Passively Investing in Real Estate is Critical for Retirement

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While there are several debates raging across real estate investing forums, one that seems to attract strong opinions is the debate on whether investors should actively or passively invest in real estate.  While there is no singular definition of what it means to invest in real estate, with the advent of reality T.V. and a host of Do-It-yourself shows, there seems to be an existing opinion among the masses that unless you are beating the streets, talking to owners or swinging the hammer yourself, you are not really investing in real estate.  Actively taking part in every aspect, it seems, would be the only way to gauge your true value and worth as a real estate investor.  I believe that unless beating the streets and swinging hammers is your idea of a fun retirement, figuring out a way to build income passively needs to be a top priority!

Definition of Wealth

Part of the problem when talking to investors about real estate and retirement is agreeing on the definition of building wealth.  Too often, the terms  “rich” and “wealthy” are confused.  Being wealthy means having the ability to choose what we do each day without worry.  Being rich means I have the money today, but when I stop producing the money…then what?

Wealth is often confused with a number on a spreadsheet.  That number could represent number of houses owned, bank account balances, the size of receivables or in some cases, the balances owed on the boats, cars or other expensive toys we collect.  Building wealth means developing a plan to one day be able to stop… to stop doing the things we have to do so we can do the things we want to do.  Each of us has a lifestyle that we live and hopefully we have identified hobbies or activities that we enjoy; wealth is simply a mathematical equation that tells each of us how long we can enjoy those hobbies and our lifestyle before our funds run out!

Here is a simple mathematical equation for determining wealth:

Balance of Accounts (cash on hand, retirement) = Retirement funds:
Monthly expenses (Mortgage payment, car notes, living expenses, insurance, required funding):
Monthly passive income (Net cash flow after debt service & expenses):

Monthly Expense - Monthly Passive Income = Total Monthly Flow (Positive or Negative) Multiply this number  by 12 to get Yearly Flow

Retirement Funds/Yearly Flow = number of years

Ideally your passive income is larger than monthly expenses, but for most, it is not.  Subtract the passive income from the expenses and divide your Retirement funds by this number and you have have how many years you can maintain your current lifestyle before your funds ran out.  Most people are often surprised to see that after a short handful of years their funds are gone.  Since very few of us are built with the notion that working until our last day is our idea of enjoyment, putting together a plan for growing passive income becomes critical for securing a comfortable retirement.

Passive Income and Real Estate Investing

When I first started flipping properties in Colorado, I was doing what many other experienced investors around me referred to as “real” real estate investing.  I was advertising for leads, talking to buyers, inspecting properties, negotiating the deal, hiring contractors, lining up money, and essentially over-seeing every step of the project.  We flipped some properties and held one as a long-term rental.  On the long-term rental, my partner and I handled everything from interviewing tenants to minor maintenance work.  Essentially, we did everything-  but hey, we were told that was what it meant to be a real estate investor.  Whether we enjoyed it or not never entered the equation.

At the same time I was buying properties in Memphis, TN that were part of my long-term retirement portfolio.  I was investing in these properties completely passively and leaving all of the heavy lifting and decision making to the companies on the ground in Memphis.  It didn’t take long for me to figure out which form of investing gave me the freedom I was looking for to enjoy my day to day life.

After depositing checks from my active flips, I was often left with a touch of anxiety because I knew that deal was over.  I needed to quickly find the next deal in order to keep the income flowing.  On the property we held as a long-term rental, I was spending an inordinate amount of time doing little things like checking on leaks that kept me from doing what I really wanted to do.  I was so ‘active’ in my investing that I was missing out on some important things in life.  I outsourced the coaching job on my sons first soccer team to another dad and that was when I decided that passive investments were going to be the major source of my real estate investments.

