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We wrapped up another amazing episode with Chad Sutton! Chad is an “old soul” and a genuine “family man”, passionate about building a quality lifestyle and quality communities for residents! He is also one of the five managing partners at Quattro Capital.
In this show, Chad Sutton dives deep and explains how Americans need to invest better and avoid common mistakes. He shares ways to invest smart and accelerate the multiplication of your money, quicker than your perceived safe way!
Get you FREE copy of the book here: https://holisticwealthstrategy.com/
He later spills his three secret components to becoming a millionaire and diversifying the income stream. This episode is packed with great information for anyone looking to improve their financial situation.
In This Episode
- How Chad transitioned from NASA engineering to real estate
- Current investment mistakes that Americans encounter
- How to diversify your income stream
- Chad’s 3 components of wealth strategy
Chad’s advice is straightforward and actionable. If you’re looking to take control of your finances, this episode is a great place to start!
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Hey everyone, and welcome to the show. Today, we are joined by Chad Sutton. Chad is one of the five managing partners at Quattro Capital, leader of the acquisitions team, and the host of the Real Estate Runway Podcast. Chad’s a recovering engineer who spent most of his profession in corporate America and space flight with NASA and aircraft with GE before following his passion as a real estate investor. He is an old soul and a genuine family man, passionate about building a time quality lifestyle and quality communities for residents. Chad, welcome to the show.
Dave, good to see you again. You know, it seems like only yesterday we were recording on my show. Good to see you on this side.
Yeah, it does for sure. Tell everyone, how do you go from working at NASA and engineering to getting into real estate? You probably get that question a lot.
I do, and it’s kind of a funny story. As a kid, I was always a little technically inclined. I built Legos, K’Nex, Erector sets—anything you can imagine. I was that guy, building tree houses out back. At some point, I was told, “You need to be an engineer.” I was pretty good with math and numbers as a kid, so I listened and went that route. I chased the corporate dream of being a top-level engineer, and I went there. I went to school for two degrees, one while working. I worked in some pretty interesting fields, working for NASA back when the space shuttle was still flying, working on things that go boom and really fast. I got to work on aircraft after that for many years, and then subsequently renewable energy products like wind turbines. Lots of really cool technology. I really enjoyed being an engineer.
What I didn’t enjoy was the economics of it. You realize after a while that you’re really just a highly paid hourly worker. Every design project you do, the resources and the budget you’re given go down. They’re always trying to squeeze the tech companies are always trying to squeeze engineering down, which means the quality of life is not great. You’re always trying to get to that extra income rung, and you’re always doing more work for less money. I realized that at an early age and decided to de-specialize. Right around the time I decided to do that, two things happened. One, the General Electric stock price went from like 40 bucks to five or something, if you remember that. We were shareholders, a dividend-paying stock that was no longer that way.
I went through a couple of administration changes within the company, and we wound up forming an internal McKinsey and Deloitte or KPMG, if you will, like an internal consulting group. My entire job as a young man, which was pretty neat, was to fly around the world on GE’s dollar, going to every manufacturing facility in the world and focusing on what’s called variable cost productivity. My whole job was how do I make the profit and loss statement better by making products more efficient. The benefit of having been a product engineer and having a little bit of business savvy was I got to go work on this team. That’s really where I gained my business savvy, my P&L experience, the whole how do you translate tech skills to numbers. My whole job was how to make the business more profitable, and not to mention I got to do some pretty neat traveling along the way as well.
Did that for a while, that really de-specialized me. That led to a global commodity leader role where I was effectively a global sourcing and negotiating lead for the renewable energy industry. I was responsible for all the big heavy electrical—think transformers, think massive breaker boxes called switch gears, things of that sort. That’s what broke me. That’s what got me out of corporate America, because my whole essence of being, my whole purpose, was to take my, what I’ll call, mom and pop small companies and be big bad GE and quite literally take everything from them. I was good at it, Dave. I was really good at it. I negotiated a lot of things that really put GE in a good spot but really put other companies in a bad spot. I would have to go look at these people who, by cutting volume, I just eliminated 40% of their workforce. So yeah, very much unethical and immoral for me. It’s a necessary part of business, but it’s just not where my heart is.
