Steven Pesavento on How to Think Like the Ultra-Wealthy
How do the wealthiest of the wealthy think? And what can you learn from their mindset and apply to your own investment approach?
Today’s guest, Steven Pesavento is a high performance coach and active real estate investor, who knows that mindset is at the center of what it takes to create financial freedom.
Steven entered the real estate market with zero experience and within the first two and a half years, his company bought 200+ houses in multiple states, renovated 100 properties, and was entrusted with more than $12 million of investor capital. Later, he was introduced to passive real estate investing and transitioned his business completely to syndications—in part because it was an opportunity to work with wealthy, lifestyle-driven investors.
In this episode, you’ll learn all about how to change your mindset and think like the ultra-wealthy. We talk about the middle-class mindset that’s holding you back, the benefits of real estate syndications, tax advantages to passive investing, and how Steven was able to build and scale a real estate business with no experience.
Featured on This Episode: Steven Pesavento
💬 Words of wisdom: Like many people, Steven grew up with the belief that people with money are greedy and that people shouldn’t talk about money, but shifting his mindset allowed him to learn how to use money in a positive way.
- Direct ownership isn’t the only way to get the benefit of a real estate investment. The typical thinking is that you have to buy and then manage a property to see returns. But that takes a lot of time and effort — it’s definitely not a passive income opportunity. Steven explains the real estate syndication, which is a group investment in real estate, used to be reserved for the wealthiest investors, but is now becoming more accessible to the everyday investor. It doesn’t require you to know everything about real estate, but you need to make an informed choice about who you invest with — it isn’t dissimilar from investing in business.
- Real estate is less emotional than Wall Street (which makes for a more sound investment). Steven Pesavento believes real estate is a stronger asset than traditional markets because the extreme liquidity of the stock market sets up individual investors to make decisions emotionally and then try to justify those decisions. With real estate, you can’t make decisions in the heat of the moment. In real estate, you don’t have the option to change your course in reaction to some bad news, which means there is less volatility overall.
- The first rule of real estate investing: Get clear on your goals.Before you start looking at any investments, Steven recommends getting clear on what you want to accomplish with your investments. Do you want something that is providing you with cash flow from day one every quarter? Or do you prefer to focus on the overall portfolio or equity growth? Once you figure out your goals, you can pair that with your risk profile and start talking to investment managers or syndication firms and start understanding whether what they provide fits into your plan.
- Adopt an investor mindset to change your life. When Steven decided to go into real estate, it was with the belief that by doing so he would be able to create the life he desired. To make big changes, it starts in your mind with believing that it’s possible to create the kind of consistent, passive income to be able to have that freedom that you’re looking for. Once you do that, you can look at understanding how the wealthiest of the wealthy think, how they create and invest in their portfolio, and how they preserve that wealth.
Steven Pessavento on The Advantages Of Multi-Family Real Estate
Episode Highlights with Steven Pesavento
Adopt mindset principles from the wealthy
“When it comes to investing and managing money and understanding some of the important pieces that can really be able to create wealth and be able to create financial freedom for people, it really starts with understanding, how do the wealthiest of the wealthy think? How are they creating and investing in their portfolio? And how are they going about preserving that wealth? And so, all of these ideas can go into an action plan, a set of strategies that you can use to be able to make big change happen, but it first starts in your mind and starting to actually believe that it’s possible, to believe that you can create the kind of consistent income, the kind of passive income, the kind of tax benefits, and to really be able to have that freedom that you’re looking for.” – Steven Pesavento
Harness an investor mindset and get comfortable talking about money
“When you’re sitting in the presence of people who have a lot of money and are creating money, that are business owners, that are high net worth individuals, they talk about money. They’re very comfortable having conversations about money — where are they making investments? What’s worked, what hasn’t? That conversation is comfortable … the middle-class mindset is don’t talk about money, don’t ask people how much they make, don’t ask them what that return was, only talk about how much money you saved.” – Steven Pesavento
The most important question for passive investors
“People think they need to know everything about real estate, but as a passive investor, the most important choice is who you’re going to invest with. And then they go and run with those investments and they typically make the majority of the profit go to the investor, 70%, 80%, 90%. And the sponsor, the syndicate, or someone like myself, we make our profit based on success. We’re paid typically at the end of the project, maybe some fees along the way. And so, it’s completely mind-blowing to people when they start hearing and realizing that there’s a whole other path towards investing in real estate, and it doesn’t require you to ever take a phone call from somebody you don’t want or to deal with any of the trials and tribulations that go along with ownership.” – Steven Pesavento
