Rich Habits Podcast - 5: Making Your First Investment (Passive Income, Real Estate, and Retirement)

Episode Date: March 28, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz share three ways to make your first investment - specifically as it relates to generating passive income, building a real estate portfolio, and investing toward your retirement. ---Be sure to check out Public's new ⁠⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

Hey everyone and welcome back to the Rich Habits podcast. My name is Austin Hankwitz and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than $200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job a few years ago, I built a seven-figure media business and invested into 26 startups ranging from Preseed to Series C. As the show name might suggest, every episode we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives. One from an industry veteran, that's Robert, and the other myself, someone who's still in the process of building wealth and figuring out all out. Robert, why don't we jump into things? What are we going to be talking about in today's episode?

Let's do it. In this episode, we're going to be talking about making your first investment. We talk about it from three different perspectives, passive income, real estate, and retirement. Our goal with this episode is to demystify investing and make sure every one of you feels comfortable and equipped to begin investing towards your financial future. No more analysis paralysis for any of you. No more analysis paralysis. I love it. So I heard passive income.

I heard real estate and I heard retirement. Start us off with passive income. How are people going to start making their first. investment toward earning passive income. Sure. Yeah, let's dig right in. I think dividend stocks are a great place to be. Austin, you're the stock guy, so I want you to take it away because you're going to explain this part of it way better than me. No problem. Okay, so dividend stocks. What is a dividend paying stock? So the word dividend is essentially passive income because it's cash paid to you by the company that you're invested into. So let's use Apple, for example, right? Apple pays a dividend. Apple pays a

dividend to their shareholders. So if you own one share of Apple, they pay you cash to own that share of stock. Well, where does that cash come from? It comes from the company's profits. So a portion of dividend paying companies, a portion of their profits is then paid out to their shareholders in the form of cash for just owning the stock. Therefore, it is passive income. All you got to do is buy the stock one time and you start getting passive income in the form of cold hard cash. So let's talk about ETFs. I know we talk about index funds and ETFs a lot and we both think they're better. Walk us down the road of what your favorite ETF is right now for dividend stocks. That's a good question. So the reason I think dividend paying stocks are so good again is because

that passive income, but you know, they also come with some volatility. When you own single stocks, who knows if it's going to go up or down or left or right, 5%, 8% down or 10%, 12% up. It's just it's a roller coaster ride. Now, back to this idea of ETFs. Again, that stands for exchange traded fund. What you can think of an ETF is as, you know, a basket of stocks. So inside of your basket, you know, it's Easter's right around the corner, right? You don't have a basket of little eggs.

You got a basket of stocks. So instead of eggs now, think about each one of these as a share of stock. And so with that, you know, if you have a bunch of these stocks together, as they're pulled together, the volatility becomes much less. right and so when we think about investing toward dividend paying stocks i just get more excited about less volatility and more certainty more smoothness i like that so when i'm investing for passive income i'm choosing the etfs and the etif that i like the most right now is called s c hd it's a high dividend yield uh et f by charles schwab and i think the yield right now is just around four percent so again i like those because it's less volatility and you're still

getting that awesome, awesome dividend. All right. I love it. Yes, S-C-H-D is a good one. I too like that one. So let's jump into the next sector of this point about dividends. So let's talk about REITs, real estate income trust. Reets must pay out 90% or more of their taxable profits to shareholders in the form of dividends. So Austin, take us away on your thoughts and your favorite one because we all know what your favorite read is. So take us away on that. and break it down for the audience, who many of these might be their first time getting into initial investing or their first real estate investment and why we like this read. Yeah, most definitely.

I just, I don't, I want to do this as politely as possible, Robert, but I want to correct you here. It's real estate investment trust, right? We think about all this passive income. You said income. I'm thinking about incomes on my mind too, my man. Yeah, me too. Yes.

Really estate investment. Yes. So we got the real estate investment trust, right? reits, R-E-I-T. And again, Robert was correct, right? They pay out 90% of their taxable profits to shareholders in the form of dividends. Well, why is that different than just a dividend-paying stock? When you have something like Apple, if they're not by law, they don't have to pay 90% of their profits out to their shareholders, right? Reets, on the other hand, do. And what a reet is, is they're investing into real estate, right? Real estate investment trusts. And so the

reet that I like the most, and I like it for a couple of reasons, but the first two here is because of the diversification, and the second one is the clientele. So when you think about a reet, how reits make money is just like any other real estate investor makes money. They buy property and they rent it out to somebody, right? So you've got reits of all different shapes and sizes. A couple of reits have data center reits. There are, you know, cell phone tower reits. There are apartment-focused reits. You've got hotel and gambling reits, golf course reeds. I mean, reits are everywhere. If you have property and you can rent it out and make money for it, capitalism tells us we got a reet in the name.