Right around that same time, the other thing that happened, back when the stock price dropped, one of the biggest influences in my life, my grandfather, passed away. Patriarch of the family, big Texas man, you know if you knew him. He was boisterous, he was loud, he was funny, but he also taught me a lot of what I know in life and continues to teach me even after he’s gone. He and my grandmother had invested in about 70 single-family rentals as a portfolio in Texas. I got involved with that and started asking the questions of why am I trading time for money. How do these people who have all this wealth and freedom, how do they get there? The common denominator in all these books was some form of real estate. It could be a farm, could be single-family, could be multi-family, could be commercial centers—anything like that. I started to focus and realize, okay, it’s not just real estate. It’s how do you buy assets that produce income, some form of tax benefits—we like depreciation, but there are others out there—and some form of marketable equity appreciation that I can sell later for a profit.
For me, real estate was the easy way, as it is for a lot of us, because it’s attainable. You can get your head around it. I’m not going and buying a tech company; I’m going and buying something that people live in, that I live in, that I understand. That was really where the transition started to happen. I got to where I wanted to be in corporate America, climbed the ladder, realized I didn’t like it at the top of the ladder. And oh, by the way, the further you get up that ladder, the more people are taking shots at you, trying to get you to fall. I discovered here’s a way to divorce time from income, and I pursued it with utmost passion. That’s kind of where the story flips over to today.
Wow, that’s really cool, Chad. You know, that story about GE, I mean, I’ve got to just share with folks how close to home that hit. In fact, that’s really what drives my investment thesis even further on the passive income side. So you take GE stock, which was considered one of the most blue-chip, stable companies you could have in your portfolio. My wife was from upstate New York, and her dad worked his whole life and invested in the market. Luckily, he invested at an early time, and there was some good appreciation in stocks like GE, IBM, and Kodak. These stocks were very sentimental to her.
But when GE stock completely crashed like that, and she also had Kodak, which went bankrupt—it really shows how the financial services industry has us thinking that you have the most security and liquidity by investing in financial markets. I would completely argue that. When something as financially stable as that goes bankrupt, and if you’re at the end of your retirement and on fixed income, you probably don’t have everything in bonds. You watch your portfolio blow up by something that’s supposed to be stable. I think there are some faulty assumptions out there.
I would agree with that. The public and the notable financial advice often come from those with the biggest marketing budgets. The thing everyone knows is the thing everyone sees—mutual funds, stocks, bonds. A lot of money is made and spent on marketing to get your money into it. There’s definitely faulty assumptions and misadvice. I’ve learned to be wary of shiny brochures. People have looked me in the eye, shaken my hand, and said, “This is going to be great,” and then it wasn’t. I hadn’t done my own personal due diligence. I had money in GE as well. I thought I understood it because I was an employee in the company.
I had no idea what was going on in that business. The biggest problem with publicly traded companies, in my opinion—this is Chad’s opinion—is that there could be a turnover in leadership, or a CEO could leave and gut the company with his C-suite team overnight, and the stock will tank before you know about it. You have no control over it. When’s the last time you could call up Steve Jobs when he was alive and ask him why he made a decision? You don’t get to do that. The bigger and more sound the investment is perceived may not be the case.
I spent a lot of my career working for Fortune 500 companies in my prior company, which was a consulting company. We did similar things, trying to make them faster, better, cheaper at different levels. The larger the company, the more complexities they had, the more disconnects they had, and different thinking. You’re right, you invest in a public company, and there are a lot of things outside of your control—leadership changes, for instance.
Think about a few months ago, when there was a drop in the markets by three percent in one night because of a Chinese conglomerate fallout that happened across the world. You have no control over that. What else, Chad, do you think is wrong with the current investment thesis and how Americans are really investing today?
The biggest thing is we’ve become generationally accepting of the fact that investments should only earn you six to eight percent, total. That’s not even aggregate because then you pay taxes on it in some way, shape, or form. If we take the basic assumption that inflation stays at two to three percent—which we know it has not, recently—but in the past ten years, it was running at three percent. If you’re really only netting, let’s say, seven percent, you’re making four percent on your money, and that’s acceptable.
