Brian Dally: Welcome to Beyond the Stock Market podcast, a Groundfloor production. I'm Brian Dally, your host, CEO of Groundfloor, which is a private markets investing and lending platform with over $2 billion in investment volume. I've spent my entire career challenging industry norms, and in 2013, I co-founded Groundfloor with Nick Bhargava to make private markets more transparent and open to everyone.

This podcast features some of the sharpest minds in finance. Each episode goes beyond the headlines to unpack the evolving relationship between traditional finance and new opportunities that are all around us. Today's guest is no exception. We have Whitney Elkins-Hutten , the Director of Investor Education at PassiveInvesting.com, which is one of the fastest growing private equity real estate firms in the USA, with more than $1.5 billion in assets under management. That's a big number. Congrats on getting it [00:01:00] there.

Whitney has spent years helping investors build wealth through alternative investments. She's also the author of "Money for Tomorrow: How to Build and Protect Generational Wealth," a new book from BiggerPockets Publishing that lays out a four-part strategy for building more long-term wealth. I'm pretty sure we're going to get into some of the details around that.

We're going to dig into generally how everyday investors are thinking about building wealth, how they can think differently about it, given the tools that are available to all of us today, and how to protect what we've accumulated, and creating something that can last for generations. Whitney, welcome to Beyond the Stock Market. Where are we catching you today?

Whitney Elkins-Hutten: I'm at my house in Boulder, Colorado.

Brian Dally: Well, hey, we're both in Colorado. I'm at my office in Telluride, Colorado, where I spend a bunch of the summer and into the fall.

Whitney Elkins-Hutten: You win. Telluride is so much cooler.

Brian Dally: I don't know. Boulder's pretty [00:02:00] awesome, I've got to say. Well, I gave a brief bio, but tell us a little about your journey. Can you share your background and what led you into financial services originally?

Whitney Elkins-Hutten: Oh, gosh. And I had no intention of ever going into financial services originally. So currently, as you said, I'm the director of investor education here at PassiveInvesting.com. But my story really starts off with my first piece of real estate in 2002. I bought a house with a significant other. It was meant to be a primary residence and we were in a market here on the Front Range of Colorado, and prices were already starting to go up. This is pre-2006, of course, before all the craziness ensued. And bought a house, and then about a month later, the relationship fell apart and I had the house. I was 103% financed on the property, which I never suggest.

Brian Dally: That was a thing back then.

Whitney Elkins-Hutten: That was the thing back then.

Brian Dally: That was. That wasn't unusual.[00:03:00]

Whitney Elkins-Hutten: I actually had none of my own money in the deal. I didn't really realize how investing worked. But, so relationship falls apart. I'm now not only the money partner, I have everything under my own name. I'm trying to figure out how to resurface floors and move walls and electrical, plumbing, the whole nine yards. But, reimbursed a lot of my friends, with pizza and beer and sushi. We got the property put back together. I actually stuffed it full of roommates who didn't mind living in a construction zone. And 11 months later, I sold the property thinking this whole time the property was going to sink me, and it turns out I made $52,000 on zero of my own money down in property.

Brian Dally: How do we calculate the IRR on that? I don't know. That's good.

Whitney Elkins-Hutten: It's infinite. Yeah, infinite rate of return. Long story short, [00:04:00] I'm filling out my taxes, and that $52,000 was actually tax-free because I had to move for my job, due to the 121 Exclusion, which, we go down the rabbit hole. It's like the 1031 exchange, but for mere mortals. And, long story short, I'm like, "Wait a second, I just made $52,000 on nights and weekends," which at the time was more than what I was making in my day job, that had me traveling 80 hours a week. And oh, by the way, I didn't have to pay taxes on it because I actually abided by the tax code. I was like, "How many more of these deals could I possibly do?"

And, got bit by the real estate bug after that. I scaled, I did $5 million in flips after that, live-in fix and flips, and then scaled a 42-unit rental portfolio, and then bought a multifamily building, and then scaled a private equity firm two other partners, and then eventually transitioned my way with PassiveInvesting.com.

Active and passive [00:05:00] real estate has been a substantial part of my portfolio for more than 24, 25 years. But certainly not the only part of my portfolio.

Brian Dally: I'm curious, how long was that a side hustle before you stopped working the 80-hour-a-week job? How long did it take into your house flipping and real estate career before you could transition that to the full-time gig?

Whitney Elkins-Hutten: Well, there was a mindset shift that had to happen there because I'm sitting here trying to accumulate a net worth when really what gives you financial freedom is cash flow. So I didn't really stumble upon cash flow as a metric as I should be tracking, like money that comes in over month to month, whether I'm working or not, until about 2014, 2015. Other than that, I was trying to scale, pile as much money up as I possibly can.

Brian Dally: Build up as much assets as you could. Yeah, yeah. [00:06:00]

Whitney Elkins-Hutten: Yeah. But when one of our friends here locally just said, "Why not keep one of those rentals and put a renter in it?" I'm like, "Why would I do that?" And he showed me the math. I'm like, "Oh."

