. To mitigate this, he diversified into self-storage, multifamily units, oil and gas, and other asset classes, ensuring multiple vintages and reducing dependency on any single investment.

Pascal Wagner [06:13]: “I have some self storage, I have some multifamily... I have 100 different investments generating me cash flow.”

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4. Challenges with Property Management

Pascal shares a critical lesson from his experience with third-party property managers. Despite initial success, he faced declining occupancy rates, dropping to 65%, which severely impacted his income. This crisis compelled him to take over operations, hire a maintenance person, and reinstated his hands-on management approach. The ordeal underscored the vulnerabilities of relying solely on external property management companies whose incentives may not always align with the owner’s interests.

Pascal Wagner [22:52]: “Real estate is just like any other business. It is a business and businesses also have down years.”

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5. Aligning Incentives Between Property Managers and Owners

A pivotal theme in the conversation is the misalignment of incentives between property managers and property owners. Pascal explains that property managers typically earn a percentage of the rent, which may lead them to prioritize occupancy rates without considering tenant quality or long-term stability. This mismatch can result in high turnover rates and increased operational issues.

Pascal Wagner [26:38]: “Their property management company is incentivized to get as many tenants on into the homes as possible...”

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6. Transitioning to In-House Property Management

To address the challenges with third-party managers, Pascal developed his own Standard Operating Procedures (SOPs) and established an in-house management system. By integrating property managers and virtual assistants, he ensured better oversight and accountability. This approach allowed him to maintain control over critical decisions and align property management efforts with his investment goals.

Pascal Wagner [33:56]: “I've created kind of different SOPs... I can hold them to more specific metrics.”

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7. Passive vs. Residual Income

Joe Jensen and Pascal clarify the distinction between passive and residual income. While passive income implies minimal ongoing effort, residual income refers to earnings that continue over time from prior efforts. Pascal advises investors to initially focus on building residual income streams before transitioning to more passive income sources.

Joe Jensen [49:00]: “Residual income is the coolest... It keeps giving.”

Pascal Wagner [50:16]: “Exactly.”

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8. Final Takeaways and Recommendations

In the concluding segment, Pascal offers actionable advice for aspiring investors:

• Seek Guidance: Instead of attempting to navigate real estate independently, follow the footsteps of experienced investors.

  Pascal Wagner [45:23]: “Don't try and do it yourself. Follow someone’s footsteps.”

• Continuous Learning: Understand local regulations and market dynamics to avoid costly mistakes.

  Pascal Wagner [47:04]: “I had to sell a property and lost like $10k on it... understanding the rules is crucial.”

• Emphasize Cash Flow: Recognize the fundamental importance of cash flow in real estate investing.

  Pascal Wagner [48:46]: “Cash flow.”

Additionally, Pascal recommends the book Atomic Habits by James Clear to build solid, repeatable habits essential for investment success.

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Conclusion

Episode 203 of the Real Estate Investing School Podcast provides invaluable insights into the significance of diversification, the complexities of property management, and the strategic balance between passive and residual income. Pascal Wagner’s experiences serve as a testament to the importance of adaptability and informed decision-making in real estate investing. His pragmatic approach offers a roadmap for investors aiming to build resilient and diversified portfolios.

For those interested in learning more from Pascal Wagner, he is active on LinkedIn and can be reached through his website growyourcashflow.io. Additionally, he offers a weekly newsletter featuring passive investment opportunities and a comprehensive database of investment options at passiveinvestingstarterkit.com.

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This summary encapsulates the key themes and valuable lessons from Episode 203, providing listeners and non-listeners alike with a thorough understanding of Pascal Wagner’s approach to real estate diversification and passive income strategies.

Transcript

[Pascal Wagner]

You know, you build your wealth through concentration and you keep it through diversification. And it was that at that time where I was like, I want 100 different investments to be generating cash flow, not one.

[Joe Jensen]

All right, welcome to the Real Estate Investing School podcast. I'm your host, Joe Jensen. Our guest today is Pascal Wagner. Now he specializes in empowering others to build diversified passive income income portfolios through alternative investments. He has experience in venture capital deploying over $150 million. He has a proven track record of deploying capital effectively and maximizing investor returns. He made a strategic shift personally and increase his passive earnings to 265,000 a year through selected real estate portfolio and private placements. He manages a portfolio of 12 properties in Atlanta, Georgia with over 104 tenants. Um, so anyway, then that just kind of skims the surface. I had to trim your bio quite a bit to just fit the intro. But man, I'm excited to dive into everything you got. But thanks for being here today, man.

[Pascal Wagner]

Yeah, thanks for having me here, Joe. I'm excited to dig in here.

[Joe Jensen]

Now you've done a lot of different things. Like I said, deploying big money. You helped, you know, manage your parents estate. When your father passed away. You had to really focus and get creative on like how do you really want to build true passive income? And that's something I'm excited to talk about. That's something I'm super passionate about. I think a lot of our listeners, a lot of the students, like people get into real estate to have passive income, but a lot of times they get stuck working in the real estate industry, you know, whether as a wholesaler, a flipper or whatever. And they never actually enjoy passive income. But I think you have a passion for passive income as much as I do.

[Pascal Wagner]

Yeah, man, it's been a big journey. I've done, as you mentioned, all different types of things. I learned how to invest institutionally, like how the institutions invest into early stage companies. I learned I built my own real estate portfolio. So I had a lot of that operator side that you were talking about. And, and now as my wealth has grown and my responsibilities have shifted, I've now moved more towards passive. And so I have like the lens of, of all of them. Love it. And that, that's influenced a lot of my style.

