What's the best PASSIVE Real Estate investment?

Rental Property Investor · Minneapolis, MN · Member since 2018 · 38 posts · 27 votes

Hi everyone!

Just wanted to start a discussion to see what real estate niche has provided the best $/hr spent of your time as an investor. How did you find it and how are you measuring that return on your time? I've been doing this for 13+ years and haven't really found a truly 'passive' niche yet.

Thanks for any insight!

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Ronald Isgate

Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes

Most of my clients who look for passive investments in real estate tend to go the lending route - i.e. invest their money with a hard money/private lending entity fund. You get a return on your investment - anywhere in the 6-10% range depending on the fund - and its all backed by RE. Its truly passive since you invest you money for a set period of time and get your return. Another option is being a Limited Partner in a venture. Both options by definition have you performing zero work, but thats a blessing and a curse. You are essentially investing in an entity you dont have control over (hence truly passive).

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Kyle Spearin
Real Estate Agent · Boston, MA · Member since 2016 · 451 posts · 214 votes
6y
@Rudy Curtler, I'm relatively new to investing, what strategies for real estate have you employed? To answer your question, I'd imagine that being on the lender side of things is the most truly passive. I can also see how someone with a great property manager and good systems could be more hands off if they give more powers to others.
3 Reply
Matthew Maynard
Delray Beach, FL · Member since 2017 · 31 posts · 8 votes
6y
I would imagine a turnkey property would be considered the most "passive" form of real estate investing. But of course the returns won't be as great on this type of investment.
2 Reply
Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
6y
Looks like your mobile home platform offers that 'passive' investment Rudy. Investors just have to do the initial DD on the sponsor, then basically take the back seat and coast. Very similar to other limited partner investment opportunities.
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Hai Loc
Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
6y
If your talking about passive real estate investment when its 100% fee simple title

#1 STNL Absolute NNN

#2 Leasehold Mobile Home Parks "tenant owned mobile homes"

#3 Large Multi Family/Self Storage that requires at least 1 onsite manager

As you grow a much larger portfolio you can hire regional managers to micro manage
7 Reply
Ronald Isgate
Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
6y
Most of my clients who look for passive investments in real estate tend to go the lending route - i.e. invest their money with a hard money/private lending entity fund. You get a return on your investment - anywhere in the 6-10% range depending on the fund - and its all backed by RE. Its truly passive since you invest you money for a set period of time and get your return. Another option is being a Limited Partner in a venture. Both options by definition have you performing zero work, but thats a blessing and a curse. You are essentially investing in an entity you dont have control over (hence truly passive).
8 Reply
Rudy Curtler
OP
Rental Property Investor · Minneapolis, MN · Member since 2018 · 38 posts · 27 votes
6y
@Hai Loc...can you explain "STNL Absolute NNN"? Thank you, Rudy

@Ronald Isgate and @Andrew Hogan thank you for your comments as well.
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Hai Loc
Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
6y
Originally posted by @Rudy Curtler:
@Hai Loc...can you explain "STNL Absolute NNN"? Thank you, Rudy

@Ronald Isgate and @Andrew Hogan thank you for your comments as well.
Single Tenant Net Lease
When you own the building who McDonalds, Starbucks, Walmart etc.. operate in and they sign long term leases..
Checks in your account every month and the tenant pays all expenses (insurance, taxes, maintenance) when its absolute NNN they also are responsible for the buildings structure, roof and roof membrane so basically you are hands off for the duration of the lease.. but normally pending on your strategy you unload the building before the lease ends and leave some meat on the bone for another buyer..

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Rudy Curtler
OP
Rental Property Investor · Minneapolis, MN · Member since 2018 · 38 posts · 27 votes
6y
Got it. I knew what NNN meant, but you had me on the STNL acronym. Now it makes sense. Thank you @Hai Loc
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Julie L.
Specialist · San Francisco, CA · Member since 2016 · 58 posts · 30 votes
6y
Hey Rudy. I've been investing for the last 11 years in real estate. I've done everything from longer term flips/buy and holds, HML, to syndication. Syndication by far has been the most passive. I probably spend about 1-2 hours per quarter to review financials to ensure no red flags. I earn 8-10% CoC returns and about a 22% annualized return. This doesn't include all the cash we're able to keep from my husband's W2 since we can deduct passive income losses against his W2 income.
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Rudy Curtler
OP
Rental Property Investor · Minneapolis, MN · Member since 2018 · 38 posts · 27 votes
6y
I like it @Julie L.
0 Reply
Roni E.Pro Member
Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
6y

I think with all real estate especially multifamily you will see a dip in returns due to the current crisis, and the back log that will be in the courts.