I struggle with new investors in our company because I have to explain to them that when I’m showing you something that will conservatively make 20 percent annualized return, if not better, whether it’s real estate or a crypto fund, you have to understand this isn’t too good to be true. There are ways to accelerate the multiplication of your money much more quickly than the perceived safe way.
Yeah, absolutely. There’s a multiplier effect. The public markets and their shiny brochures want you to think of a rate of return on an investment as very one-dimensional. This one is seven percent; that one’s eight percent, so it must be better. That’s why we talk a lot about wealth strategy here. It’s really about putting lots of pieces to the puzzle together. We’ve got tax strategy and tax planning that goes into an investment so that you can potentially have your income stream coming in completely tax-free.
You’ve got passive income, which gives you an additional source of income. If you’re out of work or another opportunity doesn’t pan out, you have diversity in your income stream, providing some protection. Then, as you pointed out, it’s that appreciation on the back end where you’re trying to drive value. As you well put, it’s really about optimizing assets, taking management control, and forcing value into that. It’s definitely a multiplier.
Yeah, and another thing I’d like to add in here, you know, I’m going to be vulnerable for a second, David. I’m going to give you actual numbers. I am a 33-year-old male, I’m married, I have two kids, and I am a millionaire several times over. I’m growing rapidly because I have broken the mold, and I invest in hard assets. It doesn’t just mean real estate, but it means a hard tangible thing that has three components. It has the ability to produce some sort of income, whether a little or a lot, while I hold it.
It has some sort of tax advantage, whether it be that I can write off that income with depreciation or something of the sort, or maybe it’s a tax credit. It just depends on what I’m in. The third benefit is that I can capitalize on that income stream as I grow it, add value to it, and sell it for more later based on what the market is willing to pay for that income stream.
So the thing I want to say here is that conventional wisdom tells you to go into paper assets. We think that stocks, bonds, mutual funds, and things of that sort that are readily available and easily tradable are the best way to go because you can be liquid in a second. You hope you have the discipline to buy low and sell high, but in reality, most of us don’t. If an investment is too liquid, we become emotionally attached to what the line is doing, and if the line starts to move, we’re like, “Oh, sell, sell, sell!” We wind up selling at the worst time. When things are going really well, we think, “Oh man, I’m going to sell the sidelines and watch it grow.
Okay, now it’s time to buy,” and you buy at the worst possible time. So, the majority of people who even try to do this themselves in paper assets that are liquid wind up shooting themselves in the foot because of their own emotions.
So I guess the summary here is that I prefer illiquid hard assets because I can’t freak out and sell them. I get those three benefits we talked about, so really there are four benefits. And oh, by the way, nobody can come to me overnight and say, “Oh, guess what? The company folded up because,” like I’m thinking Enron here, “the company folded up because we found accounting fraud and now everyone’s money is just gone.
Sorry.” It doesn’t work that way. There’s still a hard thing like if it’s an apartment building, a single-family home, a farm, or something, or what did you mention earlier? Cryptocurrency Bitcoin mining? Yes, Bitcoin mining. That’s a hard asset; it’s still there. It’s going to have some intrinsic value, even if the business plan doesn’t pan out.
Right, absolutely. So do you have a personal, overarching wealth strategy that you’ve been deploying?
I absolutely do, and the asset portion of it is just a piece of it. You’re always looking, in my mind, at what your three pillars are. In my opinion, there are what’s generating your equity, what’s generating your cash flow. I guess there are four: you have some form of insurance, and then you have a place to store liquidity. That’s kind of how I look at things. My business actually runs these assets that we invest in, so I get my equity creation as the value add that I’m adding to other investors. I make money on that, I put my money in deals with investors, and my money makes money that way, in the same way, my investors’ money makes money.