[Joe Jensen]

Cool. Yeah, let's dive into it. Maybe you can tell us a little bit about, I mean, maybe your, your perspective and philosophy on real estate now, but then also maybe how it used to be and how it's shifted over time and we can kind of go through the stages of your career.

[Pascal Wagner]

Yeah, absolutely. So I think what I've learned throughout my journey. So I bought my first rental property when I was 24 with my best friend Diego. Nice. And, and like how I really got into it was, you know, my best friend, he was, he was buying a home. I lent him money to go buy his first home. He did this concept called house hacking where he lived in the home and rented out all the rooms. And then he, he was actually just living for free and he wanted to replicate that model. And I partnered with him to then basically get into real estate and replicate the same model.

[Joe Jensen]

Yeah.

[Pascal Wagner]

And you know, I think when you're early on in, everyone wants this dream of passive income. When I started, that was the number one goal. You know, hey, I'm going to build a business or do consulting or work at a job. And the whole point is how do I live life on my terms as soon as possible? And when you're young, you have more time than money. And so at that point it required like I didn't have an option to do the type of passive investing I do today, nor did I even really have the knowledge. But you know, I think when you're young or when you have more time than money, that is, you know, you're usually getting in on the operator side if you're trying to learn how to, you know, earn money that is not tied to your hourly output or input. I think as you, you know, as your wealth grows and as you become more of an adult and you have more responsibilities and you're trying to start buying back your time, you know, you might, you know, I'm hiring a property manager, I'm hiring a maintenance person. You know, they're doing a lot of the day to day. And I sit and I meet with my team like 5 hours or less a week and kind of like guide what's happening at the portfolio level. But at some point I realized that I couldn't have all of my wealth tied up in one asset class, which for me is co living where I rent single family homes by the room. And I think one of the like the aha moment I had was like I had all of my net worth tied up in this asset class and I realized like, holy crap, all of my income comes from this. And really the dream that all of us have, or at least I have is I want to make, you know, several hundred K a year from a hundred different investments. So if one of them goes sideways, then my income isn't impacted and so that's what I've started shifting my strategy around, which is, you know, I have some self storage, I have some multifamily. I've got, you know, oil and gas. And so now you have different vintages, you have different asset classes. And no matter what, what's happening in the economy or if one deal goes sideways or one operator commits fraud or. Or whatever the case is, now I'm diversified, and I can slowly sail into the sunset, have my time back, and then invest that in however I see fit.

[Joe Jensen]

Yeah, I think that's so important to be diversified. Like, obviously at the beginning, it's like, you got to pick a niche, you got to get laser focus, you got to build something. But once you do that for a while, it's like, yeah, you. It's risky to not be diversified. And, and when. And I like how you describe diversified. It's not like, oh, and I need to go put money in this stock and this stock and this stock. Like, I've got this kind of real estate and this kind of real estate and this kind of real estate and this kind of real estate. I'm like, yeah, that I like to have A class and B class and C class, and I like to have multi family. Like, that's a good diversification because, like, say, if the economy takes a shift, you're going to be, you know, protected. You're not just in one area. And once one unique thing that I've done is I've. And this was kind of a necessity of just trying to hit my numbers, but I ended up buying throughout the country. I don't just buy in one market, which at first was like, I mean, it's still kind of a headache in some ways. I can't just, like, have one manager take care of everything and sit back because they're all over the place. But I'm like, oh, I'm kind of realizing that after the fact. I was like, oh, I've hedged risk. If there's one market, I mean, I'm looking at, like, Florida right now and these hurricanes, man, if you had everything in one market that just got decimated for some reason, like, it's all in Maui. And then that happens, you know, that's going to be really, really hard. So anyway, just the thought of diversification throughout the country, throughout different asset types, et cetera, is awesome.

[Pascal Wagner]

Yeah, I, you know, I also started that way. I was more of the money partner whenever I did real estate deals. And so, you know, I had my first couple in Austin and then I bought my next. I found a partner in Charlotte, North Carolina. And, and then I found my third partner in Atlanta. And I had had everything scattered and, and you know, I probably, as you've learned, there's trade offs. Right. What I ended up doing is selling everything everywhere and consolidating in Atlanta at one point. And the change in my thesis was, okay, I'm gonna hire one full time person on site and they're just, you know, and that reduces. I only have one tax code, I only have one district of laws, I only need one real estate agent.

[Joe Jensen]

Makes it so much simpler.

[Pascal Wagner]

Whereas I imagine you have that problem of identifying all those different people.

[Joe Jensen]

Yeah, for sure. No, and there's pros and cons, like saying I didn't even do it to diversify, I was just doing it. And then I realized I was like, hey, at least that's one pro that ended up happening, that if a tornado comes through Oklahoma, I might lose some Oklahoma tenants, but I'm not going to lose all my tenants, you know, and you know, like I said, there's pros and cons, but to scale and truly do it, you know, on a level that I think the more consolidated the better. So I'm not suggesting everybody go out and do that. I'm just saying that, that you talking about, you know, diversifying, it kind of made me think about that.