Originally posted by @Julie L.:
Hey Rudy. I've been investing for the last 11 years in real estate. I've done everything from longer term flips/buy and holds, HML, to syndication. Syndication by far has been the most passive. I probably spend about 1-2 hours per quarter to review financials to ensure no red flags. I earn 8-10% CoC returns and about a 22% annualized return. This doesn't include all the cash we're able to keep from my husband's W2 since we can deduct passive income losses against his W2 income.

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Scott Meyers
Investor · Fishers, IN · Member since 2012 · 520 posts · 499 votes
6y
That's not so easy to answer. Passive - typically this means that you are investing in a syndication with a promoter who ACTIVELY invests in Self Storage, Multi-family, turn key rentals,etc. and you enjoy returns in the 8-15% range. If you are Actively investing, and looking for an asset class that offers the least amount of time, then you may want to invest in existing and Cash-flowing Self-Storage facilities, Parking Lots, Triple Net Leased industrial, maybe RV/Boat Storage, and receive cash on cash returns from 15 - 75%. Even more active, is development & construction of all types of commercial properties, single family fix n flip, etc. with a LOT of moving parts, but bigger paydays on the back end.
Of course, I'm biased, but as we head into another recession, Self-Storage has proven to be the most Recession Resistant, as well as the best performing asset class during boom times. We syndicate, develop, acquire, turn-around, and manage these facilities with a much smaller team than when I was investing in Single Family homes and Multi-family apartments.
Happy Investing.
4 Reply
Erik W.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6y
@Rudy Curtler, hi!
The most passive way to invest in any asset is when you write one check to buy it and for the rest of your life you receive payments like clock work and never have to chase anyone for your money. We call it "mail box money." To achieve that level of passivity, a low-risk, low-turnover REIT mutual fund would be my suggestion. That said, returns on those can be pretty stinko...5% or so for the most rock solid funds.
You have to tell us what is the maximum amount of time, skill, and hassle you're willing to invest and then we can better determine which is the most passive strategy that works and achieves results with those levels of input.
Real estate is like any other investment: the less time, skill, and effort you bring to bear, usually the lower your returns. What's your trade off point where most passive = unacceptably low returns?
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Neil Henderson
Specialist · Carolina Beach, NC · Member since 2016 · 390 posts · 496 votes
6y
Hi @Rudy Curtler, my wife and I have run a short-term rental, executed BRRRR's, and invested in and been a part of real estate syndications.

The least passive has been where we've been an active participant in a real estate syndication, finding the deals, underwriting the deals, finding investors, communicating with investors, communicating and coordinating with the asset manager, etc. It's also been the highest return on our time and money.

Next on the list of has been the short-term rental we run, but with that strategy, as with most strategies, it's all about systems and your ability to find and manage the teams of people who can help you work ON the business and not IN the business. It's a tough one to put out of your mind for any length of time, as things always pop up when you are dealing with a large volume of other human beings.

Next would be the BRRRR's we've executed, but again, your mileage may vary based open the kind of team you're working with. We have a rockstar team and they have made it "mostly" hands-off. The biggest burden on our time being during the deal acquisition and refinance.

By far the most passive has been the real estate syndications we've been passively involved in. Vetting the sponsor, educating ourselves on their business plan, and the market they plan to operate in is the most activity, and that happens in the beginning. Once the capital is in place, it's just cash the checks and read the monthly email reports.

I'll echo what @Scott Meyers says about self-storage. Big fans!
Enough said. Good luck to you on your quest for the perfect passive investment.

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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Rudy Curtler, I would say that the best passive investment is one that follows Buffett's first and second rules, and where you can completely trust the syndicator. I, like Scott Meyers, think that self-storage (along with mobile home parks) are among the best, but even those can be horribly messed up with a bad operator or by over-leveraging. Thankfully, BiggerPockets published a new book last week that will help us all: Brian Burke's The Hands-Off Investor.
Also, check out this graphic with returns from 1994 to 2018...
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Rudy Curtler
OP
Rental Property Investor · Minneapolis, MN · Member since 2018 · 38 posts · 27 votes
6y
@Neil Henderson and @Scott Meyers: Thank you both for your insight! I have been thinking that investing in syndications with trusted, conscientious sponsors would be the ticket to passivity w decent returns.
Regards,
Rudy

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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
6y
@Paul Moore I am not the one to start a fight on BP by any means, I'd just like to point out that your graph is a bit general. For example within residential, you could have single-family homes, small multifamily, and large multifamily with entirely different returns. Further, it fails to break down by asset class. Grouping everything together into the "residential" category blends together crucially distinct data resulting in an arbitrary and bias answer.
Govt financing, conservative underwriting and management execution properly combined; make multifamily (in my opinion exclusively workforce housing vs luxury, student, low income, etc) the BEST risk-adjusted return of all real estate asset classes.
Any other (friendly) thoughts? Feel free to change my mind :)

1 Reply
David S.
Investor · Bay Area, CA · Member since 2014 · 165 posts · 45 votes
6y
@Julie L. You said above, "This doesn't include all the cash we're able to keep from my husband's W2 since we can deduct passive income losses against his W2 income."

