$350k/year in passive income- what does your portfolio look like?

29 Replies

As a goal setting exercise and to be sure I'm focusing my education in the right areas I'd love your input on the following:

I'm seeking 350k+/year in net passive income.  How would you design the portfolio? What exactly would it look like and how much seed capital would it require?  I'd like to travel with my family for months with only occasional check-ins with the "team".  I'm looking to replace my current W2 income and will be living off this 350k.  I'll continue to work part time and more for fun vs relying on it completely.  

A little about me: my strengths are in sales, networking and interpersonal communication.  I'm detail oriented and am good at planning and analysis.  I am TERRIBLE at pounding a nail.  Lets assume for this exercise unlimited seed capital and currently a high W2 income (if your strategy requires/benefits from leverage).  Also, I have access to a strong team including :property manager, wholesaler, realtor (commercial and residential), accountant and attorney.  The exception here at the moment is a contractor.  Perhaps my team members can help bridge this gap but at the moment I'm without a really strong contractor.  

Note: I have a preference towards simplicity and this being as passive as possible.  Also, liquidity isn't a concern.  

Thanks in advance for your thoughts and let me know if I'm missing any pertinent info!

thats pretty easy just pick and area if its landlording you want to do  figure out what cap rates are currently at for quality assets then work backwards..   if Charleston lets say is a 6 cap work backwards.

if your looking for true passive and want to be the bank..  3.5 million in cash will get you what you need.

Thanks for your input Jay.  I do like the idea of owning hard assets for the tax advantages.  I'm assuming my returns from "being the bank" would be taxed as ordinary income similar to that of a REIT?

correct.... I have a multi on Amherst in Charleston for sale  :)  brand new home in back full gut rehab in front.. 

one thing when you go down the owning the asset road is you can't exit .. without recapture or giving it to your kids.   or a charitable remainder trust.. 

with notes you pay tax but you have no recapture so you don't have to worry about that aspect.

and a combination of asset and debt may work for you...  

Originally posted by @Jay Hinrichs :

correct.... I have a multi on Amherst in Charleston for sale  :)  brand new home in back full gut rehab in front.. 

one thing when you go down the owning the asset road is you can't exit .. without recapture or giving it to your kids.   or a charitable remainder trust.. 

with notes you pay tax but you have no recapture so you don't have to worry about that aspect.

and a combination of asset and debt may work for you...  

 When I discovered the 1031.... I had many sleepless nights reading about charitable trust. I don't remember much of it... but it was interesting at the time, thanks for reminding me lol.

@Matt K.   I have personally not done one.. but I have brokered half a dozen deals were the seller was doing one.. 

its pretty cool tax tool and one I have never seen talked about on bp... 

@alan firth are you looking to stay in the Charleston area exclusively?

$7M in 1% producing RE should do it.

For passivity, that means PM. Better make it $9M.

@Alan Firth As others have said, take your prevailing cap-rate in a solid B area and work backwards. I’ll just guess you need $7M. Given you want to have limited check-ins, vacation for months at a time, etc. you want big buildings that pack in quality tenants. And you’ll be able to attract “big boy” management companies, probably onsite management, etc. The last thing I’d do is try and wholesale/rehab my way to $350K in passive income from rehabbing $50K homes. What a nightmare. Just about the least passive way to have passive income. Maybe you can 1031 your way there but you deal with seller costs each time.

For what it’s worth, I might visit my apartments every 6 months but I do have fairly frequent calls with my PM. And I don’t buy the low-end stuff where I invest. I could get a much better pro-forma return but I’d probably have a heart attack. Still, it isn’t “mailbox money” as the kids say. “Passive” is always a relative term...

@Alan Firth If there's unlimited seed capital, I'd say forget actually trying to build the team and deal with the details of building and operating a portfolio - spend the time vetting sponsors and find 3-5 large projects to take equity positions in. As an accredited investor placing $1M+, you'll have lots of options. At the moment, you can reasonably expect 8-10% current returns and, say, 17% IRR over a 5-10 year period with measured risk.

As an equity holder, the current income comes on a K-1, so you'll get your share of the depreciation tax benefits like you would on property you own yourself.

Of course, there's lots of details to understand about the skillset of the sponsor, risks involved in the particular property or portfolio, as well as exit timing and strategy.  You give up utilizing 1031s and control over the details, but ... you don't have to worry about details.  :)  Doesn't get more passive than that.

$3.5M in seed capital and you're basically there. 

Originally posted by @Justin R. :

@Alan Firth If there's unlimited seed capital, I'd say forget actually trying to build the team and deal with the details of building and operating a portfolio - spend the time vetting sponsors and find 3-5 large projects to take equity positions in. As an accredited investor placing $1M+, you'll have lots of options. At the moment, you can reasonably expect 8-10% current returns and, say, 17% IRR over a 5-10 year period with measured risk.

