One fine spring day, a man set out to compete with Amazon. I don’t mean he wanted to set up same-day home delivery from his local hardware store. I mean, he actually wanted to establish a competitor to Amazon Corporation. He reasoned that Jeff Bezos started in his Seattle, Washington, garage, and he also had a garage. He was from Oregon, after all, and that’s less than a day’s drive from Seattle. In fact, he was from Princeton, Oregon, and Bezos graduated from Princeton University.
As a hardware store owner, the man had no small knowledge about customer service, stocking a wide variety of products, and dealing with employees. He even placed custom orders on occasion. (Did Jeff Bezos do that?)
The man started by building his own desk from an old door. Then he built some shelves in the garage the following weekend. At that point, he put his project on hold for a month. After all, it was spring and he was shorthanded at the store. unfortunately, he never got his project off the ground.
Okay, this was a ridiculous parable. No one but Jeff Bezos himself would think this way, and he’s allowed to. After all, he went from obscurity in his garage to the world’s wealthiest human in a little more than two decades.
I’m guessing this post will ruffle some feathers. And make some of you mad. That’s alright. I’ve got enough evidence for my conclusions to prove I’m right—at least for many (not all) investors.
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Real estate as a side hustle
If you are making great money at a full-time job—or enjoying your retirement—does it really make sense for you to do real estate as a side gig? No, I’m not talking about investing in real estate. I’m obviously a huge fan of that. I’ve staked my entire career on this, and I plan to do nothing else professionally until I die in 43 years (when I turn 100).
I’m talking about doing real estate. Acquiring, owning, and actively managing rental properties while you have a full-time gig elsewhere. Is this even possible? The answer is a resounding YES! You can definitely do this. BiggerPockets has hundreds of thousands of subscribers who do.
But my question is not about that. It’s about whether you can do it well. And whether you can enjoy your life in the process. As I said, I’m asking if it really makes sense, not if it’s possible.
If you’re still reading, let me explain. I manage investor relations for my firm. I speak to dozens of real estate investors every month. Many of them are active on BiggerPockets.
A small percentage are full-time real estate investors. Like Todd, the guy I spoke to yesterday from Canada. He’s been investing in real estate full time for years. He serves as asset manager for his rental homes and mobile home parks from his home office. He visits the properties from time to time and oversees local property managers.
But the vast majority I speak to have full-time gigs. They’re IT professionals, dentists, doctors, and engineers. They’re homeschooling their kids or enjoying their retirement. Most of them make a lot of money and find joy in these professions, and they have great prospects for advancement. And most of them I speak with are building a real estate portfolio on the side.
After speaking with well over a thousand investors, I’ve found that those who do active real estate as a part-time gig are not satisfied with the outcome. What are the typical symptoms?
- It’s tough to find deals with predictable upside. Especially right now.
- Projects take longer and are costlier than you see on HGTV.
- Dealing with toilets, tenants, and trash is not as romantic as it sounds.
- Some tenants aren’t nice. Some of them will even sue you. That’s no fun.
- These investors often spend their lunch breaks, evenings, weekends, and vacations searching for elusive properties and/or working on the ones they have.
- Profits are smaller than projected. Or non-existent. Losses are quite possible.
Part of the problem is that these investors are trying to compete with Amazon. No, not literally. I mean that they’re trying to compete with full-time professionals. Those who have decades of experience, a time-tested team, and endless resources to support their efforts. Those who are obsessed with winning at this game. Those who find the deals these part-time investors can’t and make the profits my part-time investor friends only dream of.
So, what happens next?
I can’t speak for all of them. But the ones who call me are usually frustrated. They’re tired of spending most of their free time—and sacrificing other income and relationships—chasing an elusive dream. Many have concluded that there must be a better way to invest in real estate.
Like the Pacific Coast oral surgeon who was building a portfolio of 20 rental homes to replace his income and fund his eventual retirement. When he called me, he initially seemed enthusiastic about his plan. But his tone gave way to weariness as he described dealing with painters between operations. And screening tenants at night. “Honestly, this is driving me crazy. And I’m only on my third house.”
Or Todd from Canada who I mentioned above. Though he is a full-time investor, he’s concluded that he could make as much (or more) money investing passively as he does actively. Without all the drama. He’s preparing to sell two of his mobile home parks now.
And there was Christine Kwasny, the brilliant analyst I quoted in a recent post. After we spoke at length about the tension between active and passive investing, she had her lightbulb moment. She exclaimed, “Why am I working harder than I need to…to make less than I could?”
And there are many, many more.
Let’s face the music: Passive income from active real estate ownership is more a myth than reality.
So, what are your options?
These thoughts are for those of you with a full-time gig or retired looking for passive real estate income on the side. Generally, I’m not talking to full-time real estate investors or those on a clear path to full-time investing.
Don’t invest in real estate
Stick with stocks. In fact, take Warren Buffett’s advice and buy index funds. They have done quite well over the long run, and I’m guessing they will continue to do so in the future. You’ll miss the massive tax benefits of real estate, but you’ll also avoid the hassle.
Find a local partner
My friend Barry ran for governor of his state. He’s a successful dude who ran a great IT firm, a staffing firm, and a church at the same time. He’s made great money in real estate for years by investing with a house flipper in his town. He loans her the cash from his self-directed IRA, she does the work, and he makes about 12% on his money. Not bad for not lifting a finger (other than driving by the house before cutting her a check).
Invest in a syndication
Many investors love the idea of commercial real estate investing. But they don’t have the time, experience, team, debt capacity, and connections to do that well. (It’s like competing with Amazon—but on steroids.) Investing with a professional through a syndication can be a powerful alternative. Investors sometimes make more money, with no hassles, and all the tax benefits. (But they lose the thrill of the chase, which is important for some.)
If you’ve experienced the frustration of active real estate ownership… or you’re early in your real estate investing career and want to avoid it… BiggerPockets has just the book for you! It’s called The Hands-Off Investor and is written by my friend Brian Burke. If you want to invest passively, this is the first step.
Don’t worry, the parable has a happy ending
And what about that hardware store guy who wanted to compete with Amazon? He actually made it big! From joining Amazon. No, he didn’t go to work for Bezos. He started working in conjunction with him. By opening his own Amazon Store, the man’s customer base ballooned well past the boundaries of Princeton. His customers were nationwide now, and he staffed up to serve them.
The man partnered with the corporation he wanted to compete with. And he stayed in his lane at the same time. This man sold a lot of handcrafted desks in the past year. He heard there was a new wave of people working from home. But he was never sure why.