The benefits of real estate syndication
“The benefit of syndication, the benefit of investing in a partnership with expert operators is that they’re bringing their time, their energy, their relationships, and most importantly, their experience and expertise. And oftentimes, when you combine all of those together, the return profile, the amount of cash or capital that somebody can actually make is much higher in a syndication than if they were going to go buy a single-family rental and do their best effort of managing it themselves.” – Steven Pesavento
Investing in real estate gives you more time to make decisions
“Real estate is like a slow-moving barge. It doesn’t turn quickly, which means you have a lot of time and smart operators are able to then project how the market is going to go. And one of the most important things when it comes to real estate is what is the debt and what is the length of the debt? Can we pay the debt? What is the worst-case scenario as far as who’s staying in our property? And what is that going to look like? And how much money do we need to make every month to pay that minimum amount?” – Steven Pesavento
Active income is taxed higher than passive income
“One of the big benefits of passively investing, is you take all that active income that you’ve been working so hard for, you start investing it and you actually are taxed at a lower rate on the money that you’re making. It’s amazing the opportunity that’s available to people who are really smart with their money, and they follow this strategy.” – Steven Pesavento
- Steven Pesavento Website
- Steven Pesavento on LinkedIn | Instagram | Twitter | Facebook
- Investor Mindset podcast with Steven Pesavento
- TIGER 21
- VonFinch Capital
- Flash Boys: A Wall Street Revolt by Michael Lewis
- Passive Investor Playbook
- How Syndication Works (And Why It’s Powerful)
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Read the Full Transcript with Steven Pesavento
Justin Donald: All, right, Steven, we finally get to connect, and I’m really excited to have you on the show because there is so much that you’re doing that I feel overlaps so well with what I do and really the language that I try to communicate. So, I love so much your programming, the packaging, the content that you’re putting out. I just think that you are speaking a language that people want to hear now more than ever before. So, welcome to The Lifestyle Investor.
Steven Pesavento: I’m super excited to be here. Thanks for having me, Justin. I think you do a great job and I’m excited to dive into all things real estate mindset.
Justin Donald: I love it. And by the way, what a great place to start because the mindset is everything, and this is kind of what I introed in my book before I kicked off any specific investment advice is the power of mindset, the need for really an abundant type of mindset. And I’d love to kind of get your opinion on what you think an ideal mindset is or what’s a shift that people need to make in this kind of look of mindset.
Steven Pesavento: Yeah, well, it’s such a good question. And so, let’s start first by what is mindset with a simple definition. Mindset is the thoughts and beliefs that you have that lead directly to the actions you take and, therefore, the outcomes that you experience and really what’s happening within your life. And so, what’s great about that is that if you change those thoughts and beliefs, you’ll end up having a different set of actions and experience a completely different life.
So, when it comes to investing and managing money and understanding some of the important pieces that can really be able to create wealth and be able to create financial freedom for people, it really starts with understanding how do the wealthiest of the wealthy think? How are they creating and investing in their portfolio? And how are they going about preserving that wealth? And so, all of these ideas can go into an action plan, a set of strategies that you can use to be able to make big change happen, but it first starts in your mind and starting to actually believe that it’s possible, to believe that you can create the kind of consistent income, the kind of passive income, the kind of tax benefits, and to really be able to have that freedom that you’re looking for.
We happen to do that through real estate at VonFinch, and with my show, The Investor Mindset, we teach people how to go about creating passive income and being able to leverage some of the tools that some of the wealthiest investors use, but there’s a lot of different paths. We just believe that real estate is one of the strongest ones.
Justin Donald: Yeah, and I tend to agree with you. And not only is it one of the strongest paths, but it is one of the easiest paths to get started into. So, I like that. That really is kind of your bread and butter. And you said something with the mindset that really resonated with me because there is a different mindset amongst the ultra-wealthy.
I was hanging out with one of my friends here in Austin who is a billionaire and very high profile. And we had just the most amazing dinner and we got into some really old vintage wine from his wine cellar. And the conversation that proceeded to happen through the course of the evening was just the most high-level concept type of thinking that you’ve ever imagined. So, it was very evident quickly that his financial success is not lucky like there is no luck about it. He thinks differently. My mind was blown probably six or seven times within the first hour of us connecting. And it is so true that the mindset matters, and spending time with other people that embrace a mindset that you want to have, that you aspire to have is truly imperative. Now, your story– go ahead.