Develop Passive Investments for Retirement

By adding passive investment properties to a portfolio, an investor gives themselves the freedom to choose which activities are most important to them.  Many investors find a great deal of enjoyment out of managing properties and find it very therapeutic to do the work themselves.  God bless them!  Others find it very therapeutic to take walks on the beach and to one day hope to make the beach part of their retirement.  Regardless of what brings you joy in life and how you want to spend retirement, supplementing that retirement with passive income from real estate is a great way to build security and peace of mind.

Passive income continues to flow to us as investors regardless of our daily activities.  So whether we are knocking on doors or swinging hammers, we still have a source of income that is consistent.  When I first started investing in real estate, I was advised many times that long-term rentals and passive cash flow was for suckers and that real investors went for the big bucks in actively flipping.  As 2012 approaches and I am a few years closer to retirement, I look back on those early words of advice and am thankful I learned my lessons quickly.  While I am sure I will always be actively investing, my true joy in life is being with my kids and family.  Luckily, I am building a passive income that will allow me to experience that joy on my terms for many years to come.

Photo: Robert Tadlock

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.


  1. This topic needs to be looked at in depth by all investors at least quarterly. True wealth comes to those with a long term outlook, usually the further out the better. I am 26 and right now on average I have more time than money although week to week this varies as I hold a full time job, 40 – 56 hours a week as well as my long term rental properties that I purchase repair and rent out. Some months I put in 16 hours a day and then some months just the day job. With this time invested in my rental properties I learn all the ins and outs of repairs, remodels, contractor negotiations, legal issues and purchase issues and options. As time goes on my passive income continues to grow and I can outsource more tasks as I can afford it and my time is increasingly scarce.

    The way I see it many people have to work about the same amount over a lifetime and I would rather get it out of the way inmy early life to have the freedom to afford my time in the future. Currently I have a 14 year time window to retire from the day job and have more than enough passive income to focus on real estate full time and then work half as much and spend more on the money producing tasks in real estate outside the repairs and maintenance tasks. It is a fun and exhausting ride.

    Great post!!!

    • Chris Clothier

      Kyle –

      That is the kind of story I love to hear about in a reply! You seem very clear on your objective (which is retiring when you choose and on your terms) and you are willing to put the time and effort in that it requires to get there. I especially liked your take on outsourcing tasks over time as you can afford to financially. By that time, you will have the experience and knowledge to simply follow up on those who you pay to handle everything for you and will be able to communicate clearly what you expect.

      It is great to see you have a plan at such a young age. Keep it up and keep me posted on your success!


      • Kyle-

        Have you thought of outsourcing sooner and shortening your timeline? I started investing at 27 with the exception of working (swinging a hammer) on my first property which I learned quickly I wouldn’t want to do for a living! I have outsourced everything and purchased properties out of state for better cash flow but, even more importantly so that I couldn’t manage them myself! I should be able to retire next year because, I have outsourced everything! Doubt I will fully retire because, I’m only 30 but I will take a long vacation and figure out what I really want to do while not having to work a day job I’m not excited about.


      • Right now I do most of my own stuff except where I lack the skills or desire to do the job. I don’t do most roofs, window replacements or cement work. I have good contractors in each areas. I recently, after spending a time on biggerpockets, hooked up with a local business attorney to help me with the legal side of real estate and different ways to purchase a property.

        Right now my savings by spending extra time by doing things myself allows me the cash to invest and grow at a risk level that I am comfortable with. In five short years my income from my day job has nearly doubled and with my most recent purchases I have as much total rental income as my monthly takehome pay. This is just rental income not profit. I have a different view on risk than most and it is a constant topic to maintain growth as well as being able to maintain a strong cash position to quickly pay in cash any repair or make any improvement on a property that comes up or any vacancy that can be taken advantage of for longterm gains.