I was not aware of this....so you are saying that I as a LP in a syndication, can use the losses reported from a K-1 to offset tax liabilities due to a W2 salary...is this true?

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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
6y
@David S.
Typically within the three wealth buckets:

Portfolio (stocks), Passive (passive real estate, private equity, etc), Ordinary (W2, commission, etc.)

You usually cannot use the losses in one to offset the other bucket's income.

However, a lot of folks try to work up their logged "real estate" hours to be considered a full-time real estate professional and offset ordinary income that way. Otherwise, you can't cross wealth buckets.. Just one reason why the ultra-rich continue to invest in real estate -- to grow their wealth at a faster rate using tax-efficient investments.

Each individual should speak with their own CPA and trusted advisors to see their personal details.

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Julie L.
Specialist · San Francisco, CA · Member since 2016 · 58 posts · 30 votes
6y
@David S. Yes it is if one spouse can claim REP status and the other works a W2. So lets say you invested $100k into a deal, the sponsor does cost segregation (accelerated depreciation) that plus bonus depreciation available to apartment owners results in a $50k passive loss. You can deduct that directly off your spouses W2 income and decrease or eliminate your W2 tax obligations. We just did our first year of this in 2018 and we got back a big check which funded our 2 month vacation in Hawaii last summer :)
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Spencer Gray
Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
6y
@Andrew Hogan @Paul Moore Not to mention NAREIT data is comprised of REIT returns which are typically lower than private syndication as they are often focused on core assets in primary/gateway markets which will probably get hit hard again in this downturn. For example a 3.1% return in 2018 is nothing close to what we saw (7-15% range).
That being said I agree with Paul that self storage should perform quite well. I'm not as convinced with manufactured housing in the short term, I think there will be some issues with collections, but will perform very well in the long run simply due to the lack of affordable housing.
Surprisingly our B+/A- core plus assets are doing really well, we're setting revenue records for April so far. May could be a completely different story, however. *Knocks on wood*
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Ben Pielstick
Investor · Fairfax, VA · Member since 2020 · 17 posts · 11 votes
6y
@Spencer Gray that last part is really confusing me. I've heard people seem to say the more expensive places are going to be hit the hardest because everyone is going to scale down and cut back. What I'm guessing is that maybe people who pay more in rent are mostly in jobs they are able to do from home, and so not as effected as yet?
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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
6y
@Ben Pielstick You're right, Luxury/A++ are more prone to take a hit during a market correction.

There is a significant spread though, between those and what @Spencer Gray mentioned, A-/B+ assets... bigger than most people would think.

In some cases it can be the difference between 1,000/mo rents and 2,000/mo rents
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Andrew Hogan of course you are right. I was not really drawing any specific conclusion, just providing data. And of course, REIT returns do not reflect individual assets to your point, @Spencer Gray.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
6y
Originally posted by @Rudy Curtler:
Hi everyone!
Just wanted to start a discussion to see what real estate niche has provided the best $/hr spent of your time as an investor. How did you find it and how are you measuring that return on your time? I've been doing this for 13+ years and haven't really found a truly 'passive' niche yet.
Thanks for any insight!
for me two things that are most passive
Land in the path of progress example i bought 4 acres in Sonoma county back in 95 for 27k and did nothing to it except mow the field for 200 a year and tax's 300 a year.. and town grew to us and we sold to a developer in January for 1.950,000 long time hold some nice up side.
Next one i really like for Passive Is TIMBER in the north west.. Example : I bought in 02 700 acre tree farm for 1.9 million now this was a little more work the front 100 acres we did subdivide and build 5 houses on the 10 lots and netted about 1.5 mil on that.. But just kept the remaining 600 acres and the trees kept growing and we exited a few years ago to a big Mill for 3.2 million.. so the land and Timber part the only thing we did there was pay tax which in Oregon timber land is nothing i think the total tax bill was under 3k a year. And we got to ride our quads and target shoot and deer hunt.. so you get some recreational benefit.. So I like both of those as passive.. I am always on the hunt for that land i can buy and sit on.

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