Passive Real Estate Investing: How to Have a True “Four Hour” Real Estate Workweek

23

You know those moments in life when you’ve been dead set in one direction and then all of a sudden something crazy happens that changes everything?

It just happened to me.

I’ll spare you the nitty-gitty details but long story short, I had a pretty big disappointment happen recently that led me to take some time off to reevaluate everything in my life and the direction of my future.

Out of that personal reflection came the inspiration for this post, so I hope it serves you well.

What is Passive Income, Really?

I want to start off by asking some questions:

What does it mean to be a real estate “investor”?

Does it mean you are a millionaire?

Does it mean you are the owner of expensive things?

Does it mean you are powerful? 

What does that word actually mean to you?

For me, I never really thought of that word until recently. I called myself a real estate “investor” but come to think of it, I haven’t really done any real investing in my life yet.

You see, my interest in real estate investing started out with a conversation I had with one of my best friends. He had jumped into full-time real estate about 6 months prior and insisted that in one transaction it was possible to make over $50,000 and at the time, that was more than I could make in a year.

I really hated my day-jobback then (I loved my employers though, I just hated the actual work itself) and I had just discovered Pat Flynn over at the SmartPassiveIncome blog and was well versed in the philosophy of the “4 Hour Workweek” and the power of passive income streams. I really wanted to figure out a way to be financially free so that I could pursue my heart in life and at the time I was depressed because I couldn’t find a means to get me there.

Then this conversation happened and it was as if I was struck by lighting! I got so full of hope and excitement -real estate was my way out! It was my way to my freedom and to my destiny!

So I quit my day job on blind-faith, leaving behind both income and benefits, believing this real estate thing was going to pan-out no matter what happened.

My wife wasn’t working at the time.

We went from income to no-income at the snap of a finger.

9 months later as I am writing this post, I am finally about to make my first check from real estate in about a week from now (Luckily my wife found a job 3 months in).

I’m living the dream right?

Not really. To be honest my day-job was way better in a lot of ways.

I’ve worked 10-15 hour days, day-in-and-day-out, sometimes going for literal weeks without a day off.

I have a ton of results out of the hard work I’ve put in, with a lot of money now pending because of it (our acquisition strategy was only going after under water properties so everything I’ve brought in for the company I work for just so happens to be in the short sale process) but was this what I signed up for in the beginning?

No.

You see, what was described to me by my friend was the lifestyle and benefits of what I consider a true investor:

someone who makes money without having to do anything for it beyond the initial set up and who makes enough of it to pretty much do whatever they want. 

Though the technical definition from Investopedia defines an investor as any person who commits capital with the expectation of financial returns  in terms of the investor concept described in the Rich Dad’s Cashflow QuadrantI have come to see a huge difference between active income investors and passive income investors and I would go on to argue that active income isn’t really investing. 

Let me explain.

Is a 4-Hour Workweek Possible?

Active Income is defined as income for which services have been performed. For simplicity, if you need to be constantly working in order for your investment to turn out well, than its considered active income.

Passive Income, on the other hand, is defined as earnings an individual derives from a rental property, limited partnership or other enterprises in which he or she is not actively involved. In short, you did something with your money that now pays you returns for doing little-to-nothing.

For me,  lifestyle is the ultimate measurement of success. It doesn’t boil down to numbers in a bank account or the square footage of your primary residence. It boils down to freedom and how much control you have of your time.

Now I want to be clear about what I’m saying and what I’m not saying. With the popularity of Tim Ferriss’s 4 Hour Work Week there has been a lot of confusion as to what lifestyle design is and what it isn’t. I’ve seen a lot of that confusion actually here in our community at BiggerPockets and I want to clarify somethings for you.

Tim Ferriss typically works more than 4 hours a week.

He has actually said it multiple times in countless interviews. The 4 Hour concept isn’t to eliminate work entirely.

The point of it is to free you so that you can put the majority of your work hours into things that you are passionate about and that make you come alive inside.

The “4 hour” in the title is the sum total of the dreadful labor -the stuff you couldn’t care less about doing, that is ultimately necessary to have the income to support a life of your dreams.

Does this mean traveling the world, winning tango competitions and defeating wrestling foes in exotic Asian countries?

Sure, if that’s your passion.