[Pascal Wagner]

But yeah, yeah, I think when I similar to you at one point, I then finally just decided I'm going to bring it all under one. The stuff that I manage, I want to have the least, I want to be as efficient as I can. So all in one area, all the same type of asset class. And then I will diversify outside of that asset class with other operators around the country. And so I was very much like you up until several years ago, at which point I then switched. And I think that's a normal part of people's journey, right? You learn along the way and you learn something new and then you realize like, okay, this, this matches more with the lifestyle or my goals.

[Joe Jensen]

Well, I love that because like we started at the beginning talking about passive income, trying to make it where it's not working 9 to 5 on anything, even if it's your own stuff, you know, but you don't want to have to be showing up and doing stuff every day, you know, a few hours a week, five hours working with your team like you described, like that's really cool. And if, and like you said on your own stuff, if you can simplify it, it gives you more of that freedom, more of that time, more passivity because it's streamlined. But you've got over six figures coming in through your other investments that other operators are managing. And I think that's super, super smart way to do it is having especially the out of state, the remote stuff that you can't really take care of, effectively have someone else take care of it, you know, so. And that's where you've spread out is on the other operators, which is genius. Yeah, that's cool. So how does it go from, though? I mean, you've got like, you know, someone's hearing where you're at now, like, wow, that gives blurry. It's like, that's cool how. I don't know how that's even possible. You know, you went from renting out some rooms with a buddy to now you've got, you know, 20 limited partner investments and you've got like six figures coming here and you've got all, you know, apartment complex. Like how. How do you bridge that gap? How does someone do that?

[Pascal Wagner]

Yeah, look, I think. So there are multiple different ways people get there, right? I think the first and foremost, when I was broke and I was in my 20s, it just started with one, and then we added the second home and the third home, right. And there's no shortage of doing that. There's no shortcut to doing that path if that's where you are. You know, I think people enter the game at different stages in their life and use these investments or tools based on what they're trying to achieve, right? So if you're, if you're a doctor, for example, and you're. You finally have paid off most of your medical debt and you're now wanting to slowly invest in assets you don't have the time to break into to operate and do your own real estate. And so for them, they just skip over that initial operation hurdle if they know about passive investing and then investing in these deals. And so, you know, it depends on whether you're working, you know, your corporate career, and you're slowly stocking away money and investing in a deal or two every year, whether that's active or passively. And then there are a lot of people that also have, you know, huge windfall events or, you know, like estate planning. So in my case in 2021, I had. I had two major events happen which caused a huge shift. The first was I had my Tesla position. I had over $100,000 invested in Tesla almost a decade ago. And if you know anything about Tesla in The last four or five years that. That skyrocketed to the moon. And so this hundred thousand dollar investment.

[Joe Jensen]

Almost literally. Almost literally, yeah.

[Pascal Wagner]

That $100,000 investment turned into a $1.5 million position. That's awesome. So it was that and then also my dad passing away. I all of a sudden became the financial manager of the family. And I had to figure out how to provide my mom a retirement based off the money that my. That both of them had together. But my dad managed 100%. You know, she didn't even really know what was happening. And so I had this unique situation where all of a sudden in 2021, I decided like, okay, my Tesla position blew up. I want to take most of those chips off the table and reallocate what I have. And then I also need to allocate the portion of money that my dad left my mom in order to be able to provide, like, basically allow her to continue on in retirement and not just keep drawing on her principal. And so that might be similar in. Everyone's at different stages and have different things happen to them. Their company might have exited, or the company they're a part of might have IPO'd, or they had a huge stock go up, or an aunt passed away. There are all these different things. And I think that happens as life goes on.

[Joe Jensen]

Yeah, no, I think that's interesting. And it's like just talking about retirement, talking about your mom, and you're like, okay, I want to be able to provide for her and make sure that she's just set, you know, based off of what was left behind. And, and, you know, the, just the. The typical retirement planning is such a joke to me, where it's like, hey, save up money and then you can live off that. It's like, you don't want to put a. Like how many years you learn and let your mom live. You're like, well, ten more years, Mom. That's all you got. Then you're gonna be out of money. It's like, no, no, like, invest that so that it'll pay indefinitely. Like, it. It'll never end because it's. You're living off of your returns, not off the principal, because the principal will disappear and be gone. But the returns can go on forever. And not just for elderly, but like any investor. Like, the concept that. That should have to be shifted like that. Like, I forget. I'm so used to that world. And I meet people, I'm like, oh, yeah, people haven't really made that connection yet. I'm like, I could never work another day in my life. And my wealth will continue to come and continue to grow. I'm not going to deplete it. Like that's not a safe plan, you know, like, yeah.

[Pascal Wagner]

So I think there are two strategies in life and you basically need to choose which one you want to fall under and you can sit somewhere in between. The first is you can be the person that constantly puts money into equity growth based things. Save, save, put into investments that are all long term, wait a long time and then once it's reached this number, you either quit working, you start living off of that, or you, you then turn that huge nest egg that you built into cash flow. That's one approach. The other approach is you are slowly building cash flow over time. And eventually when I bought my first rental property, we were making a couple hundred dollars a month. You have to start somewhere. But that slowly starts to snowball over the years. And personally that strategy has helped me sleep at night. And you know, I think it's, it's not like I don't, you know, I still invest in equities and I have a portfolio of, you know, cash flow and things that are geared towards equity growth. But I think it's figuring out where in the spectrum you fall. And I've kind of fallen more in the middle.

