Real Estate Investing Basics

Which Real Estate Investments Provide True Passive Income & Financial Freedom?

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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A lot of you have probably heard of the buzzwords like financial freedom and passive income. Every Bob and their dog is parading those two words, especially all the gurus out there. I do not like those folks, but I am going to leave that for another article.

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Let’s talk about passive income and financial freedom. What are passive income and financial freedom?

What Is Passive Income? What Is Financial Freedom?

Since I started in real estate, I have bought and held onto a lot of properties that I have not sold to investors. At one time, I had about 25 single-family homes in my portfolio that my in-house property management company was managing. Was that passive income or financial freedom?

That portfolio was bringing in way more than the average U.S. salary, but I’m happy to tell you now that wasn’t true passive income. In my opinion, it also wasn’t true financial freedom. Let me tell you why—because I still got the call.

What call? “Umm, your roof just caved in because a tree branch fell off and it broke everything!” Or, “Hey, your tenant’s toilet is clogged and we can’t seem to figure out what’s wrong with it and we’re going to have to get Roto-Rooter out here. It’s going to cost $300.”

And so on.

Related: Financial Freedom: 14 Steps to Stop Relying on Your 9-5 Job’s Income

In my opinion, true financial freedom and true passive income are when you never get that call.

So, how can you go about accomplishing something like that?

Folks who are looking to buy turnkey and who think when you invest in five, 10, 15, or 20 properties like I had for financial freedom and passive income are wrong. I think that is not true financial freedom and passive income because you’re still going to get that dreaded call. You’re still going to get that dreaded email from your property manager if you’re buying turnkey or certainly if you’re managing your properties yourself.

How Can You Achieve True Financial Freedom Through Passive Income?

investment-thinking

I think you have to compromise on the yield or the net return on investment. Hypothetically, if you’re buying turnkey; buying, fixing, and holding; or buying, holding, and putting a property manager in place, you are going to have to go into a higher end type area, more of an A-class area. Ultimately you’re going to have to go into a market where there is huge population growth and where there are many jobs.

Also, you want something like they have in Sydney, Australia, where people are actually competing for rentals. That will make it truly passive income and true financial freedom.

Let’s backtrack a bit. So, you’ve bought in a higher end area, there’s a lot of population growth, there’s a huge demand for rentals, and there are people fighting over rentals. You’re probably going to have to pay more than you would in a lower asset class. So, straight away you’re going to compromise on that net return.

Related: Top 5 Books to Launch Your Path to Financial Independence

You’re also going to instruct your property manager to not bother you with any maintenance requests. I know that sucks, because you have to let go of the reins and trust them. That’s why it is so important to find the right people first before you look at the stats and demographics of an area. Teamwork makes the dream work.

OK, back on track here. So you tell your property manager that you have $1,000 in the maintenance reserve and to feel free to use it as they see fit.

This, in my opinion, will be true financial freedom and true passive income. You are going to invest a large amount of capital into buy and hold properties, and you’re going to be completely hands-off. You’re not going to have any control and trust the people in place. If you can get anywhere from 4 to 6 percent net on your investment in a true financial freedom and passive income way, I think you’re doing really well. If you want to be a little hands on, you should be getting 8 percent and up.

No phone calls, you’re sipping piña coladas in the Bahamas, and the rent is coming in.

I’d love to hear from you about this, especially from someone who has a great structure in place and has true financial freedom and passive income.

Do you think I’m right, or do you think I’m wrong?

Comment below.