As an equity holder, the current income comes on a K-1, so you'll get your share of the depreciation tax benefits like you would on property you own yourself.

Of course, there's lots of details to understand about the skillset of the sponsor, risks involved in the particular property or portfolio, as well as exit timing and strategy.  You give up utilizing 1031s and control over the details, but ... you don't have to worry about details.  :)  Doesn't get more passive than that.

$3.5M in seed capital and you're basically there. 

 This is excellent advice! 

I'll go one step further for the non-accredited investors following this discussion. An investment club is a vehicle that can allow sophisticated non-accredited investors to invest in private securities usually only available to accredited investors (those with income > $250K/yr or net worth > $1M). 

The purpose of that language in the Rules is to protect the savings of the masses, but who says that a non-"accredited investor" can't be financially savvy enough to know what they are getting into? Income and net worth are not causal factors in financial sophistication.

Anyway, a new investment club with no assets is much more likely to have access to one of the 35 spots available for non-accredited investors in a Rule 506(b) offering. Once the club assets exceed $5M, the club itself will have full accredited investor status.

awesome stuff here guys, thank you very much @Justin R. @Andrew Johnson @Thomas Rutkowski   I’m certainly open to markets outside of Charleston if it’s well managed.  It sounds like fewer, larger projects via syndication or on my own offer both benefits of simplicity as well as access to better returns.  As a follow-up if you had 3.5 MM and wanted to generate maximum income from it which mix of assets would your portfolio look like?  What markets do you like?  Long-term value and building wealth are certainly a consideration here though secondary to cash flow and income 

Also, just a thought would you suggest finding a non-traditional or real estate focused wealth manager?  Is 3.5 MM enough to seek out someone like this and have them take care of everything?  What are competitive fee structures for these folks and are these fees offset because of access to more lucrative deals at higher returns?

@Justin R. Well said.  Investing $3.5M though in a properly diversified syndication portfolio is far from passive and can take years to accomplish (done properly), especially in today's market.

Alan, the professional that you are mentioning is a Registered Investment Adviser (RIA).  The good ones will have access to real estate opportunities.  Some investors find better passive opportunities on their own but RIAs will have some as well.  The RIAs will get compensated from the sponsors on your real estate investments and from you on the assets under management on the stock/bond side (if you allocate any capital to the stock/bond market).

@Alan Firth I'd look for 8 to 12% "going in yield / cash on cash return." With some due diligence and homework that should return ~350k annual; perhaps more. You should be able to get enough deal flow coming your way from multiple sources. The next step is learning to evaluate deals. My advice, pick one or two asset classes and then underwrite 100 deals YOURSELF per asset class. DON'T hand your money over to any advisor without educating yourself first!

Originally posted by @Mike Dymski :

@Justin R. Well said.  Investing $3.5M though in a properly diversified syndication portfolio is far from passive and can take years to accomplish (done properly), especially in today's market.

Alan, the professional that you are mentioning is a Registered Investment Adviser (RIA).  The good ones will have access to real estate opportunities.  Some investors find better passive opportunities on their own but RIAs will have some as well.  The RIAs will get compensated from the sponsors on your real estate investments and from you on the assets under management on the stock/bond side (if you allocate any capital to the stock/bond market).

 A well-intentioned response, but the reality is, if you call up 100 RIAs, you'll be lucky to find one who is knowledgeable in private placement securities. Most RIAs and other financial advisors are limited to the products offered by the Broker Dealer with whom they are contracted. If you mention that you want to invest in real estate, a REIT will be their only option.

Originally posted by @Thomas Rutkowski :
Originally posted by @Mike Dymski:

@Justin R. Well said.  Investing $3.5M though in a properly diversified syndication portfolio is far from passive and can take years to accomplish (done properly), especially in today's market.

Alan, the professional that you are mentioning is a Registered Investment Adviser (RIA).  The good ones will have access to real estate opportunities.  Some investors find better passive opportunities on their own but RIAs will have some as well.  The RIAs will get compensated from the sponsors on your real estate investments and from you on the assets under management on the stock/bond side (if you allocate any capital to the stock/bond market).

 A well-intentioned response, but the reality is, if you call up 100 RIAs, you'll be lucky to find one who is knowledgeable in private placement securities. Most RIAs and other financial advisors are limited to the products offered by the Broker Dealer with whom they are contracted. If you mention that you want to invest in real estate, a REIT will be their only option.

I invest in syndications through an RIA (and on my own).  Happy to make any introductions...just another source of deal flow.  I'm not in any way associated with them.

@Thomas Rutkowski   finding a RIA that can sell away is a challenge..

the high net worth family office folks I know engage financial companies that have all hats.

they charge a flat fee.. they do the CPA work they do the investment work etc etc.. all for a flat fee usually 50 to 100k a year or so.