So I get the benefit of the cash flow, the appreciation, and the depreciation that we talked about over time. But then you eventually get money coming back and you’ve got to think about what to do with it. Well, it’s not safe sitting in a bank; it’s losing money, and banks go bust every now and then. If you look back at history, that happens. So I use properly structured whole life insurance as a storage vehicle. It’s a better savings account if you will. Don’t think of it as insurance; think of it as a savings account.
That’s a whole other topic—infinite banking strategy if you’re curious. That is where I kind of house liquidity. So if I needed to get $200,000 tomorrow, I don’t pull it out of my checking account; I go to my life insurance policy and say, “Hey, give me a loan against that.” I take the insurance company’s money while my policy is still growing at 7% a year or something like that. So it gets two jobs: I then go deploy that into an asset of some sort, and when it comes back with its friends, you know, I’ll go pay that loan down and buy another policy. So I’m always expanding my liquidity. And then the insurance side of it is that those policies I spoke of are also insurance; they do have a death benefit. I do carry some sort of appropriate insurance to protect my investment.
Depending on the assets that I’m in, I carry the appropriate insurance. I actually still carry some disability insurance. Most people don’t think that’s necessary, but as long as I’m a provider for my family, I want to make sure that if I can’t do what I do anymore for some reason, there’s still a little bit there. So those are kind of my four pillars: insurance, where do I house my liquidity, where does my equity go, and where does my income come from.
Yeah, that’s awesome, Chad. Definitely resonating. We actually spent many months getting my insurance license so we could provide this solution to our investors. You nailed it right on the head. When you can do two things with the same dollar and have these multiple purposes of having the liquidity, the savings to be able to access that while it’s compounding completely tax-free, and give it to your heirs tax-free, it’s such a great strategy.
Everyone should really have it in place, but unfortunately, there’s a lot of misinformation, or frankly, people have never even really heard about it before, and it needs to be structured the right way before you do it.
Let’s talk about that for a second because I really glossed over a lot there. You know, we think our money is safe in the bank if it’s FDIC insured. Well, I’m going to tell you something, and this is not a conspiracy theory. There’s a book I can quote on this that’ll tell you all the grim news, but it’s like a red pill, blue pill thing. If you take the red pill, you’re never going to go back. You know your money is not safe in a bank. The bank wants it there, but the bank lends out your dollar 10 times over, right?
So the bank never has enough money to pay all its deposits. That is how banking works. It is what it is. You have to keep some money in there because banks are where transactions happen. So you’re always going to be moving money in and out, but you don’t want to keep all of your liquidity, all of your cash, sitting in one bank for sure or even multiple banks.
Because what happened in 2008? Sometimes the FDIC and the Fed will let banks that are non-solvent go under, and if you’re in that unfortunate group, your money’s gone. Or what’ll happen is the government will print more money on the backs of the taxpayers anyway and give it back to you. So it’s really not a good situation either way. But when you take that risk to the side and then think about how necessary the function of banking is, it’s the best business out there.
If you’re going to buy or build a business, man, if we could figure out how to build that way to make money, that’s exactly the most profitable business out there. Everybody needs it, and the profit margins are ridiculous. Think about it this way: you put a hundred thousand dollars in a bank; they pay you what? What’s the going rate today? 0.1% or something? Maybe. Yeah, something like that. So that’s $100 a year if I did that math right.
By the way, that 0.1% is taxable income. You get your little silly statements every year from your bank account that say something like you made a taxable 25 cents. Or you could put this in one of these policies, and that money will sit there and generate probably closer to 4 to 7%, depending on what policy you set up. Just on the nature of that, the storage vehicle is much better in the insurance policy. And oh, by the way, insurance companies haven’t failed in 250 years, and if they do fail, the world’s got bigger problems than your liquidity.
From a safety and cost-efficiency perspective, you know, it’s not well known because those with the biggest advertising budgets don’t want you to know it.
Yeah, it’s one more asset, right, that has that multiplier effect and is doing multiple things. That’s why I think it’s so smart and what savvy investors know. Also, if you look at family offices and some of the most ultra-high net worth folks, they’re leveraging this strategy and putting all these things together. But I’d like to point out something that maybe listeners may or may not have picked up on by all these points that Chad’s making so eloquently.