Steven Pesavento: It’s absolutely incredibly important. You hear this, Jim Rohn has a quote. You are the sum of the five people you spend the most time with. So, if you’re spending time around people who are comfortable with money, who believe that money is a tool to create great impact contribution and to be able to allow you to use it as a tool to live a better life, then you’re going to be somebody who’s going to be attracting that money. And that’s one of the big things that’s different about very wealthy and successful people.
People have an investor mindset. They are comfortable with money. They have an identity that money is a positive thing. So, they’ve gone through their life creating a great relationship, getting rid of some of those beliefs that might hold them back, some of the ones that maybe you or I grew up with, that money is bad, that people with money are greedy, that’s only for rich people. All of these things are well intended, but they’re beliefs that end up holding us back. They prevent us from being able to take actions and learn how to use money in a positive way. And so, I’m so glad that you brought up the power of the community as one way to really kind of shift the way that you’re thinking.
Justin Donald: Yeah, most certainly. And I feel like, I guess how I was raised was to kind of like hold onto money really tightly because you don’t want to let it go because there’s not much of it, and it’s just the wrong thinking. And you’ll see by hanging out with people that do well financially that they don’t grip money like that. There’s not this overarching control mechanism. It’s very like laissez-faire and very like abundant-minded.
And so, it’s just interesting to see that people that have a lot of wealth financially, they’re, in my experience, a lot different than what I envision them to be or how I envision them to show up or interact in a conversation or what I had been taught this whole idea of like money-hungry people. And it’s actually kind of even further from the truth than what I ever would have imagined.
Steven Pesavento: Yeah, well, it’s so true. I mean, think about it when you’re sitting in the presence of people who have a lot of money and are creating money, that are business owners, that are high net worth individuals, they talk about money. They’re very comfortable having conversations about money, where are they making investments, what’s worked, what hasn’t. That conversation is comfortable because where else are you going to learn some of the lessons that other people have gone down that path, but the middle-class mindset, not the investor mindset, but the middle-class mindset is don’t talk about money, don’t ask people how much they make, don’t ask them what that return was, only talk about how much money you saved, right?
These are shifts in thinking that can help you start to kind of take on the identity of somebody who is wealthy, the multimillion-dollar mindset, if you will, to be able to then be comfortable with it and start having that confidence because when you’re around people who are extremely successful, what a shame would it be for you to miss out on that opportunity to learn the way that they’re thinking about this and how they’re actually doing it because, again, once we understand how they think, we can start to bring that into our identity and we can start to be like that, we can start to show up like that so we can start to actually have some of the same results.
Justin Donald: Yeah, completely. It’s interesting because in my Mastermind application or in my private coaching application, the questions take a deep dive down the path of someone’s finances and how it’s broken up and how it’s allocated. And it gets personal, but it’s not like I don’t look at money as personal, I just look at it as something that happens. Everyone has a certain amount of value that they put out in the world and, therefore, that they’re going to attract financially.
There are other ways to attract wealth, and it’s not just financials, but I like to know every detail. And so, it’s really funny sometimes when I interview people for my Mastermind, they will say, like, this is the most I’ve ever shared with anyone about my financial life, and the intricacies, the details of what my net worth is, what my passive cash flow is, etc. And I’m just always so shocked and surprised that it’s not spoken about more often. I mean, I’m part of Tiger 21. I know you’re part of investment groups, and it’s a very open line of communication. I mean, we talk about it every time that we get together, and it’s no big deal. And I think step one is just getting clear on where you are and not being afraid to talk about it because it is a very kind of middle-class mindset, as you alluded to, to not talk about money.
Steven Pesavento: Yeah, it’s so true, and then once you start building that comfort, you’re surrounding yourself with people, that’s when you can really start. And before that, even you should start to get clear on what you want and why you want it, where you can have that clear vision and a purpose that drives you of what you’re looking to accomplish within your investments. It can make the process of going and finding great communities like Tiger, like many others, to then start understanding, hey, how can you level up your knowledge and skill set there?
And once you have that clear idea of what you’re looking for, then you can actually start taking a look at investments, then you can start talking to investment managers or people like myself who run real estate’s syndication firms or others to then start understanding, hey, how does what they are providing fit into my plan? Is this a fit? Is this not a fit? Do I like something that maybe is giving me cash flow from day one every month or every quarter? Or am I somebody who is preferring to focus on the overall portfolio or equity growth? Or maybe am I looking for a blend of the two, maybe more of a conservative standpoint, more of a, in your mind, when you see a check coming in every month, maybe that feels good to you so you like to see those dividends versus somebody who doesn’t need the dividend. They’re making so much great income in their life, in their business, or their career that they are only focused on what that end number is going to be.
