How to Become 100% Passive with Real Estate Investing?

23 Replies

There are all types of real estate investors. Some that love to be actively involved and others that prefer the "real estate" asset class, but don't have the time to commit to it. I started off as an active real estate investor doing fix and flip and single-family buy and holds and vacation rentals. Over time it became too much of a time commitment and I wanted to pursue other full-time ventures in my life. I realized that I didn't have to "give up" real estate or sell everything to become a 100% passive investor. I transitioned into multifamily syndications for the past several years in order to achieve the passive status I was seeking. I'm curious if there are other strategies or techniques to consider for someone who wants to be a passive real estate investor. Thanks for your comments!

You could invest in a TIC, REIT or be a private lender.

NNN is not a true passive investment if you are the owner operator.

Originally posted by @Greg Dickerson :

You could invest in a TIC, REIT or be a private lender.

NNN is not a true passive investment if you are the owner operator.

Agree with Greg. NNN is not passive if you're the owner. We have a NNN property right now that we're leasing up and it's not passive at all. However once it's leased up, I am sure it's not as time consuming as an apartment building.

You can be an LP in a syndicated commercial deal that is being leased triple net. So yes, you can do it in the same way you invest in a syndicated apartment deal.

@Travis Watts , Given the definition that "syndication" really just means a fraction ownership of an asset by not equals for a common goal there are definitely some different options than the typical "LP" syndication that is prevalent today.  @Greg Dickerson mentioned a couple - the REIT (fractional ownership of a company that invests in real estate) or a TIC (actual ownership of tenant in common interests of a larger asset).

NNN properties refer to the type of lease where the tenant pays and manages all taxes insurance and maintenance. These can be small local tenants or they can be large national credit tenants. And they can be single owner or they too can be fractionalized out. Most of these are fractionalized as Delaware Statutory Trusts (DSTs) which also qualify as actual ownership of real estate although you actually own a membership interest in the trust itself.

Key to the DST, TIC and NNN properties is that they qualify for 1031 exchange treatment. So you can sell your interests and move the proceeds to another real estate investment of your choice while deferring all tax on gain and depreciation recapture.

@Greg Dickerson this may be a different thread but do you know more about Private Lending (interested in becoming a PL)? You can DM me so as not to hi-jack this thread. 

I have been using my SDIRA and personal income to buy first position notes. They provide consistent monthly income at an average of 9%. Currently I am using SafeGuard Capital Partners. I think they offer notes starting at $35000.00 and up. In my opinion, they are safer than crowdfunding as you are the bank and in first position. On average the notes are at about 60% loan to value. To my knowledge there is no tax advantage other than in the SDIRA which is tax deferred.

I currently am still holding some single and multi family properties which do have a tax advantage. It's a balance of both vehicles. I personally manage some of my properties which allows me to stay somewhat busy at a retiree. The multi family are managed for me. This allows time  for travel and of course the grandkids. ;-}

Originally posted by @Travis Watts :

There are all types of real estate investors. Some that love to be actively involved and others that prefer the "real estate" asset class, but don't have the time to commit to it. I started off as an active real estate investor doing fix and flip and single-family buy and holds and vacation rentals. Over time it became too much of a time commitment and I wanted to pursue other full-time ventures in my life. I realized that I didn't have to "give up" real estate or sell everything to become a 100% passive investor. I transitioned into multifamily syndications for the past several years in order to achieve the passive status I was seeking. I'm curious if there are other strategies or techniques to consider for someone who wants to be a passive real estate investor. Thanks for your comments!

I am a passive investor and there are many, many ways to make money passively through real estate.

I also like the triple net lease asset class. However, I personally don't like owning individual properties, because the "go dark" risk is significant (i.e. the tenant leaves and then you lost 100% of income, and then have to try to find someone else who will come in. If and when you do you then probably have to pay for improvements etc.). So personally I like investing in the asset class through diversified fund. The one I chose is managed by sponsor that has full real estate cycle experience in this asset class. It's diversified by geography, asset class (the target recession resistant industries and Amazon resistant). Leverage is low (typically around 40%) and if the only fund of its kind that I know of that has an investment grade rating. The market under 506B and cannot publicly solicit, so if you want more info just message me.