[Joe Jensen]

Yeah. And there's not a right or wrong answer. You know what I mean? It's not like someone's listening like, oh, well, what should I do? It's like, am I doing it right, am I doing it wrong? It's like it totally depends on what you want out of life. You know what I mean? Like some people don't want to retire early. They're passionate about their work. Their work. They love the grind. They love showing up and building and doing. You know, it's like, what, what's. If they hit their cash flow number, it's not going to change their life because they're still just gonna go build and grow and do. And you know, so that's different than somebody who's like wanting to retire and get out of a job they hate or something like that.

[Pascal Wagner]

Well, that's what it, that's what it's been like for me. Right. So I now have this position where, you know, could I have stayed in the corporate career? Totally. I love, I loved my career and job at techstars. I got to manage a huge institutional fund. I learned a ton and like, very well, you know, I still might get back into something like that. But I think what having that kind of scenario happen in my life where I was able to reallocate everything to, to have a basis of cash flow. Now, you know, the, the risk, the, the race is off. I can slowly take time and think about like, what am I building? You know, it's not under a constrained timeline. And you know, just like you, you know, you're doing the same thing. You know, it's not like you're going to not work indefinitely moving forward. You'd have no purpose, you know, you wouldn't know what to do, you know, and eventually inflation will catch up. So it's not like you can just stop and not work for the next 70 years. Right. But I think it does provide a jumping off point to help you do something bigger if you want to.

[Joe Jensen]

Well, yeah, it gives you your freedom. Now you have time. It's like, okay, like hit that number. Now you can choose. Do I want to go grow wealth quickly? Do I want to grow slowly? Do I want to take a break for a few years? Like, you can do whatever you want to do and do it according to what matters most to you as opposed to having to do something to show up to pay the bills or your kids won't eat. You know, it's like you can prioritize it according to what you truly, truly care about, not just what's expected or demanded, which is, which is a change, you know, and that's exciting because then you can do it. You can do some really cool creative stuff and you can do things that, that you can get away with not making money on it. You're like, cool, I'm going to do this investment that won't make me money for five, six, ten years, but it's going to be the best return I've ever seen in my life where somebody who needs money today, they don't have that luxury. And so it really like opens up your options a lot.

[Pascal Wagner]

Yeah. It provides you optionality.

[Joe Jensen]

Yeah. Which is awesome. So for you personally then, so how you, you started slowly growing, you know, single family house hack, you know, maybe renting to roommates, the co living stuff. How big did you get that portfolio before you started pivoting to other types of investments?

[Pascal Wagner]

Yeah, so I grew the portfolio to 12 properties, 104 tenants. And it was at, there was a time when, you know, I think there's this perception by everyone who's in real estate, whether you're a real estate agent, you're an investor, they're a guru trying to teach people how to do a strategy that like, you know, Real estate always goes up. And real estate, you know, it's your foolproof plan. I think real estate is just like any other business. It is a business and businesses also have down years, you know, and in 2022, I, I made a transition. You know, I hired, at one point I was trying to become more passive with my portfolio and so I hired a third party property management company and we had a great run for 2ish years. And kind of the third year occupancy kept dropping lower and lower. And we, you know, at one point we were at 65% occupancy and I was like, I cannot, this is not acceptable. And so I let them go and I kind of like did a takeover, right? I went in, I had to hire a maintenance person, I had to hire a property manager. I had to put all my old procedures back in place, train the team, you know, get the financials, you know, in a cleaner spot, you know, operate the business. I had to step in. And you know, since then it took me four months to get the properties back up to 95% occupancy, where I'm sitting today, which huge win. But I can tell you it was insanely stressful, especially when all of my income that I, and you know, that I used to support my mom comes from this one asset class. And you know, I think it's everything that burns you is what ultimately makes you a better investor. And this was a scenario that burned me where, you know, for several months instead of making, you know, 15, $20,000 a month in that income, I, you know, I was making two. And like all of a sudden I was like, okay, where am I going to pull the money from to cover these expenses? And so I think it's, it's that moment, you know, I think when you're an opera. You know, at that time I was still thinking, oh, I want to become the co living king. I want to, I want thousands of these properties. And I don't think that's a bad strategy. But I, I, you know, if that's what you want your career to be, but it's also, you know, you build your wealth through concentration and you keep it through diversification. And it was that at that time where I was like, I want, I want 100 different investments to be generating me cash flow, not one. Yeah. And so that was the big takeaway.

[Joe Jensen]

I love that man. And I think that's super poignant to point out. And it's like, you know, for those listening, it's like some people, oh well, Then I, I don't want to do that. That sounds so risky. If it could get that low, it's like you're still a lot better off because you did it. Like, like, don't. He's not saying that's not an excuse not to do it, but it's just what got you here won't get you there. And it was like, that's what sets you free. That's what gave you the freedom to have the time, the bandwidth figured out. You did have to go back in and grind. And then you're like, oh, this isn't. Nothing is stable in life. Nothing is permanent. There is no, like, everything will just ride off in the sunset and never have to lift a finger again. And, and that woke you up a little bit. I think that's a really good reminder to a lot of people because, you know, once you've stabilized your portfolio, you can kind of be like, ah, get a breather. And then you're like, is this life now? It's like, well be, be smart. And, and I like that reminder to, to go find some other ways to do it as well.

