Passive Income Options

20 Replies

We are looking to diversify part of our portfolio and we are looking into some passive investing options in commercial real estate. There will be a 1031 exchange involved. What types of passive investing do you favor and why?

Can you share with me your recommendations, experiences, and the company(ies) that you have worked with that have shown results and work from a place of integrity?

We are hoping to stay clear of apartment syndication, but if you have had an incredible experience working with one, I would be open to hearing about it.

Thank you for your feedback. I appreciate your time.

Happy Investing!

Tina

@Tina Thornton , it is very difficult to 1031 into a syndication, things have to be a perfect storm. NNN properties are the typical 1031 path for people looking for passive income. Or you can try to find a DST.

@Andrew Rosenberg , not sure who hurt you, but I know plenty of syndicators with integrity, and who have lined my pockets with good profits.

I passively invest in Brandon Turners Open Door Capital fund and have been very happy with the communication, transparency and returns. I feel like I know what I am getting involved with because I have seen the team grow over the past 8 years that I have been listening to the podcast and can follow their progress on IG. Feel free to reach out if you want to know more. Must be an accredited investor. 

Originally posted by @Tina Thornton :

We are looking to diversify part of our portfolio and we are looking into some passive investing options in commercial real estate. There will be a 1031 exchange involved. What types of passive investing do you favor and why?

Can you share with me your recommendations, experiences, and the company(ies) that you have worked with that have shown results and work from a place of integrity?

We are hoping to stay clear of apartment syndication, but if you have had an incredible experience working with one, I would be open to hearing about it.

Thank you for your feedback. I appreciate your time.

Happy Investing!

Tina

I think there are some good options but not sure if any real estate investments are truly passive other than REITS or kind of a DST. I can't recommend either one as you don't get nearly the benefits (taxes, control, expenses)

A good option is a syndication with a reputable experienced group with a great track record or...out of state investing in a cash flowing market. Multifamily that is well maintained or a NNN investment property are all low headache and do well for investors. Hope that helps and happy to talk further about your 1031 exchange.

Originally posted by @Andrew Rosenberg :

@Scott Wolf Integrity was the criteria of the OP, only meant to wish her good luck. I regret that my reply gave the wrong/negative impression about syndications - like anything else just requires vetting. My apologies to any syndicators.

Fair enough, I missed that, despite it being in bold.  

@Scott Wolf All good and actually thank you. I can see how what I wrote could be read counter to my intention - gotta proof read better. Glad we cleared this up and I didn't give more people the wrong impression. Apologies to the OP/Tina, not trying to hijack your post. I'd suggest reaching out locally the REIAs in your area and asking for referrals - you'd still have to vet, but it's a good starting point. @Lane Kawaoka invests in syndications and is many times more the expert than me - suggest reaching out to him. Hope this helps. Wishing you success in your pivot.

@Tina Thornton the 1031 component does add a wrinkle to the equation but not impossible to overcome. This would be an outright purchase on your end and more of an equity agreement with a proven operator to ensure the asset is performing and managed properly. I would be happy to discuss in further detail if you like. I am specifically talking about mobile home parks in my proposed scenario.

First thing - Realize most passive investments from a 1031 mean your money is locked up for a while.

About 50% of the money into syndications is from 1031, but as noted it's a timing thing.  I'd look for a syndicator that's been in the biz and ask for refs from people already in the syndication.  Be careful of the guys proposing outland-ish returns with little history.

NNNs I guess are OK, but the pricing is wacky.  The can promise good CapRates, but if you're paying $2000/sqft for a coffee cart with 3 years left on the lease, I'd run away.  Anyways, you're buying a lease with a building attached, so you need to verify both, especially what "outs" the lease allows and can the building be easily re-purposed if the tenant leaves.

I guess DSTs would work and they seem to be available in any case, however, the guys selling them usually are stock brokers and know not much about the underlying investment, so you need to do legwork and verify returns and the potential.

@Tina Thornton When you are doing a 1031 exchange, you need to make sure you are purchasing real property. There are a few types of passive investments that qualify for 1031 exchange treatment but the options are limited. To name some passive options you could invest in a Delaware Statutory Trust (which you'd purchase from a financial advisor), or a syndicated tenant in common structure (similar to a Delaware Statutory Trust). These are registered as securities and with any security and investment there are risks involved. If you do decide to reinvest into a syndication, you need to make sure they will accept 1031 Exchange funds and you are buying alongside the syndication as a tenant in common. If you purchase partnership interests, you aren't buying real property, you are buying personal property.

I started investing into syndications this past year, so far doing well, but I'm not in it long enough to give recommendations.  Most important is do your homework and to get to know them before putting in your $.

I just did a 1031 exc from Ca to Az SFRs right before the end of the yr. Prior to closing I had sellers of a 6plex and 4plex lined up but after I closed on my sale they backed out deciding to just refinance their places and buying new investments. We didn't sign any agreements as my property was for sale then closed within a very short amount of time with a cash buyer. I found it very hard to find multi properties in areas without severe weather issues (in my identification time) that were in nice enough shape to not have to be rehabbed. I looked around for quite a while for and found a great realtor & Property Mgr. I drove out, found the houses and closed on them. It was a real seller's market and crazy out there right now. On purchasing the SFRs it is taking a little set up. It depends on what passive is to you. I have had out of state properties using Property Mgrs and one without one. On these I just got I can live off the cash flow. It is passive enough for me. 

