Unlock Passive Income: Expert Tips from Real Estate CEO Lon Welsh

Kristen Knapp (00:00.92)
Welcome back to the Real Estate Pros podcast. I’m Kristen Knapp and I’m here with Lon Welsh, serial real estate entrepreneur and the CEO of Iron Ton Capital, which we’re going to get all into today and I’m very excited. We’re going to also talk about the two companies he’s sold. He’s done a lot in this industry. So thank you so much for being here today, Lon. Yeah, awesome. So let’s just kind of go into your background quickly. Like, do you want to just give a little snapshot of, you know, everything you’ve built up to this point?

Lon Welsh (00:18.1)
Thanks for having me.

Lon Welsh (00:30.394)
yeah, I worked in corporate finance for a couple years, went back to business school, got an MBA. I worked as a strategy consultant for eight years at Deloitte and then Accenture. Then I’ve been in real estate full time for a little over two decades now. I built a real estate brokerage called Your Castle Real Estate.

into the biggest in Colorado, a little over 750 agents doing 3,000 4,000 transactions a year. And they built a title company, The Business Partner. We sold those about three and a half years ago, right before the rates went up and the market really slowed down a lot. So the timing on that worked out pretty well. I was semi-retired for a couple of months, drove my wife crazy, decided I wanted to do something else and started Irons and Capital about three years ago. So we help people invest passively, which is a lot different than what I did for 20 years before that, helping people to go buy apartment buildings and be very active.

actively involved and boy it’s really a nice change.

Kristen Knapp (01:20.3)
And what kind of drew to that change focusing more on passive than active?

Lon Welsh (01:24.672)
Well, there’s only two drivers. I’ve written 13 books, most of which are on real estate investing. And for decades, I did classes on how to become a real estate investor. And I have 20 people in the room. And one of the 20 would go by a four unit apartment with me. And then the other 19 would say, Alon, that makes a lot of sense. I see the returns are fantastic. I am too busy. I can’t do that. So finally, it occurred to me, maybe I should build a company that served 19 people out of 20 instead of one person out of 20.

Kristen Knapp (01:49.844)
Yeah, that makes a lot of sense. I think that’s a good way to pivot. And just tell us more about Iron Town Capital and what makes you guys unique.

Lon Welsh (01:57.92)
Well, what we try to really do is focus on

on two groups of people. busy professionals that don’t have the time to invest in real estate, but they’d like to diversify and have some real estate in their portfolio. And we just do all of it for them. It’s like a mutual fund of real estate where you can really be well diversified across strategies and geographies. The other group is the people who have been active investors are sort of burned out on it after doing it for 20 years. They’ve made a ton of money from it, but like, I don’t want to talk to any more tenants. I just want to go to the beach and retire and get a check every quarter. And we can solve that problem as well. So those are our two main audiences.

Kristen Knapp (02:30.594)
Awesome, and within, you know, Iron Ten, I know that you guys really diversify. You have multiple funds, and I think that’s something, you know, that’s also very unique. How do you guys kind of diversify people’s money?

Lon Welsh (02:43.775)
Well, there’s two main funds that we offer. There’s an income fund that pays between 11 and 13 % a year, so about 3 % a quarter. The more you invest, the more you get paid. And that’s really great for people who just want income.

So if you’re selling a real estate property and you’ve been living off the cash flow, you might take a lot of those proceeds to put into the income fund to replicate the cash flow that you’ve got, but now you don’t have the tenants and other issues to deal with. So no appreciation or growth, all income. The other fund is designed to be all growth over the long term, but no income or as little income as we can possibly create. And for that, we’ll generate a portfolio of 30 to 35 different commercial properties in about 10 different states.

multifamily, some industrial, some hospitality, there might be some self-storage, some will be new construction, some will be heavy value add, but we try to get a really diverse portfolio. So last year, a little bit after this, you remember there was like two hurricanes in a row that hit Tampa, and we had a multifamily there, and it was just really nice to able to sleep at night saying…

my apartment’s gonna be flooded tomorrow morning when I wake up and it’s only 3 % of the portfolio, it’s just not that big of a deal. It just really makes things a lot more relaxing.

Kristen Knapp (03:54.21)
Right.

Yeah, no, I think that’s a big benefit to it. And if you could go into kind of the risk with either funds, because I think people, you know, maybe getting into this or people who are a little seasoned see risk in different ways. So what would you say the risk of each one is?

Lon Welsh (04:12.864)
So for the income fund, we’re actually investing in medical receivables. So when you see one of those billboards, they call me if you’re in a traffic accident, and so some attorney’s phone number on it. Those attorneys get the phone calls before the doctors do. They have a lot of neck injury cases that come from, usually front end collisions. They send all of those cases to one spinal specialist in a community.