There’s an underlying theme here that’s really all about taking back control of your financial future and your family’s future. Again, kind of coming out of that Wall Street mentality, what they’re telling us is that we’re not smart enough to manage our own money, or we don’t have enough time to do that. But as you start to get a little bit more educated on some of these strategies and tactics, you can have that liquidity in your infinite banking policy.
You’re getting cash flow that’s coming in through multiple streams to provide some of that protection. You have asset protection in place, you have equity growth, and your assets just keep kicking off more and more passive income. It’s extremely powerful to get back that control.
Absolutely. One of my favorite books out there is written by my friends Jake and Gino out of Knoxville. They’re a multi-family group. It’s called “The Honeybee,” and it talks about the life of you becoming the CFO of your own financial future. Internalize that for a second: nobody is going to care enough about your personal financial future more than you. So you have to become the CFO of your own life.
If you start thinking about what your core stream of income is, let’s say it’s a little stream when it starts, then over time, it starts to become a tributary, and then it becomes a river. Over time, you start to invest or start businesses in complementary areas. For example, I’m in real estate. My biggest expenses in what I do are flooring, paint, and cabinetry. What if I decided to start a shop down those avenues?
Excuse me, the one person who can get through is my wife calling. Anyway, those tributary side streams eventually start feeding back into the big stream, and then you have this raging river. You start thinking about your investments, your income streams, your storage vehicles, and all those feed back into each other. Then you look down one day, and you’ve taken control of your income stream. You’re not building a nest egg, folks. You’re building a river that you can walk to whenever you want, take a bucket out of it, and drink it. When you build a nest egg, you eat that egg, and it’s gone.
Yeah. No, I mean there’s a simple scenario. I know folks have heard this before, but I love it because it’s such a simple scenario. So, if you took traditional theory and retirement theory, let’s say you saved up, and at 65 you had four million. Let’s say you had four million. Well, they’ll then tell you to withdraw 4%.
So at that point, you’re at 160k. Then you take out taxes; there were probably some fees along the way, so maybe it’s more like 120k, maybe 110k that you’re actually living on. And then you slowly start killing your golden goose each year, right? The 4 million gets smaller and smaller and smaller.
If you just simply take that scenario and compare that to investing in, let’s say, a dozen multi-family syndications at four million, and they could be kicking off 8% in cash flow, which is very realistic. Now you have completely double the amount of income; you have 320k, and ideally, you have enough depreciation to offset that income. So you’ve actually more than doubled what your income is, and then the beautiful thing is you’re still driving that forced appreciation.
Your 4 million continues to get bigger and bigger, and that’s how you can start to create legacy wealth and do more for your heirs and do more for others.
It’s such a different philosophy, but when you simplistically put it that way, it’s like, which side of the coin do you want to be on?
Yeah, that’s exactly right, and it just further accentuates the point. If we’re told to build a nest egg, you hope you built an egg that lasts you long enough to eat off of, or you mentioned a golden goose. You hope that golden goose can produce enough eggs, but if you pull all its eggs away and it can’t produce anymore, then you’re stuck. You really want to build a river. And what is a river? A river is a never-ending stream of water. And when you get to the bottom, it evaporates, goes back, and rains over here, and comes back again.
You can make all sorts of analogies out of this, but you’ve got to turn your attention as the CFO of your financial future to building your river, building your flow of cash. That’s going to be from things that spit off cash flow and things that give you capital events over time. We’ll call them floods, right? And you can take a bucket and drink water whenever you want to. You’re never going to run out. That is what you’re looking to do.
Chad, so as an engineer, do you have any software that you actually run to manage, or a dashboard? Or is it all just kind of custom stuff that you’re putting together to manage your whole strategy?
Yeah, you know, I really haven’t found a commercial tool out there, and maybe one of these days when I’m bored I’ll build one. If that ever happens, I’ll…
Talk to me because I have a passion to do that.