In my brief researching of NNN, DST and REITs, none of them fit my purpose or interest. I am not familiar with nor have I ever purcahsed NNNs. I really tried to see if these would work. There was too much of a learning curve for me with the time I had and from what I did see, it was not for me. I also looked into mobile home parks. My accountant advised against it. Mobile homes are not real estate unless you get the land with it as well. I didn't see that being as passive as I wanted, had again a new learning curve plus the exit strategy didn't seem as preferable as SFR or multi-units.

I wish you much success with your exchange. There are time limits and it is very important to have your ducks in a row. 


Wow! Thank you BP Family for so many great suggestions and avenues to look into. That was exactly what I was hoping for. I will be in contact with some of you that have provided options that may be a good fit. I really appreciate you all sharing your knowledge and giving of your time so generously!

Happy Investing!

Tina

@Tina Thornton Depending on the size of the property you are exchanging, you could 1031 into multiple properties to further diversify. As long as the timing works out you could go half into a syndication and half into a DST or some other combination. Be careful of the sales charges when you get a DST. Some companies charge around 6% and some are as low as 2%...for the exact same DST...

I would not suggest a 1031 with current bonus depreciation tax rules in place now.

I don't know why people do 1031s??? Here is what I did back in 2017 when I sold my turnkey rentals.

I sold 7 sfhs and had 200k of capital gains. I just offset it with 200k of passive losses that I built up by going into syndications.

The 1031 exchange is a method of pushing forward the taxes due on the capital gains of a property. You have 45 days to identify replacement property that 180 to close on said property(s).

Its a way of kicking the can down the road with taxes. I personally that you have to pay taxes at some point unless you are going to take it to the grave with you which is not very practical due to the following.

1) The 45 days is almost impossible to execute. To be able to line up a deal that is “hot”. Experienced investors spend an average of 18 months to find that elusive first apartment. Now if you are buying lukewarm deals… then be my guest. But in this seller's market, I think its a way to lose everything.

2) Most investors that I work with are high net worth and able to cashflow income minus expenses over $30k a year and have over 50K of liquidity on hand. I believe that most people, unless they are talented at being an elite investor, should just be an LP role in a syndication due to the scalability and being able to spread their capital across different leads, business plans, asset classes, and geographical locations. That said a 1031 exchange will not allow you from going from real property to an LLC (ownership in a syndication). Although you could do what is called a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It's possible but from the syndicator's perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor). We would do a TIC with you but you would need to bring in more than 1-2Mfor it to make it worth the administrative burden.

Again when we sell the asset in 5-10 years anyway you will be in the same but worse predicament. Take advantage of bonus depreciation now.

There are reverse exchanges and other more exotic exchanges but I personally not sold on the concept when the IRS comes knocking. I am not a tax professional but I feel it is tax evasion.

As a LP investor in syndications deals large enough to pay a guy 5-10K we do cost segregation in order to get bonus depreciation and write off a huge portion of the taxes from exiting the last deal. Basically bones depreciation has made 1031s obsolete.

The order in which suspended losses are deducted is:

1. To first offset depreciation recapture and gain from the activity that was sold.
2. If the suspended losses are in excess of the total gain, the remaining suspended losses will then offset ordinary income.
3. If the suspended losses do not offset 100% of the gain from the activity that was sold, you may use suspended losses from other rental activities to offset the remainder of the gain from sale.

This is detailed in IRC Sec. 469(g)(1)(A). And if you want to have a wild Wednesday night, here's an article that explains it in-depth:

https://www.thetaxadviser.com/...

Hi @Tina Thornton .  Lane has a point.  IF Bonus Depreciation survives in 2021, it can be as tax-advantaged to invest without a 1031 and get massive bonus depreciation.  Mobile home parks with 100%+ bonus depreciation on equity invested are a gold mine, but it won't last forever.  I just invested in several.  Since this concept of over 100% bonus depreciation takes some time to develop, and is beyond the scope of this post, you can message me if you wish and I will send you two Powerpoint slides to explain it.  Good luck! 

Tina Thorton it's all about your GOALS. What do you want out of life?

NNN is not for everybody. I have talked with thousands of investors over the years. Sometimes timing is not right or they simply are not a fit for it.

In life you have wealth accumulation, stabilization, and preservation stages. How much is enough? 2 million, 5, 10, 20 million or more? All depends on the individual and again what they want out of life.

Is the money you are going to invest relative to net worth small in size so if you lose money you will still be okay?

DST's you have no control, small returns, and fees are high going in. They work in some cases but not meant for everyone. They have their place just like many different types of investments. With syndicators you have to watch out. Are they in it for the UPFRONT fee or does the property have equity growth potential?

Lot's of syndicators live off of the upfront fees. You want that fee to be icing for them and not the cake. You want the cake to be when they perform and exit with a healthy profit for everyone involved. Some just take fees and become glorified property managers as an asset manager living off the fees.

You have to ask a syndicator if they are puffing what they did in the past on a different cycle timewise? Can they reasonably replicate that type of deal today and into the future? Also time to hold matters as well. Lot's of them have almost a decade of hold time to achieve an expected return and an equity multiple. The longer the hold period the better chances to experience a full cycle from peak to trough and numerous things can go wrong. Also look at syndicator and make sure they are not using short term debt to massage the numbers early on to get an investment. 

I am a principal broker that specializes in NNN properties, a syndicator, and an investor myself.

Quality NNN really starts at about 2 million with 30% down and a national investment grade tenant. There are some lenders with local relationships built over time going for 20 to 25% down but a first time buyer to the space is not going to get that type of financing.

Hope it helps.  

Thank you again for all of your wonderful feedback on 1031's, passive investing, and ideas on tax strategies. You have given me so much insight and I have so much more to research and learn for my current situation and for the future. 

Happy Investing!