Steven Pesavento: And when you know that information and you pair it next to what you might call your risk profile, how comfortable are you with the idea of loss in relation to how much return you’re going to get? Then it makes it quite easy to start evaluating different opportunities because I was to say pull out two different real estate deals in front of you, and let’s say they’re both 200-unit apartment buildings and let’s say they’re both in the same city, and we’re using a very similar strategy, but one is going to be focused on giving you cash flow and the other one’s going to have a higher overall back end return. There’s no right or wrong of which one is better than the other, but there is a right of what’s best for you, and that’s why you always have to start with that clarity. You’ve got to get your mind in the right place. You’ve got to get clear on what you want.
And then that’s when we actually start the process of deciding to start looking at what these investment opportunities really look like. We work with a number of our clients through that process, through onboarding, kind of helping them to get clear because it makes our job a lot easier to serve them. I’m sure you’ve experienced that as well as some of the people you work with.
Justin Donald: Yeah, it’s so important to know what someone’s goals are and to get to that right out of the gates because the more in alignment you can be, the easier it is to serve them. And I found it pretty interesting that you look at how are we programmed to look at wealth? Well, generally, it’s under the microscope of finances and net worth, and it’s this accumulation game. And for many people, they’re focused on accumulating all these assets, but a lot of people tend to be asset rich and cash poor, right? They’ve got a bunch of assets that are illiquid or they’ve got a business that is illiquid, and that’s where the lion’s share of their net worth comes from.
And it’s interesting that if you shift and you can focus a little bit more on the cash flow side of things, you’re naturally going to grow your net worth as you grow your cash flow. And I think for most people, they just don’t even realize that’s an option, that you can have the cash flow today versus waiting until you’re retired. My experience has been most people don’t even know this world exists, even the world of syndications, that it even exists. And I love the truth that you’re speaking here into this.
Steven Pesavento: Yeah, well, I think you’re absolutely right. It’s surprising because I’m somebody who happens to be deep within the industry. It’s very common to me. I’m very comfortable with it. We’ve done multiple deals. We work with some incredible partners from across the country to be able to deliver these kind of returns, but most people believe this false belief that the only way to own real estate, the only way to get the benefit of investing in real estate is through direct ownership. Most people believe that they have to go buy a single-family home or a duplex or a fourplex, or potentially even buy an apartment building, all with their own money and capital, which they have this belief that they need to be the one who’s going to manage it or maybe they’re going to put a property manager in place, but they’re going to be the one to take those phone calls, to make those decisions.
And it’s really not a passive opportunity for most of the people who have gone through either becoming a landlord intentionally or because of a requirement, maybe they couldn’t sell their house during some kind of economic downturn, that they’ve experienced some of the downsides of being a real estate investor and owner, is it takes a lot of effort and work. We call that the toilets, the tenants, and the termites and dealing with all the problems that can come up, but the truth is, there’s a whole industry that’s been serving the ultra-wealthy for decades and decades and decades. It was exclusively reserved for the ultra-rich and wealthiest companies in the country, but now, it’s becoming more accessible to everyday investors. Accredited investors, not accredited investors, are having opportunities to be able to invest in these kind of opportunities. And what’s phenomenal about that is the return profile is typically better than what you might see in the S&P, but the risk profile is often lower.
Now, there are ways that you have to go about it. It’s important to pick the right sponsor, to understand who you’re working with, to trust the people because, at the end of the day, when you’re investing in a real estate asset, you’re really investing in a business. You’re investing in a business that’s going to be operated by people so you want to invest with people that you know, like, and trust. And that’s where it all starts.
People think they need to know everything about real estate, but as a passive investor, the most important choice is who you’re going to invest with. And then they go and run with those investments and they typically make the majority of the profit goes to the investor, 70%, 80%, 90%. And the sponsor, the syndicate, or someone like myself, we make our profit based on success. We’re paid typically at the end of the project, maybe some fees along the way. And so, it’s completely mind-blowing to people when they start hearing and realizing that there’s a whole nother path towards investing in real estate, and it doesn’t require you to ever take a phone call from somebody you don’t want or to deal with any of the trials and tribulations that go along with ownership.
Justin Donald: Yeah, you bring up a lot of great points here, Steven. And one of them is, you’ve got to figure out how much time you want to spend doing investments. So, if you want a higher return by owning deeded property, owning a single-family home yourself, it will be more work, you can get a higher return, or you can let professionals that have experience manage and operate it, you make a lesser return because you’re paying them on the deal. And for many people, their time then is preserved. And so, again, it’s getting clear on what people’s goals are. Is your goal to maximize return? Or is your goal to maximize your time? And I think that’s an important component to consider.