But it can also look like being a stay-at-home family where both mom and dad’s primary focus is the kids.

It can look like you running a summer camp for the underprivileged or you starting a small bookstore downtown.

It can look like anything you want it to because ultimately your passion is what governs it.

Lifestyle Design is Freedom, Not Laziness. 

It actually takes a crap-ton of work to be able to it set up so don’t think I’m saying otherwise.

How Do I Engage In Real Passive Real Estate Investing?

Bringing it back to real estate investing and my personal experience, if lifestyle and freedom to pursue your passion is the hallmark of success then certain components of the real estate industry cannot be looked at as a good long-term strategies.

I have categorized the components of active income investing to include the following:

  1. 1. Wholesaling
  2. 2. Fixing and Flipping
  3. 3. Traditional Buyer/Seller Agent or Broker
  4. 4. Developing

In every one of these sub-niches of real estate, in order to be successful in them you have to be constantly on the move. You can’t really ever let your foot off the gas peddle because if you do, both your deal flow and cash flow will stop.

All of these strategies have great upsides but in terms of lifestyle, you can pretty much throw it out the window. You have to work and work and work to make things happen.

So be aware (did you notice that the top two are the things most talked about by the gurus?)

On the other hand, real estate has some of the most incredible passive income vehicles available and I’m going to take the time to go over them with you.

1. Multifamily

Buy and hold investing is probably the most popular form of passive income in real estate. The concept is pretty straight forward, you purchase a property that you can rent out at a large enough amount that there is a profit after paying for financing fees and expenses. There are two types of buy and hold properties: residential (1 -4 units) and commercial (5 or more unites).

Something you can do to truly automate your buy and hold investments and completely remove yourself from the management process is to outsource the headache to a property management company. In an ideal situation, they will handle all the dirty work while you collect your check. If you go this route,  make sure to really do your due diligence on the property management company you’re looking to hire because they have a reputation of not really having your best interest in mind.

I’ve heard a lot of horror stories regarding property management companies but it’s not to say there aren’t good ones out there. You just need to be intentional on the front end to make sure that you are working with good people and creating good systems.

You see on the passive income side of investing, the work is 99%  in actually setting things up, i.e. finding and buying your property, finding good tenants, finding a good property management company and maintenance man etc.

Once these things are set up you pretty much can sit back and enjoy the fruits of your labor and what’s awesome is that the checks will be there month-to-month, whether or not you do any additional work.

Now you could argue that multifamily investing is not 100% passive because even if you outsourced the day-to-day work to a property management company you would still need to be in touch with and “manage” the management company, so-to-speak.

I would agree if this is the case it’s not 100% passive but again, going back to the “4 Hour” concept of Tim Ferriss, this is the minimal pain needed to reap the freedom and lifestyle one can enjoy as a full-time landlord. So it’s worth it!

Related: How to Buy A Small Multifamily Property: A Step by Step Case Study

2. Triple Net

Triple Net investing is probably my favorite type of investing in all of real estate. This is a true step up in automation from multifamily because instead of outsourcing everything to a property management company that you ultimately still have to manage, you actually end up outsourcing all responsibility to your tenant!

You read correctly.

You see essentially a Triple Net investment is a free standing property that is leased to credit-worthy tenants such a Walgreens, Walmart, Bank of America, Starbucks, McDonald’s etc.

Once these tenants move in, they are responsible for all maintenance, property expenses -everything. Once you get everything set up, the tenants are usually on 10-25 year leases, so all you really need to do is cash in your checks!

Now the downside on this type of investment is the fact that they’re typically expensive. These are commercial buildings so naturally they cost more and because of that you really want to be careful at purchase, or you could loose a lot of money. If you get stuck with a Triple Net in a terrible location no tenant will want to lease from you and the month-to-month vacancy cost can be pretty crazy on some of these properties.

Related: Triple Net Lease Investing (NNN): The “No Toilet” Method to Real Estate Investing

3. Notes

Another passive income stream in real estate are in owning and selling promissory notes. These are “proofs” of debt borrowed from party to another. To put it simply, when you invest in notes you actually buy the loan that the property owner owes to the bank or individual who lent him the loan.

This is a great passive income stream because you essentially get to function as the bank! The principle and the interest goes to your pocket!