Hard money loans are another way to make money passively (which I also invest in). Again I prefer a fund over investing in individual notes due to be better diversification and also not having to do all the constant due diligence of recycling a portfolio. I personally stick to funds with conservative leverage (65% LTV or less), first position only, nonowner occupied, loan in only nonjudicial states to limit foreclosure costs, etc.

And you invest in multifamily but there are plenty of other asset classes including retail, office, self storage, etc.

 

I do not personally believe in PASSIVE income.  To me, there is no such thing.  While it is possible to not be swinging a hammer or renting space etc, the use of the term passive implies "free lunch" to me. Even triple net arrangements and investing in diversified funds requires work up front to pick the right investment and a certain degree of education to even get to the point of making a smart decision.  And then, there should be regular "oversight" of your assets/portfolio to ensure you should remain in your chosen assets and not "re-allocate". As such, I prefer the term RESIDUAL as it more accurately reflects the fact that we, as investors should ALWAYS be at the helm of our portfolios and we often "work" (even if in the form of education) without any pay at all for months or years before the income starts.  

And I realize many may view this commentary as nothing more than semantics but the language we use is important! 

All that said, I LOVE residual income.  My chosen asset class is self storage as I find it to meet my investment objectives without require too much "ACTIVE participation". I spend roughly 5 hours per week managing our stabilized properties to create roughly $100K-$250K in positive cash flow depending on where we are in our own growth/stability cycle.  Currently we are in a growth phase that brings with it a cash flow situation on the low end of the range while simultaneously increasing the work load as we have $1.2 Million deployed in re-development deals. Once these two pending projects are stabilized, we should be back to the higher end of the range of cash flow and work load should fall back to 5-8 hours per week to manage the whole portfolio. 

Originally posted by @Rene Doyle :

@Greg Dickerson this may be a different thread but do you know more about Private Lending (interested in becoming a PL)? You can DM me so as not to hi-jack this thread. 

Yes I am well versed on the subject. PM sent.

 

@Travis Watts I purchased real estate during the Credit Crisis. Every time I closed on a property, I arranged my agent to hand my PM all the keys. I didn’t need to do anything after that except approve tenants and expenses over a certain dollar amount

Originally posted by @Travis Watts :

@Greg Dickerson Thank you Greg. That is also good to now. Is there such thing as a triple net syndication where you could partner with others on a NNN?

Yes many sponsors and developers do syndicate triple net properties. You can also syndicate any other type of real estate or investments including purchasing or raising capital for a business.

Real estate syndication is simply pooling capital from multiple investors to purchase real estate. Typically the syndicator or sponsor is one person or a team of people who divide tasks and raise capital from investors for the equity or down payment to purchase the property.

The key thing to remember is when you do this you are creating and selling securities so you need to be very careful to make sure you are in compliance with SEC regulations.

There’s lots of info out regarding syndication, how it works and the rules and regulations.

@Travis Watts

While you received a ton of great feedback including a detailed one from @Ian Ippolito , it's pertinent to point out a few things.

1) Syndications allow you to invest in various asset classes. One doesn't have to stick to MFH, it could be MHP, storage, medical offices and so forth. 

2) Passive income doesn't have to come from real estate alone. Businesses outside of real estate can be syndicated, for instance you can invest in coffee production or restaurants as a  business. Consider looking into conservation easements if you're qualified.

3) Life insurance is another vehicle people often overlook. Infinite banking has been around for ages. While it's not for everyone, it is certainly worth taking a look at for some folks. 

Best of luck!

@Travis Watts another option is to find an operator that has been struggling to syndicate deals do to the high prices in the market and buy something together. You can structure the agreement so that you are still active but in such a minimal role that your time would not be overtaken by the asset. I'm not sure how much capital you would plan on placing but if it's a smaller amount you could run into scale issue which is probably one of the reasons why you like large MF projects in the first place. 

@Arta Montero NNN is triple net. Meaning the tenant is responsible (directly or through reimbursement) for taxes, insurance and operating expenses. I work for a REIT where that is all we buy because they require very little management. Leases can also be double net or net, meaning the landlord is covering one or two of the three items.