A lot of them are relatively small claims and there’s a whole lot of paperwork to get a very small payback. So what we’re doing is we’re partnering with a company that takes over all of the paperwork process with the legal process, the insurance company. We advance about a third of the value of the claim. So if your neck injury was $35,000 to get you healed, we’ll get the physician or the clinic $12,000.

So really what the physician is buying from us on these small claims is relief from the administrative burden and the cash advance is a relatively small part of what the service is. Because they could go to a bank and get an advance. Lots and lots of banks do that, the help from the paperwork is really what we’re selling. And we’ll try to have a portfolio of about 100 different claims. We advance on about 95. They’re all cross-collateralized, so if any one of them don’t work out, we can collect from one of the others.

There’s always a way for something to get screwed up, but you’d have to screw up in a lot of different ways not to get your money back on this. So that’s where the 12 % comes from.

Kristen Knapp (05:34.198)
Yeah. nice. Yeah, that’s awesome. And then someone maybe, someone’s really active in their investments and they’re looking to be more passive. What are some questions that you should ask or things you should look for when choosing a fund?

Lon Welsh (05:51.04)
Well, I think the main thing is just to understand what’s the due diligence process that we go through to try to figure out which people we should invest in or not. What are the different risk factors? What are the hedges that we’re trying to identify to offset some of those risks? We actually wrote a book on passive real estate investing. I can give you a link for your listeners to download that for free at the end if you want. But we actually have a whole bunch of due diligence questions that they should ask me or someone like me before investing.

Kristen Knapp (06:19.766)
Yeah, and I imagine this can, it just creates so much more time for people. They can just move on with their lives rather than being in the mud.

Lon Welsh (06:28.028)
Yeah, exactly. It’s just a, it’s very exciting to talk to someone who’s had six or 10 rentals for the last 20 years and they’ve created four or five million dollars worth of wealth for their family. But it’s been every single weekend and a lot of nights for that whole 20 year period, like getting to that point and be able to like get them the same or better returns and not have the headache. Their family is really the biggest cheerleader of the whole process.

Kristen Knapp (06:49.99)
And I imagine this has been really gratifying to build. Probably more people really excited about this.

Lon Welsh (06:57.824)
Yeah, yeah, our goal is that we’re going to create over $100 million of wealth for our limited partners. And most of these guys aren’t people that have got like, you know, a $50 million net worth. They’re $1 million, $3 million, $4 million. And what we can do for them really matters a lot. They can retire a little sooner. They can retire a little better. They can send their kids to a better college. Maybe they always wanted to get like a place in the mountains to go for the summer. Now they can afford to do that. I’m kind of in the dream granting business, which is like the best business in the entire world.

Kristen Knapp (07:24.844)
Yeah, that’s amazing. I love that. And can you talk about some wins you’ve had? Like, yeah.

Lon Welsh (07:30.648)
my gosh. I’ll tell you from our first fund about six years ago, I’ll tell you one great one and one disaster because it wouldn’t be fair to do both without one without the other.

Kristen Knapp (07:38.19)
Of course, yeah.

Lon Welsh (07:41.286)
One question that all of your people should ask is when they’re talking to a sponsor and they see what the best investment that person ever did was, you really have to question how much was the timing a part of it versus just the analytics and that was a really solid product. So what I’m gonna tell you is a good example of a bullshit project where we did a good job. We did it exactly at the right time and we got paid twice as much as we deserve to get paid. So I don’t want people to be confused about that. So we build a new build.

Kristen Knapp (07:52.11)
Right.

Kristen Knapp (08:06.349)
Yeah.

Lon Welsh (08:10.496)
to rent community of attached duplexes outside of Houston. And everything that could have gone right went right. We made a 54 % annualized return for our limited partners after all the fees and expenses. The reality is that we should have been in the mid-20s, but we bought it at the exact perfect moment in time in late 2019. We sold it at the exact perfect moment in time in the first quarter of 2022, and we could not have done anything even better than we did. just, sometimes it all just comes together.

Kristen Knapp (08:37.763)
Yeah.

Lon Welsh (08:38.528)
So you shouldn’t look at that and say that, these guys are really smart. They’re going to get the same 54 % return for me because there’s no possible way we could do that. We’d be grateful to get you a 17 in a safe, reliable sort of a fashion. On the other hand, at Fund One, we also bought a value-add office building in a city in Texas right before COVID. And we got wiped out entirely on that. Hopefully, you’ll give us a little bit of grace on that and not give us too much credit for the other.

Kristen Knapp (09:04.0)
Yeah, exactly. It’ll, it’ll knit together. Yeah.

Lon Welsh (09:08.362)
But this is the power of diversification because we had that grand slam of a project, a total loss on one, and then we had six that were just fine. Nothing fancy. They just came in like 12%, 15%, 18%, 21%. And the whole thing’s going to blend out to be a great fund. But most funds are like that. There’s always one where you just get blindsided in the way that, wouldn’t have seen that coming. You almost always get one that’s, I can’t believe how well that worked out.