Brian Dally: Yeah, I got it.

Whitney Elkins-Hutten: Oh, I get that coming in and they pay down my loan. I'm like, "Oh, okay. And I get tax benefits now through depreciation?" I'm like, "Oh, okay." When you're flipping primarily, that's an active income strategy. Now you can shelter part of that through QBI, but before, this was before 2017, I couldn't do that. So, I was paying ordinary income on the majority of those funds.

Brian Dally: Well that's quite a journey. And if you fast-forward to today, instead of fixing and flipping houses, sounds like you're spending a lot of time educating investors. So what are you seeing people get wrong when it comes [00:07:00] to building and protecting wealth?

Whitney Elkins-Hutten: There's usually four common traps that I see. The first trap are people who think they're beyond the elementary education. They're not tracking their income and expenses, so they've got the lifestyle creep happening, or they're not actually tracking their net worth, so they don't really know where the finish line is. And then, the second trap I see are people who don't understand. They're good at creating income and accumulating assets, but they don't know how to keep the four horsemen that will rob them of their wealth out of their portfolio. And then, where I spend most of my time is in trap number three, helping people think through really creating their own investor thesis and not just adopting what they see on YouTube Reels and Instagram and from gurus, but really helping them think through their own goals, risk, [00:08:00] and timeline. Risk capacity. We talk a lot about making sure that you have ample reserves, some more quasi fixed income strategies that'll help hedge against sequence-of-returns risk, and then also your growth strategies, and how do these all play together. And then the fourth area, the fourth trap is, you might have excelled in area one, two, and three, but then you get to the finish line, and you lose it. Or you lose substantial part of it.

And so, it's not just about having a will or a trust, but, do you have an incapacity plan? Have you trained your heirs? Heck, have you trained your executor? So I love working with people to help them understand how to plug all these gaps in order to make them a very solid financial investor.

Brian Dally: I think that first trap is a great place to start. I think it's interesting that you spend time on that because [00:09:00] so many times we as investors are thinking about, where am I going to get the highest return? And a lot of times we'll creep out on the risk curve in order to get that extra return, maybe beyond what we should, what would be advisable, without paying attention to the biggest factor in how much you have invested, which is how much you save.

And so that difference of a few percent, which points of return, is nothing compared to socking away a greater proportion of what you earn. So I think it's great that you start with that. You mentioned the idea of an investment thesis. You said, many past investors don't really have a strategy. They just have a collection of investments. What does that look like in practice, and why does that matter?

Whitney Elkins-Hutten: Well, I think, the last five years especially, if you've been in passive, say, multifamily, or even self-storage real estate, [00:10:00] it's been a very challenging time, especially if you were picking up property in 2021 and 2022. Myself, I'm not immune from this either in my portfolio. But, it's to what scale, right?

So I've spoken to a lot of investors that just went all in. Before then, you could invest in a passive deal that threw off, say 7%, 8%, 9% cash flow. The underwriting suggested in five to six years you'd get maybe a 2x multiple on your equity. You had all these depreciative benefits that were coming along with it. But you're all exposed into one timeline of the market, one asset class, maybe even one geographical area. And we had overcompensation here. A lot of investors I spoke to were actually thinking of just collecting as much cash flowing [00:11:00] investments that gave them cash flow, equity growth, depreciation, diversification, as they possibly could, and levering up, not thinking about when the market goes down, because it will. The market will always go down, and the market, we have nothing to point to otherwise, will always go back up.

So, my investors who actually were like, "Okay, I have my cash reserve solidly sit on the sideline so I can be patient and maybe deploy in a down market, and I have other investments that are in different parts of the capital stack that have a much different risk profile, but offer more of a fixed income type strategy." They fared much better because they could let their equity deals continue to work through the market cycle and their lifestyle wasn't altered because they had the cash flow, say, from a real estate debt fund. That's my favorite. Private credit, it's been [00:12:00] challenged in the market, too.

So those are just the ways that I help investors think about their risk profile. Otherwise, like I said, they end up with a collection and not really a strategy. Now, I'm not a financial advisor. I'm just an investor that's taken 25 years of bumps. And so, I had the plan that worked well for me.

Brian Dally: Very pragmatic experience. So, if somebody realizes they've built a portfolio without a clear strategy, which sounds like a lot of people do, how do you fix that? How do you actually go about developing a thesis?

Whitney Elkins-Hutten: Well, developing the thesis is a relatively straightforward, simple part. How do you pivot the portfolio can be a little more challenging. But, time and patience will help you do both. So, as far as putting together the investor thesis, a basic investor thesis is simply about sitting there and understanding, what are your goals, what risk are [00:13:00] you willing to take and not take in the environment. That's your risk tolerance. We've read plenty of articles on that, we've seen all the gurus talk about that. But also, what's your capacity for risk?

