Passive Income
A few months ago, my teenage son approached me and asked, “Dad, when I get older, can you teach me about that real estate stuff you’re always reading about?”
For those of you that have teenagers, not only was I just completely surprised that he wanted to learn about something, but he actually put his phone down and spoke. It’s a miracle!
Literally the next day, I was searching for podcasts to listen to while on the treadmill and I came across the interview below from Real Estate Investing Live.
I was completely blow away what David Toupin, a 23 year old (now 24) had accomplished in such a short period of time with real estate investing and passive income creation.
After hearing his story, I just had to connect with him to pick his brain. And luckily was able to.
Hearing his story at the perfect time my son wanted to learn more about real estate falls into David’s mission of inspiring young people to become entrepreneurs and teach real estate investing along the way.
Shaquille O’Neil
It reminded me of an interview I recently saw where a Wall Street Journal reporter was interviewing Shaquille O’Neil, AKA Shaq.
One of the greatest basketball players to go through LSU mind you.
Anyway, the interviewer asked him about why he does what he does. You see, Shaq has his hand in all kinds of business and franchises such as Krispy Kreme and now is a spokesman for Carnival Cruises.
My first thought was, “How does he fit in those tiny cabins?”
Anyway, the guy asks him, “Shaq, I’m sure you have deals pitched to you all the time. How do you filter through all of them and decide which ones to pursue?”
Shaq answers, “You know what? In the past it was all about how much money I was going to make in the deal. But now that I’m out of basketball, I’ve changed. And it’s if I know if I do this deal, I can help change other people’s lives, money doesn’t matter.”
David and Shaq are on the similar mission, to change people’s lives. The cool thing is that David can connect with the younger crowd because he’s one of them!
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David is currently owner and cofounder of Obsidian Capital which is a real estate investment firm based out of Austin, Texas. He began his entrepreneurial journey when he was 13.
His story his similar to mine in that we both started a lawn service at the age of 13. He stopped doing it before going off to college as he thought he’d like to be a dentist like his dad.
After taking that first year of biology classes at the University of Detroit Mercy, he decided that dentistry wasn’t for him.
He eventually switched to finance and did a few internships in investment banking. On the last day of his internship, he turned down a six-figure job to start up a real estate business.
They asked him, “Oh, well how are you going to start? Do you already have something lined up?”
David replied, “Nope, I’m just going to figure it out.”
After beginning to self-education himself reading books and listening to podcasts, he connected with a local mentor and started doing a handful of fix and flips.
He eventually got interested in apartment investing and got his first deal under contract as a 12 unit apartment complex. At the time he was a broke college kid living at home and had this deal on a contract where he needed a couple hundred thousand dollars to buy it.
He figured out a way to arbitrage raising capital from investors who came in on the deal passively. They were seeking passive income and thus he was creating a syndication or a pooling of funds together to buy a larger property than typically one individual can on their own.
Usually the operators, or those that put deals together, get a piece of sweat equity for their work. Normally David gave the investors 70 to 80% of the deal while he got 20 to 30% for putting it together and managing it.
And then, he gave them 70 to 80% of the profits, while he got 20 to 30% of the profits.
During the hold period it cash flowed and then was sold.
He bought that 12 unit, then another 12 unit, and then before I graduating college bought a 100 unit complex.
Let’s think about this, he’s coming out of college with over 100 units and sitting on roughly $7 million of property. Not too bad for a 20 year old. Amazing actually.
Mindset Change
David mentioned that after becoming successful with real estate investing, he had to move away from several of his circle of friends he grew up with due to his shift in mindset.
In life, the more successful you get, the more people will try to bring you down. Sometimes it’s done intentionally.
Every investment conference or book I’ve read usually talks about changing of our mindset first. We have to commit that we’re going to change and go in a certain direction.
This was true in the books:
As I’ve done a little bit of financial coaching on the side, I’ve seen too many physicians and dentists that make a lot of money but are broke.
They’ve gone through life struggling with debt and have a scarcity mindset vs having an abundant mindset.
It’s always some type of excuse why they’re broke such as:
- “I had to pay off student loans“
- “My practice loan was too big”
- “I had to buy a house”
- “I had to pay for my kid’s college and then their weddings”
I don’t know about you but if I’m broke, I’m not paying for anybody else’s bills until I get myself straight.
401k vs Real Estate
David recommends paying off all consumer debt and I wanted to get into some specific recommendations once that’s done.