Kristen Knapp (09:31.222)
Yeah, well, no, and I think that’s important to mention because I think the transparency is really refreshing, that the market really is ever-changing and it’s definitely at play.

Lon Welsh (09:44.084)
Yeah, no doubt about that.

Kristen Knapp (09:45.836)
And then how many, within the fund, how many investments are you doing per year?

Lon Welsh (09:51.68)
Usually in any given year we’re somewhere in the range of 15 to 20. We’ve done a little over 100 over the entire lifetime of all the different funds. So we probably have to look at 40 or 50 to find one we actually commit to. We’re pretty good at saying no pretty quick so we don’t do a very detailed analysis on a whole lot of them because you can, at this point I know where look to find things that are problems.

Kristen Knapp (10:11.946)
Yeah, I imagine you get pretty good at it. That’s awesome. And I can see how if one maybe doesn’t do as well, that definitely evens out. That’s enough where things kind of remain steady.

Lon Welsh (10:14.701)
Hahaha

Lon Welsh (10:26.292)
Yeah, exactly. And the thing is, if you’re an individual investor, you’re going to have the exact same results that we do. If you do enough of them, you’ll eventually have one that’s really incredible that you brag about. You’re going have one that’s a complete wreck. The problem is that if you only do one or two and you get one of those as complete wreck, it’s really a big impact, as opposed to if your wreck is just one of a large basket, you can absorb it very easily.

Kristen Knapp (10:49.693)
And I know you were saying, I would love for you to talk about just the current market and the opportunities that are there for everybody.

Lon Welsh (10:57.716)
Well think Warren Buffett had this really great quote saying that when others are being greedy you should be fearful and when everyone’s being fearful you should probably be greedy and that definitely reflects the commercial real estate market right now. I think there’s segments…

where you’d have to have an unusually large degree of local knowledge, like office buildings. We’re reluctant to invest in that because we don’t have that granular detail to like pick the one needle in a haystack. That’s probably the right one because most are probably still not the right time to buy. But in multifamily and in warehouse, man, there are so many great opportunities and there’s just like this black cloud over the entire asset class and people are really missing out on incredible opportunities that they’re chasing in video, I guess.

Kristen Knapp (11:38.988)
Yeah, mean, it’s a good look at it. It’s a very positive outlook of the market. And then I’d love to talk about, you’ve sold two companies in this industry. What are the mindset tips that you might have for someone building something?

Lon Welsh (11:56.576)
Well, if you’re building a brokerage or a title company or any other kind of business, in the early stages you have to be just really on fire to show up every day and put in 80 hour weeks and that’s just really all that you think about all the time. Eventually, hopefully things will go well for you and you’ll build something at a steady state that runs pretty well. And then for me, like after 18 years, I really had…

implemented like pretty much everything I could think of to make it grow and it was just sort of like a steady state and I couldn’t improve it. It wasn’t getting any worse either, but I couldn’t make it any better. At that point I said, you know what, I really need to find someone who could take this to the next level. So we sold it to a private equity fund and the guy that runs that ran all of Century 21 globally, just a really great experienced guy and he’s been a joy to work with and he’s got a whole bunch of ideas and resources that, know, as just an individual I wouldn’t have. So it’s been really cool to do that. So I think as long as you’ve got the passion for the business, you should keep at it. And then when you start thinking maybe this is as good

I can do, might be time to try and find someone else who can do even better yet.

Kristen Knapp (12:50.336)
Yeah, and I think that’s really impressive. I think it’s hard to kind of know when it’s time, but I think that’s a good breakdown of when it’s time.

Lon Welsh (12:57.344)
Exactly, exactly.

Kristen Knapp (13:01.75)
And that should give your iron-ton capital investors, that should give them a lot of confidence that you’ve sold two businesses.

Lon Welsh (13:09.28)
I think so, you know, we’ve done an awful lot from a business standpoint and while I’ve been a really active investor for 20 some years and I’ve learned a lot just directly from my own projects, I learned even more from all the people at your castle because if we did 3,000 or 4,000 deals in a year

600, 800 of those would be investor deals. So all day long you’re talking to realtors in the office saying, here’s an investment deal I’m working on. And you could ask them, what are the assumptions? How do you think it’s going to work? What do you think the risk factors are? And then two years later you find out how it turned out. It’s nice to able to learn from someone else’s experience. A lot cheaper that way.

Kristen Knapp (13:39.894)
Yeah, definitely. That’s awesome. And then what’s next for you? You’ve written so many books. You’ve started so many companies. What do you think is next on the horizon?