        Sharon, I agree, I should look into wholesaling. I live in Wisconsin and while I know their are deals out their and I’m sure I could spend some time setting up a buyers list. I feel the spreads are not great here as our real estates prices have have a relatively low beta and never skyrocketed and never crattered as bad as the average. I have read a lot on this sitw about every 1 out of 20 leads looking to sell turns into a deal. I don’t have a problem putting in the work to achieve success but I don’t feel that would be the best use of my limited time right now. I have spread myself as far as I can and it is quite elastic. Sometime its completely booked and then nothing. The completely booked is only cause I can’t stop if I have something hanging that needa to get done.

        I believe that success is derived from intense focus on the task
        at hand. Serving one tenant well can reap rewards for a decade and opens doors to other revenue streams and opportunities. Their is something about compartmentalizing each area of the business and at strategic times cramming to be as much of an expert as possible that reaps great rewards. Thanks for the imput guys. Learning more is always helpful.

    • Kyle – I really applaud you for figuring this out early on. It will change your life! Spending the extra time now to have freedom in the future, is a concept most 26 year olds cannot begin to understand. You know there is a saying that goes like this:

      “If you are willing to do what most folks won’t do for a couple of years, you can have what most folks won’t have for the rest of your life”. You understand this.

      I would encourage you to take one more step. Learn to wholesale in your “spare time”. LOL. Take those chunks of cash and pay off your rentals. You will have freedom much sooner. My hat’s off to you Kyle.

    • Chris Clothier

      Mike –

      Thank you for taking the time to read the article and to post a comment. It’s not just about having something to say, but saying something that others enjoy and can take away from. I appreciate the positive feedback!


  2. Chris –

    Love the article. There is such a big differnce in being rich and in being wealthy. You did a great job of breaking down the equation for folks. My big goal for 2012 has to do with developing additional passive streams of income and making them more profitable.

    • Chris Clothier

      Sharon –

      That is exactly what you can do as you grow your passive income. Build more verticals, explore new opportunities and grow as a business owner, entrepreneur and investor. I appreciate the feedback. Best of luck with your 2012!


  3. Chris,
    You really nailed it here. When you break it down to the source, people don’t really want more money, they want more time. Income is what allows them to do what they want with that time, and passive income is what allows us to get there.

    There’s a million ways to make a million dollars a year, but for me, the one that takes up the LEAST of my hours is the one I want!

    By the way, I called your office today and spoke with Ashley, and she was able to provide me with some excellent information to help me with growing my own investing business in New Jersey. You guys are doing a phenomenal job of hiring great people 🙂

    • Chris Clothier

      Jamie –

      I have to tell you, your comments are very much appreciated. Thank you for taking time to read the post and add your comments. You are spot on about your time and what so many of us often forget in our pursuit of money is that life is short and time is not on our side. I really appreciate your insight.

      On your kind words about Ashley, it fills me with a lot of thankfulness to hear those types of compliments unsolicited. We do have good people and we do always try to treat people the way we want to be treated.

      Best of luck in your investing!


      • Not a problem at all! In today’s society, we’ve lost focus on what great customer service is really about, so when I see it, I shout it out 🙂


        And thanks, I’m looking forward to having some exciting news to post in the coming weeks!

  4. Your formula doesn’t make sense.

    “Monthly Expense – Monthly Passive Income = Total Monthly Flow (Positive or Negative) Multiply this number by 12 to get Yearly Flow”

    Your monthly cash flow should be passive minus expenses, and can be positive or negative. Most would be negative. If you want to get a number for expenses after cashflow so you can divide retirement accounts by that number, you should call it “OUTFlow” (not just Flow, which implies cash flow).

    I.e. say you have $2000 in expenses and $1000 passive.. it seems awkward to say my monthly “flow” is $1000, which it is, by your formula. It should instead be -1000 (because I’m in the hole every month). Or, conversely, let’s say my passive income is larger, I have 3k coming in and only 2k going out. By your formula, my flow is -1000. It seems weird to say my flow is negative because I have more money coming in. Thus it ought to be properly termed outflow.

    Ignoring that error and assuming you actually meant outflow, by just dividing balances (cash + retirement) by monthly outflow, you are assuming your money earns 0%. Better to use a 4% withdrawal rate over 30 years, as many studies have suggested, or a 3% to infinity.