Related: Cash Flow Notes: Step by Step How to Invest in Performing Notes

 4. REIT Investing

Though I don’t know a ton about these, a Real Estate Investment Trust (REIT) is a real estate holding company that offers public shares that pretty much act like stock in a company, but instead of investing in ownership of a business your investing in ownership of a piece of property and/or mortgage.

REITs are given some pretty cool tax advantages and their shares can be purchased and traded straight from your computer screen… so that means your office could be a coffee shop off of Santana Row (Shout out to San Jose!)

Imagine that?

From what I hear, there are pros and cons associated with this asset class being that the returns are typically higher in multifamily properties and other forms of investments, but with REITS you don’t have to deal with the headache of tenants and your cash has a lot more liquidity.

Related: REITs: Invest In Real Estate Without Leaving Your Computer

5. Tax Liens

Our final asset class of passive income real estate are tax liens. The easiest way I can describe a tax lien is to compare it to the bank foreclosure process. When a borrower is behind on their mortgage payments they begin to get severely penalized by the bank as an incentive for the borrower to get current. If the delinquency of the borrower continues to no avail, then the bank will end up selling the borrower’s property at a foreclosure auction.

Tax liens are a very similar process only its not with banks and loans, its with the government and property taxes and as a means to ease the tax loss, the municipalities have decided to sell the payment demand, or lien, to investors. The government gets their taxes, while the investor gets the right to collect the delinquent tax, an additional penalty charge and interest on the late payment that can go up to 12-36% a year, depending on your state.

This is a great passive income source because after your initial research, that’s all the work you have to do. And, if the delinquent homeowner ends up not paying you within the set given period of time, you can actually foreclose on the property. So you win either way!

Related: OTC Tax Liens: How We Made 6% in Less Than 120 Days with Tax Liens

Passive Income Through Real Estate Summary

As you can see, these type of investment strategies are more accustomed to life-style driven investor.

What came out of my life reflection is that if these types of investments are available, then obviously they are what I need to be studying for and striving for.

But how do I get there?

A lot of these asset classes have a higher learning curve and demand higher capital to get started.

That’s where a choice needs to be made and active income investing comes into consideration.

If you want to grow into the passive income supported, “4 Hour Work Week” lifestyle through real estate investing, what better place to start than with building capital and experience actually in real estate?

I mean yes, essentially your starting out as an entrepreneur and bootstrapping your way to the top (which sometimes looks like struggling in the beginning) and it maybe a little smoother to have a day job to support you, but in active real estate, you’re essentially killing two birds with one stone and there is no better education than hands on.

 

Thoughts?

 

Subscribe to our mailing list

* indicates required Email Address * First Name Last Name
Share.

About Author

Jaren Barnes is passionate about what the BiggerPockets community has to offer and is very active in his local real estate market. Come say hi to him on Twitter!

23 Comments

  1. I agree with you. There is no shame in owning and running a real estate BUSINESS, and not necessarily being a real estate INVESTOR (see Cash Flow Quadrant). When people ask me my involvement in RE I tell them that I own a real estate business that buys underperforming apartment buildings, turns them around and cash flow from them. In the beginning (6 months to a year) I am very active with it, once it is stabilized then not so much.

    I also have heart burn on BP because I have to identify myself as a RE investor, when I consider myself a RE business owner.

    Finally you are right–life is like Burger King, you can get it any way you want it!

    • Seth thanks for your input! I like your business module! I’d love to get into fixing and holding apartments that’d be a sweet deal! What are your thoughts on doing a non-real estate day job to build up wealth and then use that income to become a passive income investor, compared to being an RE business owner/worker?

      • Jaren, I worked my day job and still do. But I saved as much money as I can in 2011-2012 while I lived in a 5th wheel RV, with my dog in west Texas and Arkansas. Then I took that money and shopped very diligently for a value-add apartment. I ended up purchasing a 12-plex in December 2013. I know that I could use OPM but I wanted to risk my own money, time and efforts to make the first ‘big deal’ on my own. Now that I have shown that I can perform people are offering me lots of money (for me) to do it again. It has also given me a lot of mileage with the sellers.

        But now there is NO WAY that I can successfully scale my business using only my own money. So I am stretching as a business owner to expand my experience and abilities, all while working 40 hours a week—at least til I get out of the rat race.