And I also think that with syndications, you mentioned that the syndicators or the sponsors are going to make a small percentage of the deal, but I think it’s also important to warn people that not all sponsors and not all deals are the same. You’ve got to look at the levels of experience. You also need to look at the way that the splits are structured because some syndicators will make money right out of the gates. And I like what you said that the majority of your compensation is made once the deal goes well at the end of the deal. And I think that that is really important because you are then in alignment with your investors.
Steven Pesavento: Absolutely. I think when deals are structured that way, it’s extremely valuable to both the investors and it really creates an incentive structure for the operator to go out and be able to put in the effort and energy that it’s going to take to be able to get that upside. Now, it’s really important also to remind investors that the sponsors are putting in hours, weeks, months of work well before a deal ever comes to market. And then, once the deal comes to market, they’re putting in hours, weeks, and months of work operating, managing, and really bringing this property through its rehabilitation process, through the value-add process, through the whole process, and then, of course, to sale.
So, those sponsors are doing a ton of work. And it’s important to remember that you always want that anyone that you’re going to hire on your team to feel valued, to know that they’re being compensated well for the work that they’re doing. Otherwise, they’re going to go look for other employment. And the same is true for a sponsor. And so, that’s the reason that there are fees because if we’re not being compensated the majority of our comp until the end of the project or the middle of the project, then it’s critical that there’s some money coming in to be able to keep the lights on. And this is where fees come in.
So, typically there’s a 1% to 2%, potentially on a very small deal of 3% acquisition fee that’s upfront that pays for all of that time, effort, energy, and cost that went into going and finding that property. And there’s typically an asset management fee and that ranges anywhere between 1% to 2%. And that’s paid out based on the revenue that’s generated for actually managing the property. And so, when you actually break down how much these fees are, they’re quite small in comparison with buying a $20 or $30 or $40 million property.
Steven Pesavento: And one thing that I do want to note is people definitely have the option and opportunity to go be a direct owner, to have deeded property, as you said. And there are some advantages, like the advantage of being in control of making all of the decisions. So, if you’re somebody who is very focused on control and you need to make every single decision and you want to be involved in every part of the decision-making process, syndication and crowdfunding, it’s not a good fit because at the core, what you’re giving up is control in order to be able to be in a passive place.
But here’s the other piece. Yes, you potentially have an opportunity to make more money if you do the job well, but the benefit of syndication, the benefit of investing in a partnership with expert operators is that they’re bringing their time, their energy, their relationships, and most importantly, their experience and expertise. And oftentimes, when you combine all of those together, the return profile, the amount of cash or capital that somebody can actually make is much higher in a syndication than if they were going to go buy a single-family rental and do their best effort of managing it themselves.
And here’s a perfect example why. It’s quite difficult to go and find a single-family home that’s going to return really great cash flow every single month or every quarter when you take into account how much work goes into that and what can come up along the way. So, experienced landlords who have been working in a market that’s going up over time, like we’ve been dealing with for the past 10 years, haven’t had much of an issue unless a furnace or some big thing goes out, but when you actually then break that down and look at the overall return, somebody might be making a 10% or 12% return. If the property appreciates quite a bit, they could be making more, but it needs syndications. They’re completely hands-off, meaning you’re not putting any time, effort, energy in, but you’re often seeing returns that are 12% to 15%, 12% to 17%, or potentially, if you’re somebody who likes going after a property that maybe needs a little bit more work and you’re working with an experienced sponsor, you can see those returns in the low-teens and high-20s.
And so, it’s surprising for people to be able to see return profiles that are like that. They think, oh, gosh, there must be just a crazy amount of risks, but the secret is it’s the private market. So, it takes knowing and having a relationship with these sponsors to be able to make the kind of capital. And the other piece is you’re giving up the ability to be liquid. You’re committing to that investment until the end of that investment. And so, you can go invest in, say, Arete, and you might make 6%, 7%, 8%, 10% maybe, usually 6% to 8% on Arete, but you’re liquid, you can sell any time, any day, but that also means that anyone can sell any time, any day. And so, you see a lot more fluctuation.
In these private syndications, you’re getting a lot of that value because your money is not liquid. You’re making that decision to say, hey, for one year or three years or five years, I’m going to commit to this investment. I’m going to let this business run its course and then I’m going to exit. And you’re essentially a shareholder in that business. The business just happens to be an apartment building, the same way you’re a shareholder in Apple or some other publicly-traded company.