So the reet that Robert and I both like the most is actually called Realty Income Corporation, ticker symbol O, and they essentially lease commercial space to long-term clients like CVS, Dollar General, Costco, Starbucks, KFC, and hundreds more. And what I like the most about them is not just because they have such a diversified clientele, But their clientele are these awesome companies who aren't going away. I mean, you see Starbucks on every corner. You see a dollar general on every corner. Same thing with CVS and Costco.

So I love that part. It makes me know that they're going to pay on time. And it's just a really good clientele. Now, what's really cool about this REIT as well is they pay a monthly dividend. So it's monthly passive income dropped into your brokerage account on a consistent basis that you can count on. And I would say we both love that one. but another one that I've really enjoyed over the years is PSA, public storage. And right now their yield is about 4.2%.

And I love this one because as millennials and as people downsize their homes, storage units and all of these in that category have just been such great investments. So I really like PSA as well because I think that sector is going to continue to grow across all tertiary markets and major markets. So I think that's another really good one to look at as well. I see storage facilities popping up all the time here in Nashville. And I'm sure those y'all listening right now, wherever you live, you can probably name three or four local storage facilities that are like, wait a second. Is that new?

That one's got to be new. I'm seeing these everywhere, right? So PSA, public storage, back to this point of REITs can be in anything, right? Cell phone tower, data centers, and storage units. I love it. Okay. Walk us through now, Robert, the second actionable insight. You said real estate, you said passive income, and you said retirement.

So what's the real estate side here? Yeah, so your first investment towards real estate. I think we're going to talk a little bit about the FHA loan program, house hacking and fundrise. We both love fundrise. It's really great. It's a great platform for people that are just starting out and getting into their real estate journey. So it's a great jump off point for people that are really just trying to get educated and started in real estate. So, Austin, I think for the FHA loan part, we should use your story because it's a good one.

And I think it's very insightful for our listeners to hear your story. Yeah, good call out. So from the FHA loan perspective, right, this is a government loan. And what's cool about these FHA loans is, you know, these are mortgages. And what's cool about them is they really want to encourage those first-time homebuyers. So when I was, I think, 24, 25 years old, I was renting a house here in Nashville with a couple roommates. I think there was like three of us. And we were paying about $1,800 a month in rent.

So $600 a person, right? We got a letter in the mail, and it was from our landlord. And they said, hey, we're going to raise your rent from $1,800 to $2,200 a month a month a month. And that really just, I was like, hold up, guys. That's one, that's like 30%. You know, that's crazy. But two, this place was built in 2004. It's not worth $2,200 a month in rent.

We should, you know, $2,200 a month in rent as a mortgage. We should really think about getting a house here in Nashville, especially. with the housing appreciation and things of that nature. So I went out and I researched what an FHA loan was. And essentially, it allowed me a first time home buyer at 25 years old to only put 3% down on my mortgage. You know, traditionally they charge 10 or 20% down to qualify. I only had to put down three.

So what happened here is I found a home as a small town home here in South Nashville, kind of close to the airport. I found this place for $279,000. I would all in cash out of pocket was $10,455 and I was able to put that money down, qualify for my mortgage. Weirdly enough, I convinced the seller to pay for my closing costs. Definitely do that if you can figure that part out. But that saved me about $3,000. And it was so funny.

And I mean, at the time, again, I was 25. I didn't have all that much money. I really had to go into credit card debt to hire movers and, you know, all these other different things. So it was kind of a tough time getting that figured out. But I'm glad I did because the appreciation. of the house. I was able to house hack a little bit here with the mortgage and it was just a really good experience. But the FHA loan allows anyone to make that first investment toward real estate as a primary house here, which I know you got some opinions on, Robert, but as a primary

house here, make that first investment toward your real estate with only 3% down, allowing you to really begin to walk into home ownership with a sense of confidence and dignity. Yeah, that's a great story. And I did a TikTok yesterday about it because I just don't believe people should do their first investment property on their own beginning out, you know, when they're just getting started. And I really go into it a lot about just really trying to find the right mentor or partner to help you because everyone that starts out on their own generally makes a lot of mistakes on the first property. So, yeah, let's go into the next one. You touched on it a little bit. Let's talk about house hacking and why I don't think your first investment property should be a primary home.

