How to make big money by passive investing ?
Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes
Or just similar return as saving in banks?
@David Smith I think what everyone has failed to acknowledge is what is big money to you?
You reference after the post "or just similar return as saving in banks" and that confuses me because I don't think anyone would consider that big money.
Also, you say big money not big return % which is probably just a typo, but you can make $1 mil a year if you made 1% by investing $100 mil as an example.
The answer I think you're looking for is what are returns as compared to a savings account and thats very easy to answer, they are vastly different, but passive investing will also give you vastly different returns depending on the asset you invest in.
Most people that are quoting 15-20% returns are talking about annualized returns or IRRs which is not payouts per year like dividends or cash flow, deals like that tend to pay dividends quarterly of around 6-8% and the rest of the 15-20% per year is accrued until sale.
However, most of those assets would also C/B assets (B is even debatable) and are often using moderate/high leverage in debt from a bank which makes it significantly more risky than putting your money in a savings account. Now most people feel that the risk is worth the return considering a bank is paying <1% probably or around there, but don't be fooled it's significantly more risk.
A savings account is little to no risk in losing your investment and basically certain that you won't lose more than you put into that account.
When you invest passively, you can very realistically lose all your money, and there is a possibility you could have to invest more if the property needs a capital call.
Therefore, you need to understand what the risk is on every deal, and weigh it against the upside and decide if thats worth it for you. However for high level return expectations I think you can expect the following
Multifamily only, moderate leverage (75% LTV), in fairly populous cities (top 50 or so in the US).
C class: 14-16% IRR, 6-9% Cash flow
B class: 12-14% IRR, 5-7% cash flow
A class: 10-12% IRR, 4-6% cash flow
Passively investing is rarely going to make "big money," but you can make very healthy returns of around 15-20%. If you can average the 20%, then you can turn $100k into $1.6mm in 20 years.
@David Smith, as @Todd Dexheimer mentioned you can get some very healthy risk adjusted returns as a passive investor. Definitely more than a savings account (although not much is less than a savings account), but you are taking risk. Buy at the peak and then go cashflow negative into a recession and you could get wiped out. A savings account is typically FDIC insured. Also, illiquid versus being able to walk into a bank and get your money out today.
I purchased a mutifamily property in 2005 with one (silent) partner. We both started out with $200k ea into investment of a $1.3M property. In 2017 (12 years later) we sold for $2.1M. I asked if she wanted to re-invest or take her $400k profits, she decided to stay.
We now own 2 properties valued at $2.6M (minus $700k in mortgages). So essentially our $200k is now valued at $950k ea.
In addtion we've collection distributions all along of at least $150k ea. Not too bad, $200k in $1.1M out ($900k increase in 15 years).
I'd say it's worth it. A lot better than banks, and a lot safer than stocks. That's why I'm in RE Investing.
Hey @David Smith, anybody looking for "big money" returns is going to need to take "big risks" too. Passive real estate investing is a great way to build wealth, but it does so in a balanced and methodical way. And one of its main benefits is that it is lower on the risk scale than something like public market equities. So with real estate you're not looking for a single home run as your path to wealth. You're looking to consistently invest in quality deals that pay you while you wait AND appreciate well on a risk-adjusted basis.
To get decent advice you're also going to need to be very specific about what your goals are. Big returns could mean a number of things. Total appreciation? Distributions? IRR? Equity multiple? Also, what's your time horizon? I can guarantee I can double your money... if you can wait 30 years :)
So, do you have specific goals you're trying to hit? That would be a better starting point for this type of discussion.
@David Smith I think what everyone has failed to acknowledge is what is big money to you?
You reference after the post "or just similar return as saving in banks" and that confuses me because I don't think anyone would consider that big money.
Also, you say big money not big return % which is probably just a typo, but you can make $1 mil a year if you made 1% by investing $100 mil as an example.
The answer I think you're looking for is what are returns as compared to a savings account and thats very easy to answer, they are vastly different, but passive investing will also give you vastly different returns depending on the asset you invest in.
Most people that are quoting 15-20% returns are talking about annualized returns or IRRs which is not payouts per year like dividends or cash flow, deals like that tend to pay dividends quarterly of around 6-8% and the rest of the 15-20% per year is accrued until sale.
However, most of those assets would also C/B assets (B is even debatable) and are often using moderate/high leverage in debt from a bank which makes it significantly more risky than putting your money in a savings account. Now most people feel that the risk is worth the return considering a bank is paying <1% probably or around there, but don't be fooled it's significantly more risk.
A savings account is little to no risk in losing your investment and basically certain that you won't lose more than you put into that account.
When you invest passively, you can very realistically lose all your money, and there is a possibility you could have to invest more if the property needs a capital call.
Therefore, you need to understand what the risk is on every deal, and weigh it against the upside and decide if thats worth it for you. However for high level return expectations I think you can expect the following
Multifamily only, moderate leverage (75% LTV), in fairly populous cities (top 50 or so in the US).
C class: 14-16% IRR, 6-9% Cash flow
B class: 12-14% IRR, 5-7% cash flow
A class: 10-12% IRR, 4-6% cash flow