I got into real estate investing to escape the 9 to 5 paycheck route. Now that I have enough "passive" income through single family, mulitfamily, short term rentals, a few notes, etc....I'm looking at the next step to become truly passive. I say I have passive income in quotes because I still have oversight of employees, making bigger decisions on remodels, tenant turnover, etc. plus oversight of accounting.
In my mind, truly passive means I have to do absolutely nothing and see the income rolling in. Do I save up enough money to buy an annuity to get that guaranteed income? Someone suggested liquidating property to get more into the note business, but you still have to find the notes, oversee payments, oversee foreclosure, etc. Someone has suggested becoming a private money lender, but again, you have to find potential investors, oversee payments, etc.
Don't hear me complaining! I am truly happy with the incredible amount of flexibility I currently have to be with the family and live a life we are comfortable with.
I've thought about training someone I can trust to know everything I know so they can give oversight, but most people I know like me also have the goals of being truly passive.
Any thoughts on this topic? Thanks in advance!
Passive investing is not possible, you are operating a business that requires your constant oversite. My plan is to liquidate everything and put money into diversified income/mutual funds to achieve passive investing. Aside from 3-4 meetings per year with my financial adviser it will be truly passive for retirement.
You can not retire as long as you are operating any form of business, esspically real estate investing.
@Thomas S. , I fully agree. I'm balancing enjoying being involved in the business with the goal of knowing I won't have to one day.
What are you finding in terms of how much money you'll have to put into diversified income/mutual funds to earn the monthly income needed to support your lifestyle? And are you factoring in some kind of cushion in case a recession hits while you are counting on this income?
@Derek Robinson you may consider investing in stock market (index fund), mutual fund to have truly passive investing (even that I think you still need to keep an eye on it).
Alternatively, we have investors who are truly passive when they invest into syndication with us - this maybe also something for you to take a look into.
Well, you can liquidate and invest in Real Estate syndications, start up businesses or established businesses, hard money (still semi-active), NNN lease properties or put your money into stocks, bonds, mutual funds and gold.
You can work on automating as many pieces of the business as possible and decreasing the amount of time you spent on it. I don't think you can eliminate it completely. Another point to keep in mind, you mentioned that you have SFH, MFH, short-term rentals. I think short term rentals are very time consuming - so unless you have an operator in place to coordinate it, I'd think this will take a lot of time. In terms of SFH and MFH, MFH allows you to scale and delegate most of the work to the trusted resources: property manager and accountant/bookkeeper. So if you have such team in place and you can fully trust them (over the years), then you should be able to spend much less time working on your business.
Originally posted by @Derek Robinson :I've thought about training someone I can trust to know everything I know so they can give oversight, but most people I know like me also have the goals of being truly passive.
I'm brand new here. As of yet, I don't really know anything. But I am trying to learn. Just from this thread I've picked up definitions for a few acronyms, ex. SFH, and MFH. Single and Multiple Family Homes.
I've quote the text above because people you know NOW have the goals of being truly passive. NOW is important. But it's not everything. I think this situation calls for patience. Yoda is totally yelling in my mind right now. More like barking. Patience! I didn't use to have any. Then I had to wait a bit. And it grew a little. The more I use it, the more it grows.
I am ultimately looking at 1.5 - 2M. More than I need but it's what I have.
@Derek Robinson liquidating and investing in REITs or syndications is the answer if you prefer RE related investments, although with a syndication I would still check up on what the MPs are up to with my money. If you’re open to looking outside RE, aristocrat dividend stocks that kick off 2.5-3% dividend yield (higher can be achieved but typically the companies offering 13% dividends won’t be in business much longer). ETFs like SPDR and Vanguard are popular and they have versions you can buy that are more heavily weighted with aristocrats that yield better dividends. $6-8M portfolio in one of these will yield $200-400k truly passive dividend income.