Yeah, I love building something for people like us. But right now my best tool is Google Sheets, and it’s better than Microsoft Excel. It really just comes down to what do you own, what’s it doing, and where are you at any given time. If you do nothing else, folks, most people never do this. I think Robert Kiyosaki—maybe you do as well—I don’t know. There’s a simple format that’s downloadable anywhere for a simple personal financial statement or a personal income statement and balance sheet. The balance sheet is simply going to be: what are my assets, what are my liabilities? And my income statement is: what’s my income, what are my expenses?
There’s a book about this, I think Kiyosaki wrote it, “Cash Flow Quadrant.” It talks about how most people flow money between these quadrants and how wealthy people do it. You should really internalize that. If you do nothing else, build yourself a balance sheet—assets and liabilities—and build yourself a very simple income statement in Google Sheets. You’d be surprised that you don’t have to have it where all your accounts are hooked up and data is feeding in. You don’t have to have that to know where you are, but you’ve got to know where you are to know where you’re going.
The biggest problem I think people have is that most people’s present drives the future. What you’re doing today will drive what you’re doing tomorrow. We want the future to drive the present. I’m going to quote my coach, Tommy Newberry, on that because I love that saying so much. We want the future to drive the present. You’ve got to think, where do you want to be? Do you want to have a nest egg that you’re eating and hopefully you take the last bite before you take your last breath, or do you want to have a river? You’ve got to design the present to get to that future.
Yeah, absolutely. I think this dashboard is really underrated and critical because it’s kind of like you get in your car every day. You wouldn’t drive a car with no dashboard, would you? You wouldn’t know where you’re going, you wouldn’t know if you’d run out of fuel or anything, right? So you want to do the same thing with your financial future so that you can understand where you’re going.
As you start to see that, it’s kind of illuminating to understand where your assets are and what liabilities are actually taking away from your stream analogy of what you’re trying to achieve. When you can start to see assets that aren’t producing any income, you’re just hoping that the markets will go up on them or something.
I think people have a big opportunity to reposition capital. Let’s talk about home equity as a perfect example. The markets have gone up so much in single-family homes, and if you haven’t refinanced and fully leveraged your house to pull out that equity and put it to use somewhere else, it’s basically trapped equity with a rate of return of zero on it.
I would even argue it’s negative because your personal home is costing you money; it’s not giving you money. So what’s interesting about that, and I love that you made that point. Just to conclude the previous dashboard discussion, folks, download Google Sheets on your phone. It’ll take you probably an hour tops to put your life in there and figure out what you really have. For you nerds out there like me, you can get as detailed as you want—make it 10 sheets with graphs and charts—or have one simple sheet to look at once a week in your pocket. Do that exercise because what Dave just brought up is brilliant.
That’s how I got my start. Before I started Quattro Capital with my team, before we started accepting investors into our deals, when it was just us trying to buy assets that create income, I didn’t have cash sitting around. I was doing what I was supposed to; all my money was in a retirement account, or I bought a house, or had car payments. I looked at all my assets and liabilities, and I figured out I had a poorly designed whole life insurance policy with about 12 grand in value. I had a car payment about that amount, so I liquidated the policy, paid off the car payment, and increased my positive cash flow.
I had a house that almost doubled in value over five years in Nashville, Tennessee. I didn’t want to just take out another loan; I wanted a way to recycle capital. I learned about a line of credit and found banks that would let me put a first position home equity line of credit that paid off my mortgage. Day one, I had 500,000 in equity and owed 100. They paid off my mortgage; now it’s a line of credit. I had 400,000 dollars overnight to deploy, put back, and deploy again at about 2% interest. I didn’t buy or sell anything; I just adjusted my assets.
This is a great topic, Chad, and I love that you’ve got the engineering background to back me up. Think about the power of numbers. In addition to the dashboard and those manipulations you mentioned to optimize your portfolio, there’s something key when you plug things into a spreadsheet—it becomes quantifiable and illuminating.
I’ll give you a perfect example. About 10 years ago, I had money sitting in these 401ks accruing because I followed conventional wisdom too. I looked at it and thought, “The only thing I’m certain about the future is that taxes will go up.” Tax rates will go up, and they talk about tax deferral, pushing it out. But why push it out when taxes will be higher? Unless they assume you’ll retire poor and be in a lower tax bracket, which isn’t my vision for myself.