    That being said, your main point about having passive income is a good one. If you want to eventually retire, one must have money coming in without working. Flipping houses, etc. is still work.

    • Chris Clothier

      Joe –

      Thank you very much for your input. I use the formula when talking to investors about their retirement plans as an illustration of their current situation. Most, as you pointed out, are in a negative situation and do not have enough passive income to cover monthly expenses. Once they realize this and calculate that their current retirement plan only covers a short number of years, it is very easy for them to start thinking in a mode of planning passive income streams.

      We try to keep it simple and basic just to illustrate the point. I appreciate the suggestions for changing the wording to make it read a little better.

      All the best,


  5. Great post Chris

    I also agree with Kyle’s reply. As a young man (25) I’ve implemented a ten year plan based mostly off of passive income. After the ten year mark I should have quite a bit more time on hands, by then the 16 hour days will be getting tiresome I’m sure. When I first started working with properties a few years ago, I thought it was all about getting in there with hammer and getting to work. It seemed to me like the best way to make money, until I started to pay attention to some much more savvy investors. I was taught that time is the most precious commodity there is; if you enjoy swinging the hammer then great, but personally, I’m with you Chris I’d rather spend the time with family and friends. “Building wealth means developing a plan to one day be able to stop… to stop doing the things we have to do so we can do the things we want to do.” How you put it sums it up perfectly.
    Great post and some great replies. Thanks for your insight Chris.

    • Chris Clothier

      David –

      I appreciate your insight and that you took the time to respond. Life is short and time is precious! We need to make sure we make the most of what we have and that definitely includes planning for our futures.

      Best of luck!


  6. Just wanted to add one more thing. Lee you’re absolutely right about personal finance and life planning being required high school courses. This could make a huuuge difference in the financial state of so many young people today. Great point.

  7. What a shinny phrase this is “passive income”. I definitely agree with you on this concept because that’s what real investors and entrepreneurs do “create a passive income stream they can rely on in the future”. I know that creating a passive income is probably 10 times harder than being actively involved in business, but it’s worth it. I’m myself going that rout, and i hope i can achieve great results by my retirement. Thanks Chris

    M Mark

    • Chris Clothier

      Mark –

      Thank you for taking time to reply to my posting. I am a big proponent of building passive income streams and real estate is a great way, but not the only way, to build passive income. IF you start early and are diligent and patient, you can be in control of your retirement and decide for yourself how to spend your days.

      Thanks again for posting.


  8. I’ve tried flipping a few times and can’t seem to even come close to my regular salary so I largely buy, fix and hold rentals. My cash flow is about a third of my salary after doing this for 10 years. Building passive income streams is definitely not a get rich quick scheme. More like get rich slow. Well I am almost 40 and I was already sick of working 9 to 5 when I was 21. I have a plan to pay the mortgages off all my properties in 13 years simply by using the cash flow they produce to pay off one mortgage at a time and snowballing the debt service into the next one. At today’s rents if I did not have any debt service my cash flow would equal my salary and I could retire.

    Unfortunately I am not quite happy with this plan. For several reasons:

    1) Inflation. Inflation is the debtors friend. And with the sovereign debt crisis currently raging and most likely to get worse before it gets better I expect monitization of debt and high inflation for years to come. This tells me I should let inflation and time pay down my debt in real terms instead of trying to pay it off myself.

    2) Leverage. Rather than paying off a $120K loan for an additional $800/month I could get 3 times that amount of cash flow for the same $120K if I bought more properties with debt. But at what point does it become onerous? 20 properties, 50, 100? Every property has maintenance costs. By having properties with no debt service I dilute the maintenance costs as a proportion of cash flow. By having more properties levered each property comes to the party with its own maintenance costs.

    3) Management. At the moment I manage them myself. If I buy more with debt I will have to at some point use a management company. Which dilutes cash flow and increases risk.