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
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    David Krulac from Mechanicsburg, Pennsylvania
    Replied over 2 years ago
    Engelo, my friend, very thought provoking! 1. There are bargain purchases in every class of property; might be harder to find in A Class properties, but there are some bargains. I bought a $330,000 for $30,000. Right set of multiple set of circumstances; unfortunately can’t find a deal like that every day. 2. Triple net lease properties, in my mind are about as passive as you get. Around here there was a new big gas station/convenience store and a national restaurant, that the real estate was sold for $5.1 million in less than 30 days with a 5 cap rate. So the purchaser will net $255,000 per year for their investment, and no phone calls about trees falling down and clogged toilets. For this passive income and financial freedom, the kicker is that the investor either needed $5.1 million in cash or had access to the $5.1 million. Therefore it was not attainable investment for a beginning investor with no cash and no access to $5.1 million, which is probably 99% of beginning investors. I know I was in that category when I started with nothing. 3. I met a person not on Bigger Pockets, who’s family owned vacant land that had timber quality trees. He had about 1,000 acres and once every ten years they would do a selective cut, only cutting the largest trees on the property. Once every ten years he would call a logging company to come in and selectively cut the trees and he would net $1,000 per acre. Which equals $1,000,000 divided by the ten years to $100,000 a year pro-rated. He effectively made $100,000 a year by making one phone call every ten years. Just about as passive as you can get. 4. Again the kicker is how do you get 1,000 acres of timber to get in that position to have that kind of passive income? If you’re just starting out and have no money, both of the last two examples are pretty much out of reach. 5. Starting out with nothing, something I know a lot about, you need to hunt for the best deals that you can find and over time improve your portfolio by what I call thinning the herd, keeping the best properties and getting rid of the less desirable properties and building the class of you properties. David Krulac
    Nadia Elabbar
    Replied 7 months ago
    If you don't mind me asking here, How did you get started ? Many thanks in advance.
    tim boehm
    Replied over 2 years ago
    Right on Dave, farm land will do the same. Rent out your land to either a farmer growing crops or a dairy farmer. Property tax on farm land here in Oregon is very low, same with forest land.
    Kevin Sapp Lender from Cary, North Carolina
    Replied over 2 years ago
    There are lots of ways to be more hands off or a little hands on. Notes are a great example. Longer term performing 1st will do better than the 4%. Personally, although a little more hands on, I like short term rehab notes. 12% all.day.long. when evaluated and funded properly decent safety margin.
    Nadia Elabbar
    Replied 7 months ago
    How do you find long and short term rehab investors to fund ? asking for a friend
    Tiffany Johnson Investor from Olympia, Washington
    Replied over 2 years ago
    I only invest in A-class, manage some of the properties myself, and it’s still mostly passive income. For one, I have almost zero turnover because the tenants love the neighborhoods, schools, etc. And they have pride in their homes and take care of them, so maintenance calls have been less than once a year. Appreciation and cash flow has been excellent, but that’s from buying and renovating foreclosures 3-4 years ago. I’m in a hot market (Seattle suburbs), so now I’m buying out-of-state. A-class is tough to find with turnkey companies, but it’s possible. Bought one last year, and will stick with my strategy.
    David Roberts from Brownstown, Michigan
    Replied over 2 years ago
    What about being a lender? I started off wanting to own a bunch of rentals but now I kind of like the idea of flipping and lending the money out. Eventually I wont have to flip anymore. It keeps you in the game and sharp, and lending is 100% money working for you. Just a thought.
    Lee Ripma Rental Property Investor from Los Angeles, CA
    Replied over 2 years ago
    Getting a hassel free 5% is awesome if you’ve got 1M cash in the bank. If you don’t you’re going to need to do something to get to that point and it’s not going to be passive!
    Engelo Rumora Specialist from Toledo, OH
    Replied 7 months ago
    Agreed. Work your A$$ off for years and get to the $1m asap. I did it and I'm sure everyone else can. Much success
    James V Davis
    Replied over 2 years ago
    yields are typically 4 to 8% on these type of investments !
    Adam Britt from Bessemer, Alabama
    Replied over 2 years ago
    I hear you man, I see lots of references to real estate as “passive investments,” but it seems to very rarely look passive any time I peek at these forums or listen to a Podcast. I have always thought that passive was an option for those willing to overlook some profits in trade for a hands-off approach. Makes sense to me, though I have zero experience. It also seems that many here are already stating that you have to have money in the pot to get money out. Starting off in real estate, it seems unreasonable to expect passive income until you scale up to a level where you can afford to overlook some cash for convenience. And that is assuming you fully trust your management company.
    Michelle M.
    Replied over 2 years ago
    I’m leaning on buying at foreclosure with law firm to insure my purchases and selling right away not holding property. Limit the headaches of being a landlord or having to have a property manager.
    Jerome Kaidor Investor from Hayward, California
    Replied 7 months ago
    Problem with that is you have to constantly be looking for the next deal.
    Curt Todd Investor from Happy Valley, OR
    Replied 7 months ago
    Sounds like flipping or wholesaling, which is not so passive.
    Laura Tokgozoglu Rental Property Investor from Catonsville MD
    Replied over 2 years ago
    We bought a couple of Condos and have a good property management company. The condos are fairly new and in great shape. They are in a highly sought after location (college town with a bus to the college) We live out of state and are an older couple who have other income streams including a very good W2 as well as a healthy 401K. We just got into Real Estate and are looking at it as a supplement to our income, tax breaks and part of our income when we retire. Our plan is to buy a condo in this area every year for the next 8 years so that we ultimately have 10 of them and have them all paid off in 15 years. It is a very simple and low stress strategy. Hopefully that will be possible as these little condos get bought up pretty quick when they come on the market!
    Quentin McNew Real Estate Investor from Champaign, IL
    Replied 7 months ago
    1. The best passive income is getting a K1 being from being an equity partner in a syndication. Passive partner in a syndication with a proven operator working in a market that has net migration is the ultimate end goal for me. TRULY PASSIVE. 2. Triple net leases. I have received 0 calls in 3 months of my last commercial building and putting everything on the resident. All payments are automated. I will have to do parking lot and roof every 20 years though.
    Jeff Bosaw Rental Property Investor from Saint Louis, MO
    Replied 7 months ago
    Hi Quentin, Have you considered putting solar on your commercial properties or even an EV charge station somewhere on the parking lot? This seems like something that could recoup the cost and profit in a 4-7 year window. I don't own any commercial space but I don't see why more people do this at least when it comes time to replace the roof. An EV station could potentially bring in more business if there is a restaurant or store for people to go to while their car charges. Lots of tax breaks and even grants in some states.
    Vaughn K. from Seattle, WA
    Replied 7 months ago
    Other than being a pure investor in operations managed by others (whether public stocks or private businesses), there kind of isn't anything 110% passive. But RE can provide more control and better returns, and can still be made pretty passive if you want to. Thing is you have direct control over how passive you want to make it by simply hiring a PM or not, how actively you try to buy/sell stuff, etc. At the beginning of the game for most people being more active will get them the cash they need to grow their net worth, and they can slowly become less involved in the day to day as their net investment capital grows. It's nice to have that option in RE!
    Nadia Elabbar
    Replied 7 months ago
    Hi , I am a newbie, I just learned that your youtube channel is crazy , so I signed up, LOL. Looking forward to learning from you. Nadia
    Engelo Rumora Specialist from Toledo, OH
    Replied 7 months ago
    haha Thanks Nadia, I hope you find it useful. I wish you much success