I took my 401k money, plugged it into a spreadsheet, and even with a 10% penalty and the tax bite at that time, if I invested that money into syndications, where would I be? I modeled it with a break-even around five to six years. Today, an asset I had sold for almost a 2.2 multiple, breaking even in three and a half years. Now all that capital is tax-efficient, and I’ll never pay taxes on it again. Once I saw it in a spreadsheet, even with the penalty and taxes, it was like taking medicine. Wouldn’t you rather pay taxes on the seed rather than the harvest?
Yeah, absolutely. I love that we just went to this topic. Before I say what I’m going to say, I’ll give this to you guys at the end. Go to chadsutton.info—that’s chad.info—and send me an email. I don’t have the link there yet because we’re just coming out with it, but we have a little ebook and a calculator that may actually serve this purpose for you.
Dave’s point is brilliant because you can’t qualitatively see this until you actually look at it. I did the same thing. I planned to take the hit; I was going to take a 10% hit on about $200,000 plus they’d be recognized as income. Well, guess what I learned as soon as I went and studied the assets? That was step one. I needed to get money, so I did the HELOC thing and liquidated retirement accounts. That was another repositioning of assets that you probably don’t know you have.
I took the hit because I don’t like encumbered money. I don’t like the government telling me what I can and cannot do with my money. The retirement system is that way. Even if you do a self-directed IRA, which some people choose to do, that money doesn’t help you until you’re 65; otherwise, you have to pay taxes on it. Just pay the taxes now when it’s a seed. For me, it was $200,000; now it’s millions. $200,000 was a lot smaller than taxes on millions, even if tax rates go up or down. Take the hit and put it in a spreadsheet.
You’re going to make some conservative assumptions, but you’re not going to get the benefit of the home run investments unless you do something. You wouldn’t have had the opportunity to get that 2.2x equity multiple if you hadn’t first projected. Well, I’d be okay if it only did 1.5x over five years or 2x in five years instead of three. The market was good and he got it in three and a half years. What if the market wasn’t as good and it took him seven? Big whoop; you’re still breaking even in seven years, and then you have tax-advantaged money for years to come.
I couldn’t agree more with that topic. Reach out to me again at chadsutton.info. I’m sure Dave also has something like this. We have some templates that might get you started, and you need to tweak them for your own situation. Just lay it out. This is not hard stuff. Even if you’re a pen and paper person, lay it out on pen and paper. You can do the multiplication along the way and figure it out yourself.
Yeah, I agree. There’s that initial step of mindset. It’s interesting that a lot of people just don’t get it because they’ve been fed all this conventional wisdom for so long and they don’t really want to get it. That’s partly the first step: you have to be a curious person and ask questions to figure out why things work the way they do. That’s where I started. You start inundating yourself with consuming all this information, and you realize there’s an entirely different world out there.
Then you put it together quantifiably in your spreadsheets, and it’s like, yeah, this does sound too good to be true. What am I missing? The only regret I have is why didn’t I start earlier. I’d venture to say everyone listening to this podcast is curious-minded, or you wouldn’t be here, right? You wouldn’t be listening to this right now.
I think the only other advice I’d give people on this, and I am an engineer, I’ve been a rocket scientist quite literally, so I know the definition of analysis paralysis here. Don’t let yourself look at one scenario and let the numbers scare you away. Whenever I look at an investment, sure, there’s the investment on paper, the pro forma.
But I try to figure out what’s the best it can do and what’s the worst it can do. I try to think in probabilities. There’s the 0% chance and 100% chance. If the world falls apart or if the stars align. Think about the mean line of what it’s likely going to do. I’m 75% confident it’ll be within this band on the low side and this band on the high side. You start to figure out your sensitivity window. As much as I know about this industry and this investment, I think it’ll be likely as good as this or as bad as this. Am I okay with the downside? Am I okay with the upside?
Make the investment. Don’t let yourself be paralyzed because you’re scared that the 0% chance thing will happen.