    So all in all I think the passive income ticket is the way to go. How exactly is the best way to approach it is another question.

    • Why not just start your own management company by hiring someone to manage the properties part time? Then you could market your own management company for additional cash flow. I guess its a matter of how much time you’re willing to put into it. Paying the properties off entirely instead of buying more using leverage only makes sense if you plan to retire soon and you don’t want to deal with searching/buying more properties.

      • Chris Clothier

        Jim –

        Thank you for reading and taking the time to reply to the article and to Zenith’s post. You will find that a lot of people come to the same conclusion you come to. The closer you are to retirement, the more these decisions become important.

        Thanks for reading and sharing.


    • Chris Clothier

      Zenith –

      Thanks for the reply! I applaud that you have a plan and that you are thinking through the decisions you have to make. The really funny thing about passive cash flow is that you cannot be passive about it! You have to watch your portfolio and make adjustments. At times, you need to make moves to increase and maximize your cash flow as well. That might make for a great future post. I will keep your comments in mind as I am writing.


  9. One day someone is going to have to explain to me why I am logged into Biggerpockets as Robert Steele and have a photo but when I reply to posts featured on the newsletter I can only log into WordPress as zenith191. Oh well.

    Jim, the thought of starting my own property management company has crossed my mind. However I already have a 9-5 job and don’t think I have the time to start and run a second company (my rentals being my first business and yes you should treat it like a business and not a hobby). My wife is a real estate broker so already qualifies as a property manager under Texas law but she busy with her own company and moonlight as a loans processor.

    Chris, yeah it is important to have goals. I think I would go nuts if I didn’t see any light at the end of the tunnel.

    I am figuring that unless I have an epiphany or something materially changes I will continue to plow the cash flow back into paying off the mortgages one at a time and then use additional savings from my regular salary to slowly acquire more select properties. At some point I will cry uncle but I am not there yet. Our rental business is actually pretty smooth sailing most of the time. We take care to properly train our tenants. We mail out invoices, provided direct debit automatic payments, take care of repairs promptly, remedy delinquencies promptly, perform regular maintenance on things like HVACs, raise rents when the market warrants it and most importantly select the right tenants from the start.

    • Chris Clothier

      Robert –

      Your plan has been my plan, although i will caution you on one thing. I could not stop buying even when I knew I should. As you can probably calculate, it only takes a small portfolio to have a profound impact on your retirement lifestyle. 10 properties owned free and clear at an average rent of $850 provides an incredible retirement fund. With a careful consideration of costs, that retirement fund could be a completely passive income stream as well.


      • Chris,

        Yes that is what I am noticing. I only switched to this pay down plan in the last few months but already find myself stopping by the candy store with my face pressed up against the glass from time to time. Figuratively speaking. Thus I am moderating to a hybrid mode.

    • Robert – I changed the settings on your profile here on the blog so it should show your name next time you post. You had it set to show your username instead. As for your pic, you need to set up an account on and upload your pic there. Then, when you comment here or on any other wordpress blog online, your pic will appear. I hope that helps.

      • Thanks. says that I should be able to log in with my account. I tried and it said it did not know who I was. Even though I was then able to log in to WordPress with the same username/password. Oh well. At least I am half way there now. I’ll keep bashing on it!

        • Robert – Your avatar is now working. When they refer to an account on, they are actually talking about an account on, not on our blog. I know it sounds confusing, but you can have an account over there and on individual blogs like ours. Sorry – tech is definitely tough some time.

    • Robert –

      I have a good friend that was a full time police detective, had about 100 properties and he started his own management company with just one employee working part time. He actually hired this person through an agency so he wasn’t responsible for paying her taxes etc. Now many years later, she still works for him, and he is a mega successful full tim, and he hired the right person to begin with.