I asked him, “For someone that has no debt except maybe a mortgage, what are some of the different things that they could look into build up passive income vs putting money in the market such as in a 401k.”
This was right up his alley in that his sole focus in his business is working with investors such as physicians, dentists, attorneys, entrepreneurs, business owners that are looking for passive income.
Obsidian Capital will put together a deal, run the numbers and present what type of returns are expected.
He gets several people that will invest with them with either cash or through their IRAs or 401ks using self directed accounts.
They pay out quarterly distributions to you so his investors are getting cashflow as opposed to just a value increase on a stock. Some stocks have dividends but they’re normally not more than 2-3%. He targets annually an average 8%, cash on cash return.
When they turn around and sell the property, their minimum targeted return is a mid to high teens annualized return.
Join the Passive Investors CircleExample
Here’s an example of a deal purchased in 2017 for 4.2 million. They put a couple hundred thousand into it and increased the value of it by increasing the rent.
They sold it a couple months ago for $7 million.
So in over a year and a half for an investor that put in $100,000 investment, they got back about $168,000. That’s roughly a 68% return in a year and a half, which is 70 times what the market’s going to give you in the stock or financial market.
He says that each deal is different but he hasn’t had a deal where they’ve been under a 15% annualized return after a sale.
His goal is to target stabilized cash flowing assets and people love getting those checks every quarter.
Syndication
David’s company focuses on mainly putting together syndication deals.
I asked him to describe what this is and he stated:
“A syndication is a term to describe the way that we fund the deal. So you can go in and buy a property on your own or joint venture with somebody. So, I put in $100,000, you put in $100,000 and we’ll go buy a property.”
“But then there’s syndication, which is where we pool funds together and essentially we’re selling shares to investors. So, for example, I just did a deal in Fort Worth, Texas, with a 140 unit apartment complex. We raised $3.6 million from investors, I think we had 26 separate investors put in money. Our minimum is normally 50,000 for accredited investors.”
“And so people put in money, it relates to X amount of shares based on their percentage of that total invested amount. You invest $360,000 of that $3.6 million you have 10% of the investor portion of the deal. For people that put in funds like that, you are classified as a limited partner.”
“This is a passive investment creating passive income. It’s not liquid, it’s not something that you can really sell out of. But you have ownership and shares in that, and you sign on an operating agreement, and ownership of the deal. And then that’s typically classified as a class A ownership interest, on this operating agreement.”
“For a lot of dentists and physicians that are in practice, you’re going to have an LLC that owns it, or partnership documents and an operating agreement. So we have the same thing for these properties that we buy. And then my company is the manager of the deal, the decision maker. And we have class B ownership interest, which outlines our roles and responsibilities.”
“We sign on all the debt, take the risk in terms of the loans, the management, operational responsibility. The entire time the investors stay strictly passive (which is what I like).”
What About Taxes?
Many of the readers on this site ask me about taxes whenever they’ve invested in passive real estate so I was looking forward to ask David about this.
Here’s his explanation:
“In terms of the tax implications when investing in a syndication, what happens is investors get a K1 every year. Normally the K1 deadline is mid March. It shows your portion of the profits or losses that the entity that you own a piece of gets every year. So what’s nice about real estate is we have all these write-offs like depreciation and capital expenditures. There’s bonus depreciation. So we can kind of front load a lot of these things, and it makes us show a loss on paper at the end of the year. And even though you’re getting distributions and making profit, you’ll have a loss in the first couple of years normally that you will be able to take on your taxes.”
“The great thing about these types of investments is it’s a great way to lower your taxes you receive on the passive income. Any loss that you show, you actually can write off against any other ordinary income that you make in your business, for example, or your salary. So not only do our investors get distributions, but there’s normally a loss that’s shown that reduces the amount of taxes you pay on your other income. And so going forward, most of our investors pay no taxes on any of the income or distributions that is earned throughout the course of the investment until we sell.”
My Thoughts
Whenever someone joins the Passive Investors Circle, I get to learn firsthand all about their financial goals. (Have you joined?)
The majority of the time, they have to do with retiring early from seeing patients to begin pursuing all of their interests that they can’t now because of work.
Unless you save and invest a boatload of money early on, it’s tough to retire early maintaining your current lifestyle (fatFIRE) unless of course you’ve been creating passive income streams along the way.
David has learned early on in his career how to do this and now he’s helping others along the way living his dream.