@Derek Robinson if you are seeking to become truly passive, yet stay invested real estate, you have two options. The first is to hire someone to manage your portfolio so you can step away completely. The advantage of that strategy is that you already own the real estate and are familiar with it. Plus, you don't need to give up all the control, just hand off the responsibilities. The downside of that strategy is you are not taking advantage of any additional upside, except what the market will give you. And, it's not completely passive, but it's pretty close. You would still need to oversee your manager and want to have monthly or quarterly reviews so you can keep your thumb on the pulse of your portfolio.
The other option is a real estate syndication as already mentioned above. Syndications offer a passive investment and may offer more flexibility and diversification. This strategy allows you to take advantage of the upside in deals with an experienced operator who's goal is to maximize the performance of the asset. (that's a lot different than hiring a manager to oversee your portfolio) A syndication is a truly passive investment where you receive ongoing reporting, dividends, and a split of the profits. However, you give up the control you currently have as the sole owner of your property, so you will want to be comfortable with the syndicator, the real estate, and the strategy.
With syndications, instead of investing all your capital in one deal, you can invest smaller amounts in several deals, invest with several different syndicators, and diversify across asset classes. For example, I syndicate mobile home parks as a retirement vehicle to focus on recession resistant cash flow. That strategy may not be a perfect fit for every investor, or may only be appropriate for a portion of an investor's allocation. Some of my investors like to diversity across other asset classes that might have higher risk, but can offer a higher return, or have a shorter maturity. Here on BP, you will find syndicators who specialize different asset classes, with a variety of focuses or niche strategies.
If you choose to invest in a syndication, you will want to spend the time to get comfortable with the syndicator. Consider the following:
- Character - When you invest in a syndication, you are a passive investor and the syndicator is in the active management role, so if they are dishonest everything below will not matter. Make sure to do proper due diligence on the syndicator's character and acquire testimonials from current/prior investors.
- The strategy - Does the overall real estate strategy make sense? Strong returns are nice, but what are the risks? Has the syndicator worked through all the potential risks related to the current and future market, the economy, interest rates, etc? Have they worked through all the property specific challenges, both current and future? Has the overall strategy been stress tested? Even if you have a syndicator with great character, the project can still be a bad one if the strategy is poor. This step will help you avoid jumping into an investment just because they're a good guy with "a great deal".
- Experience - Does the syndicator know how to find great deals, and can they demonstrate why a deal is a great one? Do they have the experience to execute the strategy on the deal? Even a great deal can turn into a dud if there is not adequate experience. Do they have a successful track record, or is their first deal? Are they proactive or a reactive? Do they have a team around them with systems, processes, and measurable goals? Do they have the ability to meet target projections related to timing and returns?
- The model - The relationship between an investor and a syndicator as it relates to how income and profits are split is extremely important. Most investment models include a host of ongoing fees, splits, inversions, waterfalls, lockups, tails, etc. which can be complicated and confusing for investors. Make sure to take the time to understand the model completely and consider the most important question: With this model, will every decision that is made be in the best interest of all parties?
- The business - Most real estate syndicators are good at real estate. Some are REALLY good at real estate. However, there a lot more required in this business and if they don't have their processes and systems set up correctly, that will cause investors to become frustrated. How do they approach investor reporting? What does that include and when is it scheduled? What about timely delivery of payments and accurate, transparent financials? And don't forget timely delivery of tax documents. That can be extremely frustrating for investors at tax time. To be candid, this may be one of the most important and most overlooked component of choosing a syndicated investment.
Syndications are a powerful way to take advantage of someone else's ability to find great deals and their expertise in maximizing the performance of the deal. But before you invest in a syndication take the time to get comfortable with the items above and you will be glad you did.
All the best,
@Derek Robinson you can invest in Multifamily syndications if you are an accredited investor because most of the syndicators accept only accredited investors but some do take sophisticated investors if you are not an accredited investor and you can sit and see the money being directly deposited to your account and also you can reap the benefit of cost segregation and accelerated depreciation and wash off your other passive income with paper loss in apartment investment.