[Pascal Wagner]

I think one of the. Also having had that journey, I think also made me a better quote unquote, passive investor or just have better expectations going into what am I investing in? I think if you're, if you haven't operated real estate before, you know, it's very easy to go in and you see the projections of these investments and, and then get upset when the investment doesn't mirror the pro forma. Some, some crush it. Some, some have way better than what's projected and some perform less because there, it's a business and markets change, interest rates rise, property insurance goes up, you have natural disasters like hurricanes. You know, there are, there are all these things. And so I think understanding it at the operator level made me a better passive investor. And I think that that's what I would want to pass along and share is that you're still investing in a business and businesses have ups and downs and so no investment is perfect.

[Joe Jensen]

Yeah, no, it's super interesting. I do want to dig into that a little bit, if you don't mind. I think we have some time property managers, so really hard to find a good one. If anybody has a great property manager, treat them like gold, take care of them, keep them close to you. But man, they're hard to find good ones. Like how in the world did they let this go to 65% vacancy or occupancy? And then, and it wasn't like, oh, well, the world was falling apart because you stepped in and rose it right back up to 95 within a few months. Like, and that was their professional job. You know, were you just being sidelined because they were busy with other stuff and they weren't prioritizing, or were they, like, you know, embezzling funds and leaving stuff up? Like, what went on there? How does that happen? And. And what did you do to get it back up? Personally, if someone else listening is in that same boat, or maybe a property manager is like, I need to step my game up. Anyway, I think there's a lot we can learn from that experience because that's super interesting.

[Pascal Wagner]

Yeah. So I'm going to butcher the quote, but Warren Buffett or Charlie Munger has. Has this quote that's like, you know, show me the incentives and I'll. I'll show you how. How successful the company will be. Something like that.

[Joe Jensen]

Yeah.

[Pascal Wagner]

And I think it is very much the same here. You know, I think the way property managers and operators, or I guess the asset owner are incentivized are different. Right. If a room goes, the way that property managers are compensated is it's usually on a percentage of monthly rent or first month's rent, something like that.

[Joe Jensen]

It appears to be right on the surface. Oh, the more it's rented, the more I make. But then what are the other ways they make money?

[Pascal Wagner]

So, you know, let's say a room that usually rents for $1,000 doesn't go rented for a month. So the property manager only loses out on 100 buc. $100, but I lose out on $900.

[Joe Jensen]

And we're also on the flip side, not to interrupt you, but let's say they could have rented it for 1100, but they just lent it for a thousand because it was easier. They make $10 less. They don't give a shit you made a hundred dollars less, which they could have just tried a little harder, and you could have made an extra $90 a month. You know what I mean? So anyway, yeah, the loss and the gain is not as impactful to them as it is to you, which I.

[Pascal Wagner]

Think is the bulk. Now imagine you. You have that issue across a hundred, 100 rooms, you know, and all of a sudden those. Those properties stack. And at least in the case of commercial real estate, the value of your entire building is based on the net operating income of the property. So if you have a third party managing it who isn't as incentivized, and that is the main value driver of how Much you're going to sell the building for in a couple of years is a huge, like, it's, it's a misalignment that needs to either be adjusted or to be highly managed. So I think that that was the big issue. And you know, I think, you know, I don't fault, I actually think that who I worked with were great partners. I think that the alignment was the clear issue. So I have all my homes on PadSplit and we use PadSplit's property management company. And I think what I learned throughout the process is that, you know, their property management company is incentivized to get as many tenants on, into the homes and onto the platform as possible because they're supporting the PadSPL platform, which is essentially the Airbnb of co living. You go onto this website and you book a room and you can go in and. Which is very different than me being an owner and saying, is this person going to cause headaches when they move in? And you know, whereas they would, they even, you know, they're not. They're basically just accepting people who apply.

[Joe Jensen]

And burn in and churn and they're.

[Pascal Wagner]

Like burning and churning.

[Joe Jensen]

Yeah.

[Pascal Wagner]

Whereas my approach is, you know, we, we reject over 35% of people who apply. You know, so like point one just in the filtering process, like we're ruling out people. And especially in my asset class, I've learned that when you have one, you know, bad apple in a host of, in a home of eight or ten people like that causes a lot of other people to move out and causes a lot of issues. So, you know, and then I think there's just some, there is some misalignment in terms of, you know, what improvements do you make? You know, I think as a property manager and when you're a third party, you know, me as an owner, I'm coming in and I'm questioning why was this done or how, how was like, what are these expenses for? And they become very, you know, like, okay, how do we just do the minimum and keep profits high? Because that's why they're going to keep me. And I think there's a disconnect between you as an owner and the third party management than if you are ultimately operating the business. Because now I'm making more longer term decisions. Oh, we need, we do need to put in more money here. We do need to, you know, repaint the walls or make these adjustments because it's going to change the overall feel of the home and our tenants are going to stay longer and you know, yada, yada, yada.

[Joe Jensen]

Yeah. So question on the pad split stuff, the co living, do they charge per turn or is that not a thing? Like when they need to get. So that's different because we're talking about the misalignment. This is huge. And this doesn't just apply to property management. This applies to anything in your life. So anybody, any listeners, like whatever job you have, whatever relationships you have, anything in your life, you need to make sure the incentives are aligned. Because if they're not people, even good people, like say, like these are good operators, whatever, you know, it can be very subconscious that you're going to just do what aligns with what you need and if it doesn't align with you, you're just subconsciously not going to do it necessarily. It's hard to go against what is aligning. And so just on the property management though, another a couple of ways people get is very misaligned is repairs. Okay. So if a property management company is getting paid to do the repairs, do you think they're going to find more repairs that need to be done or less? Right. If it doesn't even need to be done, but they can go make an extra couple thousand or a couple hundred and then multiply that. It's like they're going to be finding things that don't need to be done. And then the turn is the huge one that people don't realize. If your property manager gets paid full month's rent for a turn, let's say.