And so, if you can't afford to lose any more than, say, 1% to 3% of your total net worth on any one deal, that needs to be built into your investing rules. No matter how good that deal is, it needs to be built into your investing rules. Also, that's a clue, how you need to diversify across operators, maybe even markets. And so, long story short, I help people think into these questions at a deeper level, so they can actually put together a plan that works for them, that allows them to sleep well at night.

I do a lot of investing in the private market space. [00:14:00] I'm very much a proponent of diversifying in public and private markets, maybe some owned, controlled real estate. We also think about the different layers of the capital stack, too. What do they need their portfolio to do today? What do they need their portfolio to do in 5 years and 10 years? That's where I think a lot of people have gotten stuck, is that they got enamored by the returns that a potential investment can make. But if the timeline to exit has been extended, now they're butting up against maybe having to liquidate an asset they never intended to liquidate in order to fund a retirement or a kid's college or anything like that.

So, I help people think through how do we make this the most nimble plan for them, while trying to be as optimized with yield, with taxes, as possible. [00:15:00] Now, again, I'm not a financial advisor or a tax advisor, but I help them think through more the behavioral aspect. Because if you can make those decisions now with a cool head, when you've got a deal in front of you, it's going to be a lot easier to evaluate. I have a teen, guys. We're in that cool head, hot head stage.

Brian Dally: Oh, yeah.

Whitney Elkins-Hutten: "I need you to make this decision right now with a cool head, because when you're out with your friends, it's going to be a lot different."

Brian Dally: Yeah, I have been there, first-person experience. You mentioned debt funds, and how much you like them. I think they have become an increasingly popular way for investors to access real estate, but I'm sure not all debt funds are created equal. What should investors look at before putting their money into one? These are very popular. They're in the news. There's a lot of interest in them. But what should investors look at?

Whitney Elkins-Hutten: Well, I think the first thing that an investor needs to understand, [00:16:00] on a conceptual level, debt puts you in a higher priority to get paid in the capital stack. You're now an expense to the deal, not an equity partner in the deal. Okay? But risk just shows up in a different way, and that's what I want investors to really wrap their head around. The higher rate of return that you're seeing on a debt fund offering or a private credit offering is an indication of risk of the loan, the borrower, or structural risk of the fund. Now, I'm not saying they're bad. Okay? That's not what I'm saying, because this is all going to be disclosed to you in the offering memorandum.

You need, again, now go back and understand how this fits to your overall portfolio. So, when we're dealing with, I'm going to take real estate debt funds. The biggest risk here is going to be, how is the asset valuated, how is the borrower [00:17:00] underwritten, and what's the duration of that loan? How quickly is that money coming back and being recycled?

So those are the big three, and then those are all at the loan level. I can assess those at the loan level. So if I have a clear valuation of an asset, say, a single family property, in a market where values have never decreased more than, say, 10% in a 12-month period. I have a clear valuation. If that loan is six to nine months, as a lender, historically, I'm pretty guarded in my position if my borrower's bringing 30% to 40% of the deal and the market's never gone down more than the 10%, I'm pretty buffered in that position. And then if it exits out after six to nine months and I have a high quality borrower, I'm sitting in a pretty nice position.

Now, the one piece that doesn't have anything to do with the loan level is, what does the [00:18:00] operator do at the fund level? And this is where I see a lot of creative fund structures that can get investors, put them in a position that can be quite uncomfortable, and to be honest, might actually be more of an equity deal than it is a debt deal. And so, is the operator actually taking your money as the investor to the bank to go get more money?

Now, if they're using, say, a 10% warehouse line of credit to smooth inflow and outflow of the fund, is there leverage? Technically, yes. But in theory, they're going to be able to pay that off pretty readily. But if they're levered 20%, 30%, 40%, 50%, 100% of the fund, you're no longer in a debt position. You're going to be more in an equity position.

Brian Dally: Through structure they've made it into an equity position. That's a great insight.

Whitney Elkins-Hutten: And I see that. I also see funds that sell off their [00:19:00] loans, so they might sell off loans to insurance companies and REITs to recapitalize. But those buyers generally are going to cherry pick and take the best loans, which you have to understand, what is the fund then left with as far as performing loans in the fund.

So none of these strategies in and of themself are wrong. You just need to understand how that impacts and how does it align with your goals, your risk tolerance, and your risk capacity.

Brian Dally: I think that is very insightful. I think people are really going to benefit from that as they look at debt funds. And I love the distinction you made between the loan level and the fund level, because I think from what I've seen in the market, there's a wide dispersion of what you are actually getting underneath the covers. And most people stop at the total return that they're expecting to get, and that, as you're pointing out, could be dangerous if you don't know what you're buying. That's interesting.

We've covered a lot [00:20:00] already. We're going to pause here and come back for part two, when we're going to learn more about your thoughts on investment strategies and your new book. So for our audience, you can connect with Whitney via her LinkedIn, which we'll include in the show notes, or you can visit PassiveInvesting.com. Check out all the episodes of our podcast at groundfloor.com/podcast, and we really appreciate it when you like and subscribe wherever you tune in because that helps more people find us. Thanks again for joining us on Beyond the Stock Market.