        • It sounds like a lot of hard work, but it also sounds like you’re very passionate about it :P I think it’s cool to work hard at running an RE business, as long as you’re enjoying it :D Especially since all the work you’re putting in initially just means that it’ll be an awesome passive investment down the road since you’ve made sure that it’s a viable model, and you’ve spent the year or two fixing all the potential problems before leaving it to passively make money :D

        • Very cool Seth! I think a day job and doing real estate around that is a really smart way to go about it and probably the best of both worlds. You gotta just make sure you actually do the real estate on the side so you can learn and grow.

    • gualter amarelo on

      I agree with all of the above. I love the passive income I get from my multifamilies but I hate my job, LOL. The biggest problem is that it’s very easy for me to get bank financing as long as I keep a permanent job. Also the active income has proven helpful in the first couple months after renovations. I certainly don’t intend to stay in a job I can’t stand, but in the long run I think that it is the only way I can safely keep my little empire growing. At least until my RE business is bringing in enough passive income to prove to banks that i’m worth lending to.
      I guess this is a case of first world problems, but damn I wish I could just flip houses and still get financing from the banks!!!

      • I feel your pain Gualter! Have you considered switching your day job to something that you enjoy so you could have the best of both worlds? I mean maybe you could get into a property management company or something in real estate that’s salaried.

        • gualter amarelo on

          Jaren, that has totally been the topic of discussion in my house lately, lol. My wife just quit her job so she could start her wedding invitation business full time, so I feel a stronger obligation to not do anything too risky with my current job. That said… The more I think about it, the more I think that I need to start applying for Property Management positions!!! I am working on tying up another property this weekend in my name and am hoping to be able to tie 2 more up using my partners financing. Once I close on the first one I might be in a better position to switch jobs while I wait for the other two properties to age before assuming the loans. MAN I love this business!!! Thanks for pushing me in the right direction!

  2. Haha this reminds of what Kevin O’ Leary said on Shark Tank, where he compared money to soldiers. How he sent them out to bring back more comrades, and that doing anything else was just killing money :D

  3. Brandon Turner

    Awesome post Jaren! I’m a huge fan of the 4 Hour Workweek, though I know a lot of folks run the other way because it sounds scammy. But you totally get the heart of what Ferriss is saying. Thanks for the post and keep up the great work!

  4. I disagree with your idea that being a traditional agent is the way to a 4-hour work week. You will never be able to do enough sales to live on working that few of hours a week. No way. In the beginning of my career I worked about 70 hours per week. Thankfully I did put in that initial huge effort because now I work mainly with referrals and past clients and work only work about half that much, although I also make half the money.

    I love the 4-hour work week concept and finally I am able to do it if I want to. I got to this point by having 5 rental properties. Additionally, equally as important, my husband and I scaled back our lives so that we can live on just our rental income which enables us work less so we have much more time to travel and pursue hobbies.

  5. Great article and posts. Ive also determined that while I dont need to make money in RE to eventually invest in RE it can only help to inundate myself in the business.

  6. I enjoy the passion and story, but job #1 take care of family and bring in income. There are many hours outside of work that can be used. I worked two jobs, while taking real estate classes, put money in side business, dividend stocks and lending club. By the time I got to the small texas bank even though I moved around and switched jobs frequently they felt secure in loaning to me. Maybe I have a hard time on the creative financing bandwagon but love hearing the stories. Also the real truth that it takes times to grow a business and get passive income.

  7. What a wonderful summary for anyone looking at Real Estate investing. After 30 years, I’m now working no more than four hours a week. My income is partially from established, luxury condo rentals, but primarily from private lending, which is similar to Notes, but shorter term, higher interest. These are carefully selected, but require no work, as the monthly payments are deposited into my bank account. I also dabble in Tax Liens. One month a year I study the sales (this IS time-consuming – but short-term) and buy promising certificates. These can take up to two years to pay off. But I use funds from a self-directed Roth IRA, that I maintain for growth rather than income.

  8. LaShelle Smith on

    Excellent post. I want to build a portfolio of multifamily units and I had to convince myself to view my job as just a tool helping me do that. It provides me with proof of income to banks, keeps the bills paid while I build my business and is money going towards my emergency fund. Short term pain for long term gain! I don’t love my job…but I love what it can do for me.

Leave A Reply

css.php