[Pascal Wagner]

Rent, they're more incentivized to have rooms turn more often.

[Joe Jensen]

Big time, baby. Right. They would rather have a room be empty for a month or two and then go make $1,000 instead of making $100 for those two months. $200, $300. No, they want it to turn every few months. Now are they going to actually go and implement that? No. But then again, the incentives are not aligned. They're messy, they're complicated, it's confusing. They have no, they'll make more money if there's a lot of issues. They have to be constantly repairing and they have a lot of turnover. They will make substantially more money.

[Pascal Wagner]

I mean it's the same reason companies vertically integrate. Right. You, you take out all the extra, you know, like with a property manager they not only do they pay for the repair, but then they charge a fee on top of the repair for managing it. Yeah. And look like, you know, I agree that people need to get paid for the work and somehow. But it's. I Haven't quite cracked that code. And I'm sure there are plenty of amazing property managers out there. I've heard of investors having amazing partners. And I think it's also one of those things where for what period of time? Because everyone has good periods and bad periods with any working relationship that they have.

[Joe Jensen]

And again, it's not a bash on the actual managers. It's the system that has been created is misaligned like you said. And a lot of, even though we're talking about, ooh, they're getting too much money here, too much money here. Another big problem is they're not making enough money because that $10 is not incentive for them to do a good job. You know, and so it's like, it gets messy, it gets complicated, and if someone can crack the code, that would be great. But yeah, anyway, just.

[Pascal Wagner]

I can, I can.

[Joe Jensen]

That's an interesting.

[Pascal Wagner]

Like, how I've chosen to tackle this is I've created kind of different SOPs and I've standard operating procedures where, you know, I have someone on site and, and I have a property manager in the Philippines that handles all the tenant questions and kind of directs our person on the ground kind of handling issues. And, and I can tell you that having that kind of oversight and saying, hey, look, I don't want to be, I only want to be brought in on decisions that are over $500, you know, if it's under $500 here, are acceptable, you know, things that you can buy or make decisions on. And so it's taken a lot of that kind of misalignment and changed it. So for anyone who's, who's debating on, on the two, that might be a good way to think about it.

[Joe Jensen]

So because you're not having an outside property managing company run all of it anymore, you're now creating a system that you run, but you have the, the procedures in place. So it's not like taking a ton of your bandwidth. But, but at the end of the day, they answer to you and you create the system and that way you can keep everything aligned. There's no going to be subconscious or conscious manipulation of the system.

[Pascal Wagner]

Right.

[Joe Jensen]

Interesting. I like that.

[Pascal Wagner]

And, and the team is either doing a good job or they're not. Right. And they get feedback and they're, they're, I can, I can hold them to, to more specific metrics and, and the repercussion is much greater. Right. Like you'll get fired if you do a poor job and I am your sole source of income versus me firing A property management company where I'm probably one of a hundred clients and big deal if they lose me, right?

[Joe Jensen]

Better aligned incentives, right? It's like, oh, this, this aligns better. It takes a little more work on your side, right? You can't just go, hey, property manager, here it is, here's the keys. Bye. I don't want to hear about it. Which is the dream of a landlord to do. Which obviously doesn't always work out that way. You had to create the SOPs, you had to find the virtual assistants, you had to go do all this stuff. But once you get it in place, it seems like a better system than the other way.

[Pascal Wagner]

Now I will tell you, there was a reason why there are pros and cons to this, right? So like at the beginning, I told you at one point I consolidated my portfolio from both Austin and North Carolina and consolidated all in Atlanta. And the reason is because I hired this property management company because as I was building up my portfolio, I couldn't hire a full time property manager and maintenance person when I had one or two homes.

[Joe Jensen]

Right.

[Pascal Wagner]

And so if you had 100 homes.

[Joe Jensen]

Spread across the country all in different locations.

[Pascal Wagner]

Right, yeah, but, but by, you know, all of these are different tools for different stages of the business. And once my portfolio was up and running and I had, you know, had all 12 homes in one area, then I, then I had the positioning where I could let go of that property management team and move to an in house solution. But doing that earlier wouldn't have made much sense for me.

[Joe Jensen]

Yeah, no, I love that. That's the thing, like you said, there's different levels and there's different goals and you just got to be aware of, you got to do a status check. I think that's a big thing. I recommend all my students and any investors to do is like every year at most step back and be okay. Where, where are things? Why are things running the way they are? What got me here won't get me there necessarily. Do I want to keep running this way as my capital being allocated correctly, where do I have like tons of equity sitting around like, you just got to take a status check and be like, you know, because you can get so distracted, especially when you're first building, you get a little bit out of the rat race and it's like, I did it. You feel like you accomplished the world and then, then you look back like, oh, but that doesn't mean everything is as good as it should be. I can get this a lot smoother and more passive. Like We've been talking about, you know, you got to do these status checks and be really honest with yourself, and it doesn't mean you made a mistake, and it doesn't mean you did it wrong. Just because you need to pivot and realize, okay, I want to actually put some money in some limited funds, you know, be a limited partner, which I'm like, at first, I hated that. I'm like, no, no, no. You got to be control of the asset. Build your own thing. Like, you run the asset. Don't just give money to someone else. I was like, kind of almost anti that. But then, like, once you hit a point where, I mean, that's the real passive. Right. You know, that's way more passive than owning. You know what I mean? And you don't have your whole portfolio of that, but you have a mix, and there's a time and a place that makes sense for all of it.

