Best passive way to earn cash flow
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One thing that hasn't been mentioned yet is dividend stocks. Most investment vehicles RE-related aren't truly as passive as advertised in my opinion (with syndications you've got to put in the work vetting sponsors (a lot of them are having trouble recently, and it's not passive for the investor when the syndication starts having capital calls or stops distributions...), and with private lending you've still got to have some experience and understanding of the risk, know how to protect your principal investment, know how to set up the loan terms and contracts to protect your capital, and know what to do in case the borrower isn’t able to perform).
51 Replies
- Member since 2019 · 144 posts · 93 votes2y
Quote from @Venkat P.:
My wife and I are just starting in the rental RE. We have purchased a SFR (cash negative) in Sacramento, CA area few months ago. We know that it is currently cash negative but given our income from W2, we are able to cover that for now . The goal then was to build some equity on it long term and refi when the rates go down.
Looking for the next investment suggestions. We do not want to take another cash negative property, so looking for cash positive options. We have reserves to do 20% down on ~500k properties. The goal for us is to scale our investments so we can get around 2k/month in the next 2-3 years
As you mentioned yourself the first deal is more an appreciation / refi-cash out or sell property after it made some equity.
Going into multifamily is a good step to increase cash-flow. They are also versatile enough to turn them into medium short-term rentals to further increase the cashflow if you find them in better areas and you guys got extra cash for renovation and furnishing.
So making 2k/month is actually a very modest and attainable goal.
Thanks @Michael Thach. Started to look at multi family options but unable to find any good deals in the area.
Can you clarify how many $500k properties can you do 20% down? Just the one? or multiple?
I was just thinking: 2k/mo is $24k/yr or 10% on $240k, right? Private lending is doing 12% or better. Your subject header is "best passive way to earn cash flow.." You really aren't that far away and having to deal with landlording, which isn't entirely passive and has its own expenses.
- Real Estate Broker · Modesto, CA · Member since 2023 · 192 posts · 77 votes2y
Quote from @Venkat P.:
My wife and I are just starting in the rental RE. We have purchased a SFR (cash negative) in Sacramento, CA area few months ago. We know that it is currently cash negative but given our income from W2, we are able to cover that for now . The goal then was to build some equity on it long term and refi when the rates go down.
Looking for the next investment suggestions. We do not want to take another cash negative property, so looking for cash positive options. We have reserves to do 20% down on ~500k properties. The goal for us is to scale our investments so we can get around 2k/month in the next 2-3 years
Hi Venkat, I am anxious to help build this out with you. I help a lot of investors in this situation and am fortunate enough to be in a market with good appreciation and rents. I help a lot of investors that get into similar situations get out of them. I have references I am happy to share that are from the Bay Area and surrounding areas. The most recent deal I helped someone purchase will generate around 12K annually for them - duplex.
What you are desiring requires much more underwriting and planning than buying a cashflowing property - especially with that timeline. You need to purchase and build with a 1031 exchange scenario unless you have continued capital to expand. Ensure that you are buying something in a market that is not stale. Happy to connect and will send a DM!
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Venkat P.
Looking for cash flow go with a debt fund
Many pay monthly dividends and is truly passive
Returns may not be as high but neither is risk (depending on sponsor)
7e investments53 Reviews - Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Venkat P., as others noted, is cash flow your only true goal. I debt fund is great and generates cash flow, typically, and the tradeoff is equity growth. As Chris noted, you really need to vet your sponsor of debt funds and understand who they are lending to. At the end of the day, while you are in first lien position (hopefully, and I would confirm the sponsor is not taking second lien positions or understand the risks in doing such), the underlying borrower and their deal is ultimately what is supporting your return. So, in a way, you need to underwrite the debt fund sponsor that you are actually investing with, and either the borrower, or in the case of a fund, I would want to see very clear underwriting standards for how they underwrite the actual borrower and borrowing entity.
There are equity positions that are legitimately creating cash flow, albeit typically much less on the front end, with the chance for appreciation. This is higher risk, but also higher potential upside. Things to look out for on these equity investments primarily comes down to what generates the cash flow, and is it actual present day 1 or does the sponsor need to improve operations just to be cash flow positive. And then, understand how the business plan is underwritten and deal is structured that allows you to actually be able to grow your cash flow and overall asset value.
Quote from @David M.:
I was just thinking: 2k/mo is $24k/yr or 10% on $240k, right? Private lending is doing 12% or better. Your subject header is "best passive way to earn cash flow.." You really aren't that far away and having to deal with landlording, which isn't entirely passive and has its own expenses.
That's not a bad idea. I will look into private lending and debt funding like others are saying.
Quote from @Nick Maugeri:
Quote from @Venkat P.:
My wife and I are just starting in the rental RE. We have purchased a SFR (cash negative) in Sacramento, CA area few months ago. We know that it is currently cash negative but given our income from W2, we are able to cover that for now . The goal then was to build some equity on it long term and refi when the rates go down.