Lon Welsh (13:50.208)
Well, the next book I’m working on is on 1031 exchanges and how the new tax laws that just got passed a couple weeks ago impact your strategy from a tax standpoint with real estate. So that sounds like a pretty dry topic, and it is. But for the people who own a building that’s maybe appreciated by a million bucks and they’re looking at, you know, a quarter million dollar capital gains bill, they’ll probably be very excited to read it.

Kristen Knapp (13:54.637)
and

Kristen Knapp (14:03.48)
now.

Kristen Knapp (14:12.142)
Absolutely. I mean, I think there’s a lot of nuance in there that a lot of people miss. What’s like a misconception or what’s a mistake that you see a lot when people are doing the 1031 exchanges?

Lon Welsh (14:23.518)
Yeah, I’m glad that you asked that. So our long-term fund actually has two share classes. If you’re investing in your IRA or maybe you’re just a high-income person that doesn’t have any losses,

You’ll probably want the share class that pays a slightly higher preferred return, but it gets none of the depreciation loss. If on the other hand, you own an apartment building and you just sold it and you’re facing a large tax bill, our other share class gets all of the depreciation losses. And this new tax bill greatly accelerated how fast we can recognize depreciation loss. So instead of over a really long period of time, we could take a lot of it upfront. So what I can do for you is I can usually give you enough of a depreciation loss in the first year to offset the capital gain that you’re going to be otherwise incurring.

Otherwise, your only option would be to do a 1031 exchange, buy another property, and you’re still on the active treadmill. You haven’t gotten off. This enables you to get off the active treadmill and still get the tax benefit that you’re seeking. So I think that’s a tax strategy that people generally are not aware of.

Kristen Knapp (15:19.97)
Yeah, that’s really impressive. I love that you mentioned that. you’re diving the 1031s. What is another thing? Because I know that people, maybe they don’t start it quick enough or whatnot. What is just a big common mistake that you see people kind of do when they’re trying to do these exchanges where maybe they end up missing out?

Lon Welsh (15:44.426)
So for your listeners, should I explain this for listeners who may not know this, or would all of your listeners know this?

Kristen Knapp (15:48.13)
Sure, yeah, yeah, just going to quick.

Lon Welsh (15:51.36)
Yes, if you guys don’t know, if you’ve owned a rental property for a while, there’s a section of the tax code, 1031, that outlines if you follow these steps for the IRS, you can buy a replacement property. And if you follow all the rules, you can defer the payment of your capital gains tax until after you sell that replacement property. And if you own that when you die, your kids will inherit it from you. Maybe you paid a million for it, and it’s worth four million and your kids inherit it. As part of the probate process, they’ll get an appraisal.

set the value at four million. for them it’s not one, it’s four. They sell it the next day for four million, there’s no tax due. So it’s a great way to transfer wealth between generations. The problem is that you have to manage the thing until you die, which is very hard to do. So it’s been a time-honored tax strategy for a really long time, but now we’ve got an alternative that gives people another way to manage around having to pay all those taxes, which is generally not too well known. I don’t know, did I answer the core of your question?

Kristen Knapp (16:49.014)
Yeah, yeah, yeah. think that it’s a topic that people think they might know, but maybe don’t do it correctly. So I think that your book will be a great insight into that.

Lon Welsh (16:59.264)
Yeah, it should help out a lot. So if I’m on your show in six months, I can give you a link for that book instead of the one on passive investing.

Kristen Knapp (17:02.924)
Yes, of course, yes. Awesome. So where can people find you?

Lon Welsh (17:10.59)
Yeah, you can go to ironton, I-R-O-N-T-O-N, capital.com, and I’m just Lon Welsh at irontoncapitol.com. And if you are trying to figure out your investment portfolio, honestly, just send me a text. We’ll set up a 15 minute call, 303-619.

0633. I had a lot of people help me when I was getting started out and there’s no way I could have gotten as far as I did as fast as I did without the guidance of a few people. If I can spend 15 minutes helping one of your listeners out I’d be honored to do that. The other thing you can do is if you want to go to iringtoncapitol.com forward slash R-E-Pros R-E-P-R-O-S you can download a free copy of the passive investing book.

Kristen Knapp (17:49.538)
That’s amazing. mean, giving out your number, that’s very beneficial for people. So everyone, please take advantage of that. Those are great opportunities to learn more about it.

Lon Welsh (18:00.126)
Yep, happy to help out.

Kristen Knapp (18:01.504)
Yeah, well thank you so much for being here today, Lon. This has been very insightful, and I think a lot of people probably got a lot of great information about it.

Lon Welsh (18:09.182)
Thanks for having me, I really appreciate it.

Kristen Knapp (18:11.518)
Awesome. Okay, well thank you so much and we’ll see you back when you have published this next book. Awesome.

Lon Welsh (18:16.938)
Sounds great, have a nice day.