[Pascal Wagner]

Yeah. I think when I first got into passive investing, you know, first off, it. It seems too good to be true almost. You know, like, I think when you build real estate and you start building a portfolio, everyone talks about it being passive income, but it's very. Not. It's very active income. And, you know, even if you have a property manager in place like I do, I'm still an asset manager. I still have to make sure the bookkeeping's in place. I still need to file the taxes. I need to. You know, I had a tree fall on my home, and it was a $65,000 insurance. You know, you gotta. You have to deal with these things.

[Joe Jensen]

Whereas managers, you know.

[Pascal Wagner]

Yeah, but. But with passive investing, you know, I think it's like you do all of your diligence up front, just like you would in an active deal. You know, you're looking at deals, you're trying to figure out what property to buy, whatever. But then once you've made the decision and you've wired the money, it's hands off. Right? You're either.

[Joe Jensen]

Whether you like it or not, it's. There's nothing you can do, so don't worry about it. Yeah, no, and it's cool, though, because it's sexy. If you can find an operator that you truly trust and you have the excess capital that. And here's a big thing. And if someone's like, well, when should I invest in funds and syndications and truly passive, which sounds awesome versus building my own portfolio. And there's probably a lot of ways to skin it. My perspective is if you have your base like you do, you have your 104 units or whatever, you have your income excess of that, you can go spend it on the passive stuff because when the passive thing ends in five years and they finish that role and they give you your money back, now you're not bringing in any income from that. But if you're living off of your other portfolio, that's fine. If you're going to build, you know, you give all these syndications and funds all of your money and you're living off of it and everything's cool for five years. But then those funds end and they, they give you your money back. Now you have no investments and you're screwed. So once you have that foundation base, that's when I would say go do the other stuff. But a lot of times people want to do it vice versa because they're starting out, they don't know anything. They want passivity. So these fund managers sell them on and they just give them their money, but it's not really going to achieve their freedom goals.

[Pascal Wagner]

Yeah, I mean, I think my take on this is I, I think it depends on where your focus is. I, before, you know, I've really considered selling my entire personal portfolio and putting it all into passive investments. And one of the reasons I've held back from doing that is because I can get, you know, 12 to 15% cash on cash returns plus equity growth plus appreciation plus, you know, operating my own. But I actually do think for many people it makes sense a lot earlier because I view it as a function of focus. If you are making multiple six figures and let's say you're in sales or you're a doctor or you're a lawyer and you, you don't have the time to go build a personal portfolio. And it would also be distracting from what makes you the most amount of your money. So if you're making 2,300k a year in a sales position for you to then divide your focus and start managing active real estate property, and then you, you're not, you know, you're distracting yourself from where you make your cash cow your money. And so I think for many of those types of instances, it's all a function of where are you putting high.

[Joe Jensen]

Income earners like you said. And again, you know, like I said, what is your focus going? Because I'm thinking the mindset of like, I want to have my freedom, I want to be free out of the rat race. But if you're still going to be working and you're a high income earner, it makes no sense to try to get out of the rat race because you're not going to get out of the race. So focus on what you make do good out, make a ton of money and just put it into these funds for that person. That makes a ton of sense. And that's a lot of the people you help are these, you know, high level CEOs, high income earners that need a place to put their money and it makes a ton of sense to them because even if they hit their cash from them, they're not going to stop working. So it's not going to change their life.

[Pascal Wagner]

I mean, some, some do, some do. You know, I think it's just a matter of, of, you know, you can be a high income earner and put money away and it slowly build up cash flow over time to where you're like, you know, I want to leave just different strategies on how to get there 100%.

[Joe Jensen]

And also, I'd just say one more thing on the funds, the true passive investing with these funds stuff, if you have enough of them, it's, it's a lot different than if you have two or three, right? If you have two or three and then one ends and one sucks, you're screwed. If you've got 20, 30, 40, 50 of these babies and you know, one ends, the next one's going to the next one and you've still got 60 more coming through. Like there's this round robin where you're constantly redeploying that capital and you're still going to be reset and you can live off it fine, you know, because you can do it at that scale. That's very different than the guy who's got three or four that if they all four run perfect, he could live off that just barely. And you know that that's very different than when you've got it at a scale that's manageable, where you can really do it, you know.

[Pascal Wagner]

Totally.

[Joe Jensen]

So anyway, so many ways to look at it, man. This is exciting stuff. If people want to follow you or learn from you, I know you have a ton of resources and a ton of experience. We didn't even get into, I mean, we didn't even talk about all the things that you've done and could provide value in. But where could people learn more about that?

[Pascal Wagner]

Yeah. So I think if you want to follow me online, I'm on LinkedIn so you can just look up Pascal Wagner. Our website is growyourcashflow IO and I also have a weekly newsletter where I send at least 5 cash flowing LP investment opportunities, passive investing opportunities. And if that's. If you want to see a full database of all these different opportunities, I offer that for free at the passive investing starter kit dot com.