      • Chris Clothier

        Sharon –

        Great comment on here and a really good observation. A lot of investors who have experience managing their properties would make very good property managers. They have experience and know exactly what an investor wants when it comes to managing a property. I am not surprised that your friend is finding great success. Add his ‘active’ income to his ‘passive income from his properties, and your friend probably has a great retirement portfolio.


  10. I’ve been searching for a way to build passive income but find myself stalling at every turn. I’m not very real estate savvy but know that this is the path for me. So i’ve been reading everyone’s success stories. If someone out there is willing to teach a newbie, i’d love to have a mentor, I’d love to buy the right type of properties and rent them out. thanks!

    • Chris Clothier

      Sorab –

      Thank you for reading the article and taking the time to post. Best of luck in your real estate buying and be patient. You will find a good mentor and continue to look to other investors you know for solid advice. Best of luck –


  11. Sorry, investing in rentals with or without a team is anything but “passive”. Yeah, you’ll be sitting on the beach sipping maitais alright. In between angry phone calls to you’re property manager about a tenant who just left with no notice (and stole the appliances), or a “team” member trying to overcharge you for a repair they don’t really have to do. Unless, of course, you have to hop on a jet to see what the hell is REALLY going on “over there”. They’ll be plenty of time for the beach. And zanax to go along with the maitai.

    At this point, the seller of so-called “passive” real estate investing opportunities (while you’re out sailing and visiting casinos with classy vegas chicks) will chime in to say, “Hey Phil, calm down. This is why you have to hire us. A team you can trust!”. Sounds good. Only that’s what ALL such sellers tell you. Most investors have to go through at least two, sometimes half a dozen such organizations to find that dream team. Not a “passive” thing in itself.

    • Chris Clothier

      Phil –

      Looks like you’ve been drinking mai-tai’s tonight while reading the blog articles!

      I’ve read a lot of your posts on the BP forums so I know you agree with building passive income which is the point of the article. You need to have a reliable source of income that is not part of a 9-5 job if you want to retire on your terms. I have read some of your posts about money lending which is a way to earn a passive form of income that does not require you to interrupt what you want to do each day. THAT IS a strategy for building passive income and that was the point of the article – you have to build those income streams now. Of course, you have no underlying asset and you have to continue lending to earn, but you do have a strategy to use real estate for retirement funding.

      As far as your personal experience with buying rentals, it sounds like it went off track somewhere, but hopefully the other forms of investing and building passive income you are undertaking will be more successful.

      Thanks for your post.


  12. Anthony DePietro on

    I only jumped into the real estate market about 3 years ago with a buy and hold stategy to first assist with sending my son to college if that is what he choses to do (he’s only 4 so who knows) and second for passive retirement income since I’m not banking social security going bankrupt. I’m 39 and stated investing in mutual funds and such in my 20’s but with the market being unreliable I ceased that (with the exception of my 401k with company match) and jumped into real estate. This is my first post on BP but this site has been a great wealth of information and I’ve very happy that I stumbled upon it a few months ago. I’m very impressed by all the comments above and applaud the folks in their 20’s that have figured out the value of passive income. Nothing is without risk but the value that can be found in the current market is undeniable. My first deal was a 2 unit property that I purchased for $95k that rents for $1400. I quickly learned that I want more ROI. My second deal was a $24k property that rents for $550 and my last property was purchased for $37.5 and rents for $850. I’m still learning but have had positive cashflow from my real estate investments from day 1. I thank you all for your contributions to this site and for your sharing of knowledge.

  13. Chris,
    As a Retirement Planner (my full time day job) and Real Estate Investor I could not agree with you more! In my experience the overwhelming majority of people approaching retirement don’t realize how short a period their retirement funds will likely last and unfortunately many of them find going back to work after retirement inevitable. I am fortunate that my husband has always had a passion for investing in real estate so it naturally became part of our long term financial plans. Living in a day in time where pensions are becoming a thing of the past unless you work for a county, city, state etc. real estate is becoming almost an imperitive part of retirement income planning. Great post! Thanks.

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