Looking for the next investment suggestions. We do not want to take another cash negative property, so looking for cash positive options. We have reserves to do 20% down on ~500k properties. The goal for us is to scale our investments so we can get around 2k/month in the next 2-3 years
Hi Venkat, I am anxious to help build this out with you. I help a lot of investors in this situation and am fortunate enough to be in a market with good appreciation and rents. I help a lot of investors that get into similar situations get out of them. I have references I am happy to share that are from the Bay Area and surrounding areas. The most recent deal I helped someone purchase will generate around 12K annually for them - duplex.
What you are desiring requires much more underwriting and planning than buying a cashflowing property - especially with that timeline. You need to purchase and build with a 1031 exchange scenario unless you have continued capital to expand. Ensure that you are buying something in a market that is not stale. Happy to connect and will send a DM!
Interesting. Would like to know more about the approach you took with others
Quote from @V.G Jason:
You don't want to buy hard assets if your desired goal is instant cash flow(sub 2 years). Go buy the note behind the property.
Hard assets are the best investment overall, just not in that time frame.
Thanks. I understand that my question purely says cash flow but I am also interested in pushing out my time frame if I could get cash flow along with appreciation. Would your response change if I change my timeframe to 5 years and still aim for 2k/month cash flow?
Quote from @Chris Seveney:
@Venkat P.
Looking for cash flow go with a debt fund
Many pay monthly dividends and is truly passive
Returns may not be as high but neither is risk (depending on sponsor)
Thanks. I will have to take a look at debt funding. But would your answer change if my timeframe changes from 2-3 years to 5 years? I also do not want to lose the appreciation factor which drew me to rental RE
Quote from @Evan Polaski:
@Venkat P., as others noted, is cash flow your only true goal. I debt fund is great and generates cash flow, typically, and the tradeoff is equity growth. As Chris noted, you really need to vet your sponsor of debt funds and understand who they are lending to. At the end of the day, while you are in first lien position (hopefully, and I would confirm the sponsor is not taking second lien positions or understand the risks in doing such), the underlying borrower and their deal is ultimately what is supporting your return. So, in a way, you need to underwrite the debt fund sponsor that you are actually investing with, and either the borrower, or in the case of a fund, I would want to see very clear underwriting standards for how they underwrite the actual borrower and borrowing entity.
There are equity positions that are legitimately creating cash flow, albeit typically much less on the front end, with the chance for appreciation. This is higher risk, but also higher potential upside. Things to look out for on these equity investments primarily comes down to what generates the cash flow, and is it actual present day 1 or does the sponsor need to improve operations just to be cash flow positive. And then, understand how the business plan is underwritten and deal is structured that allows you to actually be able to grow your cash flow and overall asset value.
Thank you!! Good suggestions.
- Attorney · Columbus, OH · Member since 2023 · 193 posts · 145 votes2y
Quote from @Venkat P.:
My wife and I are just starting in the rental RE. We have purchased a SFR (cash negative) in Sacramento, CA area few months ago. We know that it is currently cash negative but given our income from W2, we are able to cover that for now . The goal then was to build some equity on it long term and refi when the rates go down.
Looking for the next investment suggestions. We do not want to take another cash negative property, so looking for cash positive options. We have reserves to do 20% down on ~500k properties. The goal for us is to scale our investments so we can get around 2k/month in the next 2-3 years
I'd suggest investing in Columbus, Ohio. There are a significant amount of investment opportunities here that meet or exceed the 1% rule.
Even in a 5 year timeline... You can still lose money in real estate. Just like the public markets, you have no idea which way your market will go. Lots of people still lose money.
Also, landlording still has tax liabilities. If you aren't ready to face them, you may box yourself into a corner. the big one is depreciation. it may be nice year over year as it helps cover your excess rents, but when you go to sell you have to pay that all back at 25%. You either die or keep 1031'ing until you die... That's fine if that's what you want, but there is always that liability, and the unpredictable liability of being a landlord.
This issue just keeps coming up over and over again..
good luck.
- Real Estate Broker · Sacramento, CA · Member since 2021 · 518 posts · 408 votes2y
Hey Venkat, I'm a local real estate broker and investor, and we manage over 100 properties (mostly STR as well as some LTR).
There is a sweet spot in Sacramento for B-class multifamily for STR/MTR, and some LTR, where the numbers can make a lot of sense from a Cash-on-Cash standpoint, while also enjoying equity appreciation and meaningful tax benefits.
Quote from @David M.:
Even in a 5 year timeline... You can still lose money in real estate. Just like the public markets, you have no idea which way your market will go. Lots of people still lose money.
Also, landlording still has tax liabilities. If you aren't ready to face them, you may box yourself into a corner. the big one is depreciation. it may be nice year over year as it helps cover your excess rents, but when you go to sell you have to pay that all back at 25%. You either die or keep 1031'ing until you die... That's fine if that's what you want, but there is always that liability, and the unpredictable liability of being a landlord.
This issue just keeps coming up over and over again..
good luck.
Thanks and that makes sense. Wouldn't you be paying the same tax while doing private funding or debt funding? I have not looked into those areas yet.