[Joe Jensen]

Yeah, I love that. So it's growyourcashflow.IO not dot com growyourcashflow IO go check that out. And like I said, there's. Look at where you're at in your career, what makes sense to you, and act accordingly because there's no one way to skin a cat. There's 100 different ways to do this and to do it appropriately, and there's times of pivot and change. So I love that, man. Do you mind if we go into our final four questions here?

[Pascal Wagner]

Let's do it.

[Joe Jensen]

All right, so question number one. If you could send a text message out to the whole world, everybody's phone's about to blow up right now. Start buzzing and ringing. What's that message gonna say?

[Pascal Wagner]

I think that message is going to say, don't try and do it yourself. Follow some. Follow in someone's footsteps.

[Joe Jensen]

Mmm, that's powerful. Find people who've already done it, that know what they're doing right. Partner with them, work with them, learn from them. Don't just try to do it blindly on your own. It's good advice.

[Pascal Wagner]

That's everything I've done. Pretty much every time I tried blazing my own path, I failed.

[Joe Jensen]

Yeah. Which is so cool because it's like if you do it that way, you don't need to be special, you don't need to be smart. Like, because maybe someone could. Maybe they're so creative and so hardworking and so self disciplined and so intuitive, they could blaze their own path on a hundred different levels. But for most people, and it's like even someone who's very uncreative, undisciplined, unintelligent, you can still go be wildly successful if you just go find someone that's already done it and duplicate and partner with them. And then for all of us in between that, you know, it, that works too. So I love that. All right, Book or podcast recommendation?

[Pascal Wagner]

You know, I really like Atomic Habits. I think it's like a good foundation by James clear of just building solid habits that stack and repeat over time.

[Joe Jensen]

Classic. Can't go wrong with that. All right, what is one of the most expensive or just interesting error unquote, you know, mistakes you've made in real estate investing?

[Pascal Wagner]

Yeah, one is, you know, I bought a property several years ago that ended up, that was just outside one of the Jurisdictions. I talked a little bit about having my portfolio all in one area in one city. Well, even having homes across multiple counties, counties all have different rules. And so I think in the niche that I'm in, I've learned a lot about how municipalities, tax codes, districts, they're all different. And how much that makes an impact. Earlier this year, I had to sell a property and lost, like, 10k on it. And thankfully not, you know, terrible. But I think it really changed. It really changed how I think about investing and understanding the rules and not being as. Yeah, it's just gung ho. And I didn't know the difference between different districts and cities.

[Joe Jensen]

Yeah. Like you say, every city has its own rules. Every county has different taxes even. It all changes as soon as you start getting out of different boundaries. I mean, even different neighborhoods, you could find an awesome house, and then you go two streets over, thinking you're buying in a similar area, and it's like.

[Pascal Wagner]

Yeah, not crap shoot. Right?

[Joe Jensen]

Yeah, that's good advice. I like that. All right, last question then. What is a one word or short phrase to encapsulate why you personally love real estate investing so much?

[Pascal Wagner]

Cash flow.

[Joe Jensen]

Cash flow, baby. I love it. I love it, man. We have a few minutes. I just want to hit on one point that we were kind of riffing on. We didn't dive into how it's not always as passive as you think. People get into this. They buy it. They're like, oh, I want passive income. Passive income. I want to talk about two different words here. Residual income and passive income. And what people really are chasing or should be chasing initially is residual income. I did commission sales. Right. But even if you're an hourly employee, it's the same thing. You show up, you get a sale, you get paid your 500 bucks, let's say. Or you show up, you do your 10 hours, and you get paid your 500 bucks or whatever your payment is. Right. It's tit for tat. You do this, you get paid. That's not residual. It only comes from what you did. Now, residual income is the coolest, most exciting, sexy thing in the whole world for someone who's used to just making money for the exchange of time or effort because it keeps giving. You put in five, 10 hours, you get a deal or two, and then it pays residually. It keeps coming every month, you know, technically indefinitely. Right. That's a really cool thing. It doesn't mean it's passive, though. You might still need to maintain those relationships or do these things or put in effort. It doesn't mean it's passive. It doesn't mean you're not doing anything, but it does mean it's still paying ongoing. Now, once you've hit the residual, then you can do what you did, Pascal, and try to pivot to make that residual more passive.

[Pascal Wagner]

Exactly.

[Joe Jensen]

Two different words, very different meanings. But sometimes they get very intermixed in this industry. And I just wanted to point that out because people, oh, well, it's not passive. I'm out. It's like, well, let's start with residual and then we can pivot to passive. But it doesn't mean you need to give up just because you have some work at the beginning. Because residual is a lot better than a one off in my personal.

[Pascal Wagner]

Great point to make. Great point to make.

[Joe Jensen]

Anyway, you're awesome, man. Thank you so much for sharing. Any final thoughts you want to share with our audience?

[Pascal Wagner]

No, I just appreciate you having me on the show, Joe. Great talking to you, and if I can be of help to anyone, please let me know.

[Joe Jensen]

Cool. I encourage everybody to go check out your stuff. I know you're going to be on a couple other really cool podcasts people would love to hear, and I'm sure they'll be very different than this. Every interview is so different, so there's so much to learn. But thanks for being here.

[Pascal Wagner]

Thanks, Joe.

[Joe Jensen]

This is Joe Jensen signing off for the Real Estate Investing School podcast, reminding you don't do it on your own.