Justin Donald: Yeah, and a lot of it is, are you buying that asset under market value, right? If you’re doing that, you’ve got a pretty good hedge on risks. And I think that that’s important. And finding off-market deals, that’s very possible. I first started investing, I bought deeded property and I learned probably just like you. And in fact, I want to get into your back story here in a little bit, but I did own deeded property and I still owned deeded property, but today, I really value my time so much different than I did years ago, a decade ago, 15 years ago, where I’d rather have syndicators really well, like refined systems and processes, like these operators that have a killer track record. I’d rather have them manage it because then it doesn’t take any of my time because that is to me, the most important commodity that I want to guard.
And so, we talked a little bit about you and the expertise that you have, what you’ve done. I’m also really curious, before we even get into your back story, you brought up a little bit with the stock market, and I think you and I share a very similar opinion of the stock market and kind of what I would say the idiocracy of having 100% of your assets in most people’s cases in one vehicle or in one place, let’s just call it the public equities. That to me, is very risky, even though Wall Street has conditioned us to think that that’s very safe. So, I’d love to hear your take on that as well, Steven.
Steven Pesavento: Yeah, well, here’s the truth is that for decades, for a generation or two, Wall Street has been pumping in money, talking about the traditional markets. It’s the entire reason that most people think of stock investing. The entire financial services industry is built around investing in publicly-traded companies and mutual funds. They make their money based on having you keep your money managed by them. Absolutely makes sense. That’s where their incentive is. It’s the same– that could be true about where our incentive is on the real estate side. Let’s just be clear.
We have a belief that real estate’s a stronger asset. Therefore, we’ve built an entire industry around it. And one of the reasons that so many people are leaving the stock market is because they happen to see they have a lot more control and leverage by directly investing their money into these kind of real estate deals than in the stock market, but the thing that is true about the stock market, that is not true about privately held real estate or syndications, like we’ve been discussing during this entire show, is that the stock market is extremely liquid. There are billions of dollars that are being moved in and out of stocks every single minute of every single day. And part of that is to direct where the market is going to go.
So, some of the biggest hedge funds, some of the richest individuals and companies, what they do in the stock market is they make little bets and decisions. Hey, I’m going to bet that this stock is going to go up or down and I’m going to push the market in that direction to make that stock go up and down. We’ve seen it with the Wall Street bets, people pushing back on that. We know this is the way the market works. So, as an individual investor, you might think, hey, I’m going to put my money into this investment, but what are the biggest challenges that most people have if they’re not professional investors, is that they make decisions emotionally and then they justify it logically. So, when something bad happens, you see the stock go down and you think to yourself, well, I better get out of here. And you have the ability to make that decision emotionally in that moment.
Steven Pesavento: In these real estate deals, you don’t have the ability. That’s actually a huge benefit because by making that decision, when you’re in a clear state of mind when you’re ready to make that investment when you see what the entire business plan is, you don’t have that optionality to just say, hey, in an emotional moment on a Tuesday afternoon, when something happens in the news, you don’t have that option to be able to sell. And that can be a huge benefit because what happens is there’s a lot less volatility as a result.
Real estate is like a slow-moving barge. It doesn’t turn quickly, which means you have a lot of time and smart operators are able to then project how the market is going to go. And one of the most important things when it comes to real estate is what is the debt and what is the length of the debt? Can we pay the debt? What is the worst-case scenario as far as who’s staying in our property? And what that’s going to look like? And how much money we need to make every month to pay that minimum amount?
And so smart operators go in with a plan. They know exactly what that’s going to be like so that if the market turns, they’re not going to be in a bad situation, but as a stock market investor, you’re the person trying to make decisions about your own financial future while you’re emotionally feeling the fear of what happens. Have you seen that as well, Justin?
Justin Donald: Oh, yeah, without a doubt. And in fact, in the stock market, you’re playing at a major disadvantage anyway, even if you’re a trader because you have algorithms that are just superior to just about anything else that’s out there, superior to people’s own decisions because we are emotional creatures. So, you have these algorithms that are outperforming humans. And then, on top of that, I don’t know if you’ve read the book Flash Boys by Michael Lewis, but the incredible book with the speed at which these transactions can be had like you cannot beat them, you cannot beat Wall Street, you cannot beat the investment bankers at their game. And so, you’re always a few steps behind. And that might even be really generous to say, just a few steps behind.