Yeah, very pragmatic advice, Chad. Let’s transition right now into real estate specifically, okay? We’re in March 2022, so let’s talk a little bit about the market. What’s changing for you? I know you’re really on the acquisition side. Very interesting times that we’re living in right now, so what’s really shifted for you? What do you see in terms of the climate for this year?
Yeah, I guess the first thing I’ll say, and you know our company, Quattro Capital, is an alternative investing firm. We’re still focused on multi-family apartments, mobile home parks, and we still really like the residential space in large commercial assets. Looking at how those assets are trading today, there’s a lot of money out there seeking this asset type.
I’d describe it as this: if the cap rate is my shoulders, that’s simply the ratio by which people pay for an income stream. The lower the cap rate, the higher the price. Think of all the money out there—billions and billions of dollars looking for apartments right now, especially a lot of institutional players. That money is sitting on my shoulders and pushing me down. The reason assets are so expensive right now is the demand by the capital out there looking for these assets.
I do think that at some point we will see some decompression of that cap rate. Right now, I see it continuing to compress because the fiscal demand is still there. How am I getting deals done today? We used to buy old assets in low-end workforce housing areas that are trending. We’d inject a little bit of money, raise rents, and sell it for 2x value in two years. We are not doing deals like that anymore.
I feel that the risk of a recession is high. We don’t know what will cause it—we didn’t know a pandemic would cause the one in 2020 or that the banking system would collapse in 2008. We just know that the expansion cycle has been going for a very long time, and the likelihood of a recession in our near future is pretty high. It’s cyclical. We’re focusing our efforts on really good B-class properties built between 1980 and 2000, with solid bones, infrastructure, plumbing, and electrical.
We’re not wanting to fix any of that stuff anymore. We will inject at least $15,000 to $20,000 per unit, which is a lot in the multi-family space. We’re looking to take that property and make it compete with new builds. The biggest reason that works is we’re behind on construction for years to come with the number of people wanting to live in households. We are supportive of the current market and willing to pay more than an asset is worth today because I’m going to double the NOI. I’m not going to add 20%; I’m going to double it.
I’m buying things maybe for way too much money; they’re renting at $700, but I’ve got comps showing $1,200 if I put money into it and make it compete. Some say, “Wow, you’re overpaying for properties.” Well, everyone is. If you’re doing deals right now, you’re overpaying for property. What I’m doing is baking in cap rate decompression. Even if the market turns back and the cap rate goes 2 or 300 basis points higher—if you’re at a 4 and it goes to a 7, that’s a big move. For one thing, I’m probably not going to sell because I don’t have to.
I’m going to have it cash flowing well at a different clientele level, two rungs up. I’m okay holding the property. If I did sell, I’ve doubled the net operating income on the asset. Put a cap rate on that. Take a number and do a million dollars divided by 0.04 and a million dollars divided by 0.06 or 0.07—you’re still going to have tangible equity. That’s how I’m recession-proofing us—baking so much capex into a non-obsolete asset. It’s an asset that’s still good and will compete for years to come.
Right. I think we could devote a whole episode to this, Chad. We’ll have to get you back and talk about the state of the economics and everything. If you could give one piece of advice to our audience about growing their wealth, what would it be?
One piece of advice. I’m going to wrap two quotes I said earlier today. Hopefully, if you hear them two or three times, they’ll internalize. Stagnation is degradation. Become the CEO of your own financial future. For most people, the present drives the future, but we want the future to drive the present. Think about the river you’re trying to build, not the nest egg. Start taking action today to figure out what will help feed a river. If you do nothing else but follow that, the rest of your investing career will be just fine.
Awesome. Love it, Chad. Where can folks find you, how can they reach out, and how can they connect and follow you?
I’m available on LinkedIn, Facebook, Instagram—all that kind of stuff. Everything that my company Quattro Capital offers is available at chadsutton.info. You’ll find my social media front and center—you can follow whatever platform you like. You’ll find the podcast, the website, and you’ll have the opportunity to email me if you’re looking for that financial freedom calculator we talked about or any other resource. It is coming soon. Really enjoyed being on, Dave. Thanks for having me today.
Awesome, Chad. Thanks so much for coming on.