@Derek Robinson you can invest in a range of private placement funds. For example there are more funds that pay fixed returns of 10% per year. Or syndications that have variable income and growth. Or hard money lending funds that pay quarterly. All require due diligence up front on the fund manager and the downside is you give up control and liquidity. But it is truly passive. Just get deposits on your account and forget about it
@Derek Robinson best way to go truly passive - find a syndicator.
From my silver-plated spoon childhood (rich friends) it seemed that the totally passive concept was bearer bonds. Old folks would go to the bank, open their box, use the scissors they kept in the box to clip the bonds and go collect their money from the teller.
But alas today bearer bonds don't exist anymore. That gave way to the Bond Ladder - a series of bonds maturing regularly. But rates are low. And when rates rise, bonds value decrease - I still bet they will go up more than down. So this plan is no longer the answer.
To replace the above (and an echo @Jack Martin above), I have a MF syndication Ladder. Several sell each year and I buy a some more, keeping what I need. Like bonds, they typically have cash flow. Unlike bonds, they typically increase. OK, when there is a down time, I keep a fund to live on. I have to admit, one has to put in some time to find and invest in these, so not really zero time. I do not find my involvement painful, but it is not zero. And I often have to take those pesky checks to the bank.
Some other options I didn't see above. Dividend harvesting - I am invested in a group that does all the work, they play in stocks that pay a dividend. Has worked pretty well. I talk to them twice a year. I also have some with a fellow that does "active trading". He does well, but the market is the market. I talk to him quarterly. BTW, I know my limitations (do the opposite of anything I do with a stock!), so I play only in mutual funds. This requires me to dig in for a couple days each quarter - again not zero work.
Make a transition over to “being the bank” and go the private lender route.
Another option is to look into AHP Servicing. They are offering a 10% preferred return in the current notes fund.
Thanks for (most) of the input guys! It's looking like based on my interest and goals, syndication or private money lending might be my next route. I do currently enjoy managing all my real estate, but want to plan for the future and know I have an investment vehicle that can be mostly hands off when I'm ready for that transition.
If you go the syndication/crowdfunding route do as much research as possible on the sponsor. They will make you or break you. There are some good ones out there, but plenty of guys with no clue and are in it for the fees. Whatever you do, ignore the ones that email you or ask you to PM them for more information.
How come nobody mentioned 1031 exchange?!? It's a key strategy to defer your capital gain taxes if you want to switch to a different asset class, which also includes syndications in the forms of TIC and DST. I'd also look into 1031 into NNN (minus the duh ;) as passive investments. But don't sell your sh*t, pay taxes and buy something else...especially if it's still real estate based!
I’m also loosely looking at my options. This morning I just got a tenant move out notice, so it triggers the “I just want out!” sentiment. But in my case all my holdings are in prime San Francisco, so I’d like to hang on to it longer before selling out. I’ll probably go the ‘hire a property manager’ route, as I want to retain control, and also get more appreciation, as I think it’s still there for SF.
Well said @Amit M. . Sure there's times when it's right to sell and pay the tax man. But as a coordinated long term strategy??? I don't think so either. Especially when there's so many options like you listed to keep your tax in the game working for you. Like @Thomas S. said, truly passive investing (the kind where you don't touch think or even dream about your investments) can't happen. But I'd venture to say then that that truly passive investing - in any sector or industry isn't possible.
No one in their right mind earns a nest egg and then hands it to someone and trusts. So if truly passive set it and forget it investing isn't a reality then you've got to pick your comfort level of involvement and watchfulness.
Personally I prefer the ones where I get to watch the government tax dollars grow for me.
Simply stated, @Amit M. One option for the retiring landlord is a 1031 exchange using a TIC or DST as the replacement propert(ies). Inventory is always available, and the investment amount is exact to the penny.
My clients have found them useful in transitioning to passive management while maintaining net worth and an income stream.
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