- Good to know. Interested to know about the options
Quote from @Noah Laker:
Hey Venkat, I'm a local real estate broker and investor, and we manage over 100 properties (mostly STR as well as some LTR).
There is a sweet spot in Sacramento for B-class multifamily for STR/MTR, and some LTR, where the numbers can make a lot of sense from a Cash-on-Cash standpoint, while also enjoying equity appreciation and meaningful tax benefits.
Its the same but different... Its a timing issue, as in when the tax liability is due... Do you defer the tax further with a 1031 (assuming real estate)?...
With debt funding or other funds/securities, are you making more after taxes so you are actually ahead? Especially with no other uncontrolled liabilities. Also, some securities are tax free.
There are a bunch of potentials out there. Its just whatever you are comfortable and what risk profile you are ready to assume. Good luck.
One thing that hasn't been mentioned yet is dividend stocks. Most investment vehicles RE-related aren't truly as passive as advertised in my opinion (with syndications you've got to put in the work vetting sponsors (a lot of them are having trouble recently, and it's not passive for the investor when the syndication starts having capital calls or stops distributions...), and with private lending you've still got to have some experience and understanding of the risk, know how to protect your principal investment, know how to set up the loan terms and contracts to protect your capital, and know what to do in case the borrower isn’t able to perform).
- 2yScott ScovilleBusiness MemberReal Estate Agent · Sacramento, CA · Member since 2019 · 502 posts · 274 votes
Quote from @Venkat P.:
My wife and I are just starting in the rental RE. We have purchased a SFR (cash negative) in Sacramento, CA area few months ago. We know that it is currently cash negative but given our income from W2, we are able to cover that for now . The goal then was to build some equity on it long term and refi when the rates go down.
Looking for the next investment suggestions. We do not want to take another cash negative property, so looking for cash positive options. We have reserves to do 20% down on ~500k properties. The goal for us is to scale our investments so we can get around 2k/month in the next 2-3 years
Hey Venkat,
We are actively working with off market sellers on Subto deals in Sacramento. We just made an offer for another investor and close to locking it up. This is probably the best way to get cash flow in the this market. The alternative would be to look at hard money, buy as a cash buyer. You'll be able to lock up deals at a better price, be able to fund the rehab, which can get you closer to cash flow. The key though is to find value add properties well below market value to make this strategy work. We're doing all of the above at Hardin Realty. Would love to chat when you have time.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2yIf you said 20 years, then you can go with appreciation, 5 years, way to short a time frame. If a $500k property dropped to $450k (10%) and then stabilized and went back to traditional 3% you would be back at even, and will lose money since you will pay 10% in closing costs etc.
Quote from @Venkat P.:
Quote from @Chris Seveney:
@Venkat P.
Looking for cash flow go with a debt fund
Many pay monthly dividends and is truly passive
Returns may not be as high but neither is risk (depending on sponsor)
Thanks. I will have to take a look at debt funding. But would your answer change if my timeframe changes from 2-3 years to 5 years? I also do not want to lose the appreciation factor which drew me to rental RE
7e investments53 Reviews Quote from @Chris Seveney:
If you said 20 years, then you can go with appreciation, 5 years, way to short a time frame. If a $500k property dropped to $450k (10%) and then stabilized and went back to traditional 3% you would be back at even, and will lose money since you will pay 10% in closing costs etc.Quote from @Venkat P.:
Quote from @Chris Seveney:
@Venkat P.
Looking for cash flow go with a debt fund
Many pay monthly dividends and is truly passive
Returns may not be as high but neither is risk (depending on sponsor)
Thanks. I will have to take a look at debt funding. But would your answer change if my timeframe changes from 2-3 years to 5 years? I also do not want to lose the appreciation factor which drew me to rental RE
I meant to say, I could wait it out on the appreciation a little longer if I can also get the cash flow I am looking for.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Venkat P.:
Quote from @Chris Seveney:
If you said 20 years, then you can go with appreciation, 5 years, way to short a time frame. If a $500k property dropped to $450k (10%) and then stabilized and went back to traditional 3% you would be back at even, and will lose money since you will pay 10% in closing costs etc.Quote from @Venkat P.:
Quote from @Chris Seveney:
@Venkat P.
Looking for cash flow go with a debt fund
Many pay monthly dividends and is truly passive
Returns may not be as high but neither is risk (depending on sponsor)
Thanks. I will have to take a look at debt funding. But would your answer change if my timeframe changes from 2-3 years to 5 years? I also do not want to lose the appreciation factor which drew me to rental RE
I meant to say, I could wait it out on the appreciation a little longer if I can also get the cash flow I am looking for.
today you are getting neither in real estate, there is little to no appreciation (and personally I think will go down) and there is no cash flow. To get cash flow on a decent asset today you are putting 35-40% down. ROI for deals is very low unless you find an off market property or will rehab the property and self manage. This is just the reality that people do not want to grasp today. They will say there are deals, which there are, but finding them is very hard and takes a lot of time and effort and typically $ to market for them
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