So, I’d love to transition here real quick because, Steven, your story is really fascinating to me. You went from a management consultant for many of the Fortune 500 top companies. You left that and you started buying single-family homes. You scaled a portfolio of over 200 single-family homes. Now, I believe in the process, you are flipping as well. So, I don’t think you’re actually holding the whole time, probably some you held and some you flipped. I’d love to know more of the details. And then you pivoted into multifamily. I want to know kind of that story, like what got you into management consulting? And then what made you leave it? And why single-family homes? And then why multifamily, because you have a lot of experience across many different facets of business?
Steven Pesavento: Yeah, well, I’m excited to talk about that because it’s one of the big drivers of why our business is where it is today. And so, based on all the conversations we’re having, I want to share a resource with the audience. I think it’s going to really help them understand this asset class on a deeper level. It’s a complementary resource. We spent a lot of time putting it together. It’s really detailed but easy for just about anybody to be able to soak in.
And there’s one section in particular on understanding how to pick a deal, due diligence that I think you guys will get a lot from. And if you guys want that, you can just head over to InvestorMindset.com/passive. It’s called the Passive Investor playbook. It’ll walk you through step by step what you need to do in order to start taking advantage of these kind of opportunities. And that’s at InvestorMindset.com/passive. And I’m sure Justin will include that in the show notes.
So, when it comes to my background, I went the traditional route. I went to university following the belief that by going to university, I’m going to end up getting that dream job as a management consultant. That’s the job that every business graduate is encouraged to desire to want. And I went into that field process improvement, focus on how do I make these multi billion-dollar companies run more effectively or specific software processes that they’re operating in. And it was rewarding. I really enjoyed it. I was phenomenal at it, but there was something that was missing, and it was this passion. It was this drive. It was being surrounded by other people who believed that you could create a better life. What I saw was, and I’m sure a lot of listeners can relate to this, there’s a lot of people who are punching the clock from nine to five, working for the weekends, working for that moment that they get out, and not really thinking about how do they create a great lifestyle.
And so, for me, what that led to was me making a decision, hey, I have a belief that it’s possible to go and create everything you want to create. So, let me go on this journey to go and find it. And that led me into technology, that led me into the startup community, and eventually, it led me into real estate. And so, after having many experiences, doubling my salary at every single position I took along the way, learning a lot, I ended up landing in real estate because it was that one passion that that idea that kept coming back up, but I kept limiting myself, I kept holding myself back from doing it. Probably a lot of the same reasons. A lot of the listeners have held themselves back from investing in real estate for the first time or investing in real estate in a new way if they’ve already done it before.
Steven Pesavento: And so, what it was, was I had this idea, this vision, but I didn’t think investing in apartments was possible. I thought, oh, well, that’s too big. That’s for other people. And so, I started flipping houses and I built a very successful house-flipping business and was flipping over 75 houses per year, over 200 houses in about two and a half years, and that was phenomenal. We are making a lot of money, and I realized that I need to start holding on to some of these assets to start creating that cash flow, that income, but what I noticed was there was a huge lack of scalability with these small assets, even though I had a pipeline. We’re buying directly from homeowners or buying things at 60 to 70 cents on the dollar. We’re getting a great deal and we’ve got teams and systems in place, but it was still nearly impossible for us to find cash-flowing assets. We’d have to buy deals and hope that they would cash flow in the future.
So, I started looking around. What are some of the other options? And that’s when I got reintroduced to apartments. And I started seeing that it was possible for people like me, high-income earners, to be able to invest passively. And as I started investing passively, I started seeing the opportunity for me to transition our entire business in that direction. And the key reason, although scalability and cash flow and the tax benefits and all of these things that were really important on the passive side as well as active, were available, the big thing for me was the people that I got to work with. I wanted to build a business around my ideal client, other people who are successful like me, we’re making great money, but they had this common belief that they were focused on growth not only for themselves and financially, but to have this belief that they can live a better life. And that’s the one thing that I find in common in this part of the industry, is when you start making a decision to invest in syndications and crowdfunding, you’re creating a network of other fellow people who are also big believers that life can be better and bigger.
And so, that’s what we’ve done. And we’ve served hundreds of investors and we do a phenomenal job of what we do, but at the core, what I love so much about it is I get to surround myself with people who are extremely successful, and we get to share ideas and grow and obviously, see the portfolio grow, that’s not a bad thing as well.
Justin Donald: Yeah, you hit the nail on the head. It’s about creating a community of like-minded individuals that play the game of life at a higher level than you do or at the same level, but desire to play it at higher. And they’re eager to learn. And then it’s about having that tier of mentors and coaches and people that have the experience, not just someone who calls themselves a life coach, but someone that has actually done the thing that you want to do. And you follow that person because they have the blueprint. And I think that that’s so important. You got to look at the track record. Did someone do what it was that you want them to do? Otherwise, don’t pay them to teach you if they haven’t done it first.
