How to get 10%+ passive income

[Sheri Fluellen]

I’ve been real estate investing for over 15years, acquiring a large nest egg of net worth. The problem is we aren’t getting much cash flow from the portfolio for a variety of reasons and our rentals, flips, and short term rentals are time and energy intensive. I’m considering selling 8 of our least desirable and profitable properties, which would result in profit of $1.4M. Would like to 1031 that into some truly passive investing that can get us at least a 10% return so we can travel abroad with our kids for a year. I am aware of and learning more about LP positions in large multifamily syndications. (Would love to do GP but still working on that). Any other options I’m missing that could meet my needs?

[Michael Penny]

Hey Sheri,

I am an active GP and a currently about to close on 60 units in MS.  I sent you a message and would be happy to chat about your goals and objectives.  On the surface, it sounds like if you want to be passive you don’t need to be on the GP side, especially if 10% returns were sufficient.

Best,

Mike Penny

[Kash Jawed]

Hi Sheri, when you say 10% return, I assume you're talking IRR and not CoC ?

If IRR, most of the investments offer 10+ IRR with very reputable operators so I see that very achievable.

If CoC, you're looking at about 7-8%

Hope this helps. 

[Colton Hahn]

Quote from @Sheri Fluellen:

I’ve been real estate investing for over 15years, acquiring a large nest egg of net worth. The problem is we aren’t getting much cash flow from the portfolio for a variety of reasons and our rentals, flips, and short term rentals are time and energy intensive. I’m considering selling 8 of our least desirable and profitable properties, which would result in profit of $1.4M. Would like to 1031 that into some truly passive investing that can get us at least a 10% return so we can travel abroad with our kids for a year. I am aware of and learning more about LP positions in large multifamily syndications. (Would love to do GP but still working on that). Any other options I’m missing that could meet my needs?

 Hey Sheri there are syndicators, like us, out there that offer a passive income focused class of share that offers 10% annually distributed monthly. 

Only issue is the lack of 1031 opportunity, but if you are willing to take the short term tax for the long term peace of mind then it may be worth it. Example: I have an investor who is selling all his properties and investing the proceeds into syndications to get that truly passive feeling, so he can enjoy his life rather than trading one w2 for another. He is fine with that short term loss, for the long term gain of getting his life back. 

Food for thought!

[Joe Archbold]

Sheri,

There are larger experienced syndicators that will 1031 into a LP position that are offering preferred rates to 10%.

I will forward you my contact to better understand your objective.

Regards,

Joe

[Dave Foster]

@Sheri Fluellen, As several have alluded to a membership position in an LP will not qualify for 1031 treatment.  It sounds like you're wanting to take a hiatus and travel for a bit.  But you're not ready to drop off the face of the earth and never return.  That can be a great plan.  We took off several years in the middle to raise our boys on a sailboat and have never regretted a minute!!!

But you're going to want your capital war chest intact when you get back.  So starting with the 1031 is key.  selling and paying tax to be able to move into a passive investment where returns may be marginally better than you can get elsewhere with a 1031 may not be your best bet for capital return.

In addition to that you'll want to look at your timeline and the timelines of the syndicators you want to work with (if they can offer you a TIC position to accommodate your 1031). If you're only wanting to take a year or two. But the project window is 5 years then you may end up being frustrated and impatient in an opportunistic market correction with time and desire but no money to start your own things with.

I'd offer (and ready to be flamed :) that a shorter term DST would be a better investment for you. The returns will be generally slightly less than those promised by the syndicators. But the time frames may work better for you. And the difference in going into a DST at 6-7% but paying no tax versus a syndication where you pay the tax up front and get a couple more points of potential return might actually be tipped in favor of the DST.

I'd suggest commercial real estate as the best of all worlds for you as it's passive, you're in control, and leases are much longer.  But again, you buy these to hold and I'll bet after a year or two having fun you'll be raring and ready to do your own thing - perhaps your own LP.

[Carlos Ptriawan]

invest on leveraged debt funds (including bridge). It's risky but 10% is possible. 

[Todd Dexheimer]

10% cash on cash is possible, but unlikely in todays market as a passive investor. Our senior housing deals can pay out 10-15% CoC, but that's also not a guarantee. Most of our multifamily deals and other syndicators are paying out 5-9% CoC, with an expected IRR of around 15-20%. You can invest in the preferred class and get a 10% pref, but that likely won't allow for a 1031 Exchange.

If you want to be passive, I would suggest lowering your expectations a bit. You can still find great returns and be completely passive. 

Oh and don't get too caught up in returns. Someone can tell you they have a great deal with excellent returns, but reality only happens upon execution. Make sure they have a strong track record and you can trust them with your money. 

[Carlos Ptriawan]

Quote from @Dave Foster:

state as the best of all worlds for you as it's passive, you're in control, and leases are much longer.  But again, you buy these to hold and I'll bet after a year or two having fun you'll be raring and ready to do your own thing - perhaps your own LP.