Yeah, so I'm curious, Robert. I know you, you, you're have some experience with house hacking so does i've got a friend john erringman shout out johnny finance on tic-tok and instagram we both love him he's a house hacker i think he's in columbus ohio with his his fiance doing some of that stuff at at 25 26 but i want to learn more about house hacking from your perspective you know buying the duplex or the triplex or the quadplex walk us through that entire experience yeah i just think that you know we've been sold the american dream for decades that buying your primary home is your first property is the smart way to go. And the math just does not add up. When you think about buying a primary home, you're locking up sometimes 20% of your cash,

plus you're locking up all of your credit in that first home. And so a primary home just generally isn't profitable unless you're in an area where there's really high yearly capital appreciation. Plus you have to take into effect when you buy that home, you have closing costs. You have the broker fees, you have the down payment, you have the bank. So year over year, let's say your house is appreciating three to five percent. You're spending way more of that on the fees that it takes for the bank loan and everything else amortized over those years to try to make a profit. That's why I always tell people if you're just getting started in real estate, rather than buying a primary home house hack by a duplex, buy a triplex, buy a fourplex, buy something like that

where you can live in one of the models, rent the other three, do that for a few years, then maybe look at it when you're ready to get your primary home. Because that way, the tenants themselves are paying your mortgage, and it just really put you in a better spot than starting out with a primary home as your first investment. I think that's really powerful, right? Because, I mean, as someone who purchased their first house here in Nashville, I got really lucky with the builder seller, you know, it was a new development, so I was able to convince the builder to sell me the house here and then to cover the closing cost. But, you know, I just, I think

about those people who are in their late 20s, their mid-30s, or even in their 40s, who are purchasing that house for the first time. They're like, wait a second, the median house right now in America is $350, $400,000. So I now have to put 20% down to qualify for a mortgage. interest rates on these mortgages are 7, 8, 9%, so I'm locking up nearly $100,000 in capital, and then I'm also now paying a high interest rate with an amateurization schedule that is not my favor in the near term. If I'm going to be going through those hoops and locking up all that capital, why don't I do it in a way where I'm making some cash flow, where other people are helping me pay off this mortgage

while this property is appreciating, which at the end of the day is what you just described as house hacking. So I know just a lot of people might have questions. personally not an expert to house hack. And Robert, I don't know if you define yourself as one, but highly recommend people just Googling house hack. I know there's a ton of, I think, the deeper pockets or deep pockets, or bigger pockets. That's what it is. Bigger pockets is really good. Yep. Okay. Check out bigger pockets. I know they're really into real estate and house hacking. So if that's something you're in a position of and you're comfortable owning a duplex or a

quadplex and living in one unit, renting out to others, definitely check that out. And Robert, before we move on to our last point here, you mentioned fund rise. So again, that's f-undr-r-is-e dot com and why we like funderize so much is because it unlocks the ability to invest in institutional level real estate the real estate that's only shared to the j p morgans the the big you know hedge funds people that really have the hundreds of millions if not billions of dollars it unlocks that to the everyday person with just ten dollars right so they've got seven billion dollars in assets under management across two hundred thousand people but it's it's a robo advisor essentially for real estate investing. We both like it a lot. We'll have a link actually in the description if you

want to learn more about them. Two thumbs up from us. So, Robert, what's this last point, this third point about retirement, making your first investment toward retirement? Walk me through some of that. Yeah, it's just really all about setting yourself up with the right platforms and strategies to build your wealth. Because so many people, they suffer from analysis, paralysis, they get a bunch of money in a bank account, they don't know what to do with it. They kind of meander around from here to there and go, oh, I'm going to buy some stocks or, oh, I'm going to buy this index fund, but they don't really have a plan. So then maybe they go to a couple meetings from some of these advisors that are on every street corner. They're not sure what to do. And so for this

number three, this point, we really want to talk about some of the best strategies to set yourself up early and often so you have the right portfolio and understanding of what you're doing with your money because what I see with most of the clients I deal with on a daily basis, they do a lot of the heavy lifting, but they don't know how to optimize their money for wealth. And that's a really slippery slope if you're not moving in the right direction with the right platforms to make sure you're doing the job to build your wealth portfolio. So you use the word portfolio a few times. What are maybe a way that someone could begin building their portfolio as it relates to retirement investor. Yeah, I would start out first with a Roth IRA. It's one of the most important

vehicles you can have in your overall strategy. And so many people get this wrong. They think Roth IRA is an investment. I had a client recently. She's like, yeah, I have 20,000 in my Roth IRA. I was like, amazing, you're off to a good start. What is the 20,000 invested in? And she was like, what do you mean? It's invested in Roth IRA. And I was like, well, you still have to invest it when it's in the Roth IRA. This happens a lot. So to me, one of the most important things in your strategy, whether you're in your 20s, 30s, 40s, or 50s is making sure that you have your Roth IRA set up and you max that Roth IRA out every single year with a good mix of index funds or whatever it is your thinking is your best strategy or if you have a financial advisor or you get opinions

from someone like myself or Austin. But the Roth IRA to me is the most important because you of $6,500 a year that is tax-free for life. So give me your thoughts, Austin, on the Roth. Do you agree with me that that is one of the best strategies to start with? Absolutely. And I think the big reason that I'm so excited about the Roth IRA is on one side, you've got this awesome tax-advantaged account. But it's also some people, and I don't recommend this,