And you mentioned something else, Steven, that I thought was really important, that with single-family homes, and by the way, I’ve done single-family homes, I’ve got a business that specializes in single-family home maintenance for the rich and the largest owners of single-family home rentals, and there are economies of scale, but it is hard to make a big return on single-family home rentals until you generally get to like 40 or 50 homes. And many people would tell you a hundred, but I’d say at least 40 to 50 homes. That’s a lot to manage. And so, when you have group syndications that are doing this on a scale of thousands of homes, that to me, is where you can get some good traction, get some good returns. You’ve got institutional management in place. And I think that that is powerful and really important.
One last thing, though, you mentioned tax advantages. I want to know all of your tax advantages, but also there is a difference that most people don’t realize between passive income and earned income. Most people don’t get that earned income is the highest taxed income that exists, passive income is one of the lowest tax incomes. And for someone that is a passive investor, meaning they have no earned income, they fall into the lowest tax bracket that exists, and by IRS standards, they are a passive investor. And I think that that is important to kind of shed light on.
Steven Pesavento: Yeah, well, that’s exactly it. That’s one of the big benefits of passively investing, is you take all that active income that you’ve been working so hard for, you start investing it and you actually are taxed at a lower rate on the money that you’re making. It’s amazing the opportunity that’s available to people who are really smart with their money, and they follow this strategy. The benefit of investing in real estate over other activities is that you have the benefit of depreciation and bonus depreciation, in particular, you essentially buy a property, and let’s say you invest $100,000 in that property.
Well, that $100,000, if you use bonus depreciation, you’re able to write off between 60% and potentially 80% for some deals. I’ve seen where it’s actually over 100% depreciation write-off, which means that you’re able to actually take that as a passive loss on your taxes, which means that you can make these kind of returns tax-free or tax-deferred. So, if you’re really excited about the idea of reducing your tax burden, real estate can be a really great option and opportunity.
Steven Pesaventor: And here’s another secret for all of those real estate professionals, those real estate brokers, those active investors, those fix and flippers, if they invest in syndications, they invest in the type of deals they’re actually able to write off their active income. So, there are some really cool things that are available in real estate that are not available in very many other places. And that’s because the government, the Congress, they wanted to incentivize creating great places for people to live. And so, they’ve gone about creating a tax code, which is really just a map of what the government wants you to do. And as long as you follow the steps on that map, you’ll end up getting to that big red X of low or no taxes. And so, it’s a big reason why real estate is loved by the ultra-wealthy because who wants to pay more taxes?
Justin Donald: Yeah, and if you have earned income, you should become a real estate professional for tax purposes. You can get those extra write-offs. I think that’s tremendous. And by the way, if you have no earned income, that can actually be a handicap. So, you want to be careful using that because times in my life where I’ve had zero dollars of earned income, having that designation actually would have cost me more in tax dollars than to not be a real estate professional. So, always check with your CPA on that stuff.
Steven, it has been just so awesome having you on the show. You are a wealth of knowledge. Where can our listeners learn more about you? I know you shared a place that they could go get one of your resources, but tell us more about where we can find you.
Steven Pesavento: Yeah, if you like the conversations that we’ve had here today, we have them twice a week on the Investor Mindset – Real Estate Show where we dive into how to create passive income through real estate. We dive into a mindset. We dive into a lot of things that are going to help you become a better leader. You can find that on Apple or any of your favorite places to listen to the shows just like this. I encourage you to go hit that subscribe button right now.
The other places, if you’d like to get in touch, I encourage you to reach out directly on social media, Facebook, LinkedIn, Instagram, shoot over a DM. Myself or someone from my team will put us in touch, and we’ll be able to share some resources that can really help you get started. Then I definitely want to remind you guys, go grab the Passive Investor Playbook. It’s a 52-page resource, very powerful. It’s something we should be charging for, but we’re not because we really want to be able to introduce these ideas to even more people. So, you can find that at InvestorMindset.com/passive.
Justin Donald: Awesome. Thanks so much, Steven. And to all of you watching and all of you listening right now, I just want to end the episode today, as I do every week. And that is this, take some form of action today towards the life of your dreams and towards financial freedom in some way, shape, or form. It can be a baby step. That’s all right. Just take action today and move to a life of choice, a life by design, not a life by default. Thanks for tuning in and we will catch you next week.