I agree at the end of the day we're all going to invest in commercial real estate ( in any way possible). With current standing of 3-4% cap-rate, the actual realized DST return shall be around 4-5% (after all these commissions). If the DST owner can sell quickly that's even better.

10% return in RE is possible but one need to be a note holder/investing at debt syndication for riskier asset class (just look at GF there's lot of offers like that).

[Paul Moore]

Hi @Sheri Fluellen. Congratulations on your success and your critical thinking. This could be a great move for you. 

As a fund manager, we have to turn down investors who need 1031 exchanges quite often. It happens so much that we have developed a short list of alternatives. I would be glad to share them with you if you want to reach out to me. 

One of our investors sold over 60 single-family rentals last year and came up with a strategy to avoid a 1031 exchange, but still avoid the capital gains tax, at least for a very long time. I can introduce you to him if you wish. 

I also know one of our competitors in the syndication space allows TIC investors which would allow you to preserve your 1031. I would be happy to introduce you to them as well. Good luck and happy investing!

[Jim Pfeifer]

If you are selling active properties and intend to invest passively, why do a 1031 at all?  The 1031 Exchange forces you to stay an active investor as it is difficult to find syndications that take 1031 funds - this restricts your choice of syndicator and means you are choosing an operator based on their acceptance of 1031 money rather than on their success as an operator.  I sold all of my active properties and had a gain similar in size to what you are talking about.  I did not do a 1031 Exchange and I did not pay any capital gains taxes on the sale of the active investment properties.  I did what my CPA calls a "Lazy 1031".  I took the gains and some principal from the sales and invested in various syndications - chosen for the quality of the operator.  These syndications did cost segregations and gave me bonus depreciation resulting in paper losses of 60% to 110% of the amount I invested.  These losses deferred all of the tax from the sale of my properties.  Similar to a standard 1031, all I have to do is continue investing after deals go full cycle to continue deferring the tax.  It's been several years that I have been on the Golden Hamster Wheel of tax deferral and I still do not pay taxes on the gains or cash flow from my syndication investments.  The best part of the Lazy 1031 is there are no timing requirements other than the syndications need to be invested in the same year as the sales and you do not have to continually upgrade into larger debt and bigger deals!

[Sheri Fluellen]

Quote from @Jim Pfeifer:

If you are selling active properties and intend to invest passively, why do a 1031 at all?  The 1031 Exchange forces you to stay an active investor as it is difficult to find syndications that take 1031 funds - this restricts your choice of syndicator and means you are choosing an operator based on their acceptance of 1031 money rather than on their success as an operator.  I sold all of my active properties and had a gain similar in size to what you are talking about.  I did not do a 1031 Exchange and I did not pay any capital gains taxes on the sale of the active investment properties.  I did what my CPA calls a "Lazy 1031".  I took the gains and some principal from the sales and invested in various syndications - chosen for the quality of the operator.  These syndications did cost segregations and gave me bonus depreciation resulting in paper losses of 60% to 110% of the amount I invested.  These losses deferred all of the tax from the sale of my properties.  Similar to a standard 1031, all I have to do is continue investing after deals go full cycle to continue deferring the tax.  It's been several years that I have been on the Golden Hamster Wheel of tax deferral and I still do not pay taxes on the gains or cash flow from my syndication investments.  The best part of the Lazy 1031 is there are no timing requirements other than the syndications need to be invested in the same year as the sales and you do not have to continually upgrade into larger debt and bigger deals!

 I've heard that bonus depreciation is on the chopping block with the current president.  Anyone aware of this?

[Adam Lacey]

@Sheri Fluellen LP in a syndication is probably your best option for a truly passive investment. You'll just have to make sure you communicate with the sponsorship that you want to 1031 into the deal and they'll have to set it up as a TIC. Most groups are open to that as long as you're bringing $1m+ to the table, but it sounds like you have that covered. Sounds like you have a clear path to an amazing year with your family! Enjoy it!!!

[Nicholas L.]

@Sheri Fluellen are you self managing your entire portfolio?

[Shalini Kadaveru]

Hi @Sheri Fluellen Agree with Kash, also the profit metrics that you'll take into account when calculating IRR will depend on your overall business model or investment strategy.

[Sheri Fluellen]

@Nicholas L., yes. For better or worse we are self managing everything except 1 STR in FL. We do have a part time operations manager so she does most of the annoying stuff.. lol! But even that has gotten to the point of feeling draining at times. I'm not confident in any of the PM companies in our smallish size town so I'd rather find better investments elsewhere for the time being. We intend to hang on to our small multifamilies and commercial properties still for a while longer.

[Nicholas L.]

@Sheri Fluellen OK - makes sense.  But, you could sell the 1-2 "least desirable" properties, and put the rest under management for a year and see what happens / how you feel about it. If you don't like it, you can still exit them all.