but some people even treat it as a savings account because how flexible the penalties are on the Roth IRA. Now let me explain this to you, Rob. So as you probably know here from the tax advantage perspective, what you're doing is you're contributing after tax dollars toward this retirement account. And what you're also doing now is investing it toward these index funds or ETFs that we talk about all the time, right? The VOO, the VTI, other things of that nature. And as that grows, right, because this is after tax dollars, as that grows throughout your life, when you're 59 and a half and you're now retired and old enough to take this money out, you can take as much as you want out. tax free. So if this grows to 500, 700, a million dollars, quite literally, you can take the money

out, deposit in your bank account, and spend it tax free. You're not paying any federal income tax on your profits. Profits. You're not paying any taxes on those profits. Now, keyword's profits. Now keep that profit word in your mind as well with these penalties, Robert, because what's interesting about a Roth IRA, and again, I don't encourage anyone to borrow against their future by taking money out of their retirement. Don't do that. Figure out different ways. to attain attain money if you need it in a pinch here. But if you are going to withdraw money from your Roth IRA, because you're contributing after tax dollars, you can actually withdraw the contributions out of your retirement account, your Roth IRA account without any penalties

at any age. Now, you can't withdraw the profits, right? Can't withdraw those. That'll be taxed because capital gains, profits are making money. That'll be taxed. But the money that you contributed, So the $6,500 that Robert alluded to earlier, you can take that money out the next year and say, you know, if you really need it, again, don't do that. But you can take that out and you won't be penalized 10%. You won't be tax on it. You won't be any of that stuff, which is, I think, is a really flexible option for people that might be wanting to get excited about retirement investing, but they're not really sure exactly if they can afford this or if, you know, they just want that flexibility. The Roth is the way to go. Yeah, I agree totally. And there is a lot of flexibility in a Roth. And one of the things that's a key takeaway for this point, because I think it goes across a lot of different investment strategies,

is people feel when they're investing through their Roth or into an index fund or some of the other kind of tools that we talk about is they feel that that money is just tied up and gone forever. And that's just not true. Most of the things we're going to be talking about on the podcast or on TikTok or whatever we're doing with some of these strategies, most of it's going to be liquid. So keep that in mind, guys.

When you get into real estate projects, that's a little different, or you get into some syndications. That might tie your money up for five or six years. But most of the items we're talking about here are still going to be liquid and without penalty. So just keep that in mind. And by the way, Robert, you said syndications, you said real estate projects. I want the people listening right now to let us know in the comments of this or somewhere. Let us know if you want us to talk about those things.

If you want us to talk about syndications, if you want us to talk about different. projects or how we've been able to invest throughout our lives. I certainly want to learn from you, Robert, about the syndications that you were involved in and probably still involved in today. So if you're all listening right now and you want us to get into those deeper things, please let us know. This was a good episode. I like this. So we talked about passive income through dividend paying stocks in our ETF of SCHD. We talked about passive income through real estate investment trusts, specifically O and PSA. We talked about making that first investment in real estate here

through an FHA loan, something that I did or house hacking, something Robert did and is very familiar with, as well as Fundrise, a platform we're both really excited about. And then we also talked about making that first investment toward retirement through a Roth IRA. And we talked a little bit about the penalties. A really good episode, Robert. I'm feeling good about this one, man. So many of the listeners out there just don't know where to go. Every day, that's what I deal with. I don't know where to go. I have this and I have this amount of money. I have this in my 401k. but they're just not sure what to do. And that's why as you go along in your investment and your wealth journey,

you really need to stay educated, stay on top of what works, because we are in an ever-changing market, especially right now, with high interest rates and everything that's going on with banking, the markets have been sideways for quite some time. This is an ongoing process. You can't just set it and forget it and expect to really thrive. So that's why we're here every week, trying to give you guys the best information we can to guide you on your wealth journeys.

Well, here, if you're listening right now, I want you to do us a favor. If you learn something about dividend stocks or reeds or if you thought anything we mentioned today was interesting, share this podcast episode with a friend, right? Let them know, hey, I'm learning about passive income. I'm learning about making my first investment in real estate or my retirement. I want you to learn about that too. Share this episode with a friend. Also, leave us a five-star review if you're on Spotify or Apple Podcast.

follow us on those platforms. Wherever you listen to podcasts, we're probably going to be on there. And be sure to tune in every Monday morning because we're going to be dropping these awesome episodes every single week. So make sure you come back next Monday for our next episode.

Thanks to all so much for hanging out with us. My name's Austin. This is Robert, and we're going to see you on the next episode of the Rich Habits podcast.