I just struggle with wanting to be guaranteed "at least a 10% return," especially in today's market environment.  It sounds like you've worked hard to build up this portfolio.

[Account Closed]

I am also looking for passivity, as well. I’m totally flip-flopping on whether to sell or not—mine are commercial, so I don’t have a bunch of smaller properties. 

A lot of people push syndications, which I am looking into. My gut feeling is that syndications are pretty exposed to market conditions and will not be able to deliver on their projections.

I'm also considering selling the properties with owner financing. I would maintain ownership until closing after the options are executed. I would only consider interest-only financing, so I would get the full sales price at the end. I don't think I would get 10% interest, but my IRR would be de pretty good.

DSTs seem to be pretty popular, so I am looking into them, as well. 

[Jack Martin]

@Sheri Fluellen to answer your question above, 100% bonus depreciation will be phased out by increments starting next year. The amount allowed this year is 100%, next year it will be reduced to 80%, then 60% in 2024, 40% in 2025, and 20% in 2026. Keep in mind, some property types will produce more bonus depreciation than others so you may be able to achieve your intended goal, even after 100% is reduced. 

Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

The "lazy 1031" can be executed with a direct investment yourself, or through a passive investment in a syndication with a sponsor who is taking the bonus election. If you invest passively you should receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested, over the next couple years. 

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years. 

All the best,

Jack

PS - I am not a tax advisor or a CPA. This perspective is solely from my own experience in managing mobile home park funds and working with the tax experts around us.

[Ian Ippolito]

Quote from @Sheri Fluellen:

I’ve been real estate investing for over 15years, acquiring a large nest egg of net worth. The problem is we aren’t getting much cash flow from the portfolio for a variety of reasons and our rentals, flips, and short term rentals are time and energy intensive. I’m considering selling 8 of our least desirable and profitable properties, which would result in profit of $1.4M. Would like to 1031 that into some truly passive investing that can get us at least a 10% return so we can travel abroad with our kids for a year. I am aware of and learning more about LP positions in large multifamily syndications. (Would love to do GP but still working on that). Any other options I’m missing that could meet my needs?

I look at more than 100 passive syndication/crowdfunding deals each month. Typically they will throw off some sort of regular income from rent and at the end when they sell some sort of final payment from price appreciation.

The % you get on both varies a lot depending on the asset class (for example multifamily versus mobile home parks versus office) and strategy ( core plus versus value-added versus opportunistic). And in general an investor has to take more risk to get a higher return.

These days there's not much that's going to produce a 10% return purely from income/rent distributions. So you would need to supplement with deals that are looking to exit (and stagger them to exit, say every year or so...so you could benefit from the price appreciation boost). However, exits are more difficult to project for sponsors (both timing and amount). And if there were an unexpecte downturn, typically they aren't going to sell until prices recovered. So if you were counting on that for income, it wouldn't necessarily be reliable.

[Jeff McKee]

I am a GP on 2,500+ apartment doors and a Limited Partner Investor on 1,500+ apartment doors. It is a good inflation hedge and provides cash flow especially for retirees.

[Eric Lin]

Quote from @Ian Ippolito:

Quote from @Sheri Fluellen:

I’ve been real estate investing for over 15years, acquiring a large nest egg of net worth. The problem is we aren’t getting much cash flow from the portfolio for a variety of reasons and our rentals, flips, and short term rentals are time and energy intensive. I’m considering selling 8 of our least desirable and profitable properties, which would result in profit of $1.4M. Would like to 1031 that into some truly passive investing that can get us at least a 10% return so we can travel abroad with our kids for a year. I am aware of and learning more about LP positions in large multifamily syndications. (Would love to do GP but still working on that). Any other options I’m missing that could meet my needs?

I look at more than 100 passive syndication/crowdfunding deals each month. Typically they will throw off some sort of regular income from rent and at the end when they sell some sort of final payment from price appreciation.

The % you get on both varies a lot depending on the asset class (for example multifamily versus mobile home parks versus office) and strategy ( core plus versus value-added versus opportunistic). And in general an investor has to take more risk to get a higher return.

These days there's not much that's going to produce a 10% return purely from income/rent distributions. So you would need to supplement with deals that are looking to exit (and stagger them to exit, say every year or so...so you could benefit from the price appreciation boost). However, exits are more difficult to project for sponsors (both timing and amount). And if there were an unexpecte downturn, typically they aren't going to sell until prices recovered. So if you were counting on that for income, it wouldn't necessarily be reliable.

Ian, just curious, where did you find those deals to review? I am new to syndication, and would like off load some of my cash/property to passive investment.

Thanks

[Michael Plante]

You weren’t making 10% while actively managing your properties correct?
but now want to make 10% passively 

Not going to happen in safe way in my opinion