RIAs that can sell away you need to be somewhat careful as they many times in MY experience are looking to sell stuff with SUPER high commissions to themselves.. Just saying in my experience..

Also I would think a good money manager would take this on and diversify through a few different asset class's not just put it all in one asset IE real estate.

I used my 401K for doing 1st lien mortgages. TAX EXEMPT until withdrawn. I hold my rentals outside of it to have cash to live on. Not at 350K yet but getting there.

@Alan Firth If you're sitting on $3.5MM that's enough to get you into just about anything.  But, if you're trying to balance simplicity and returns, well...I don't know that you need giant "team" or even a wealth advisor.  In your situation I wouldn't over-leverage, I'd just look for two ~$5MM apartment buildings.  That's assuming you can find a bank to find your deals (they might have hurdles around net worth, etc.) but if you're sitting on $3.5MM in seed cash you probably can pass those.  You can either use two management companies or one management company.  In all likelihood you start with two and consolidate to one (the better PM performer) if your buildings are in the same area.  If you have these larger buildings you can probably also negotiate a couple of points off of a "standard" PM agreement because of volume.  You'll have enough depreciation and mortgage interest to offset net income for a while so that's groovy.  And once you consolidate to one PM then you literally just have one person that you're talking to about vacancy, repairs, cap-ex, etc.  And if you really want to make your life easier, just increase the dollar threshold from $300 to $1,000 for them to contact you.  Get you Appfolio (or whatever system your PM uses) and review it, visit a couple of times a year, and vacation in the Caribbean.  

Some of this just depends on how you look at real estate.  If it's intellectually engaging to you then you'll always want to be looking at deals, etc. just because, well, there's an element of fun/challenge/etc. as well as a return.  If you want to travel, just have mailbox money, etc. then that's a different story.  

@Alan Firth nobody has unlimited seed capital. Building out a plan depends on how much money you have set aside to invest, combined with yearly additional capital you can set aside. Even if you you are making $350K right now, the question is how much are you spending versus saving?

Others have provided good advice on how much you need. If you have a few million in the bank right now, you can make this happen quickly.

There are 4 legs that are needed to set this table:

a) Management company (Example: Many reviews = Many customers. They will always be bad, just read them all and see how fast they respond.)

b) Landlord friendly locations. (Example: How fast is their eviction process?)

c) Cash-Flow over the 1% rule. (Example: 100k property = Rent should be over $1,000 a month.)

d) Market neutral (Example: Military Bases, Has many prisons etc... where peoples salaries are constant and unchanged regardless of the market.)

Bonus: How far from the closest Starbucks/Wholefood/Fast-Food is the property? They all spend A LOT of money to figure out traffic trends. Stick to their analytics.

@Alan Firth   At our mastermind on Saturday, We discussed several strategies that would help you accomplish this goal.  We should talk soon.

Simple. 

Find 2-3 very highly regarded (research them EXTENSIVELY and meet them) private equity real estate firms such as www.origininvestments.com that have a fund, and invest into their diversified private fund. I also like www.cashflowconnections.com Hunter Thompson is smart and well diversified into asset classes I like a lot for the next 10 years, Self-Storage, Mobile Home Parks and Value-add apartments on the more affordable side, NOT CLASS A.

Gaw Capital is also a firm i have directed some of my private clients to review, if you want international diversity.

You need some geographic and asset class diversity, and this structure is hard to beat, you could go with 1 firm, but i feel putting the hypothetical $3.5mm into 2-3 top notch, recession surviving firms is best. make sure they have been through a recession.

With good operators, you should be pushing high teens IRRs fairly safely. this is VERY PASSIVE and IMHO a fairly safe way to go.

I tell anyone who will listen this is where i would park my money if i wanted passive cashflow and some upside potential. 

Also, make sure the operators are taking out long term debt on deals, another critical factor to allow them not to get pinched in these downturns. As that fact alone has cause more sinking ships than a bad deal or operations.. the financing is critical piece here.

Originally posted by @Adam Robinson :

Simple. 

Find 2-3 very highly regarded (research them EXTENSIVELY and meet them) private equity real estate firms such as www.origininvestments.com that have a fund, and invest into their diversified private fund. I also like www.cashflowconnections.com Hunter Thompson is smart and well diversified into asset classes I like a lot for the next 10 years, Self-Storage, Mobile Home Parks and Value-add apartments on the more affordable side, NOT CLASS A.

Gaw Capital is also a firm i have directed some of my private clients to review, if you want international diversity.

You need some geographic and asset class diversity, and this structure is hard to beat, you could go with 1 firm, but i feel putting the hypothetical $3.5mm into 2-3 top notch, recession surviving firms is best. make sure they have been through a recession.

With good operators, you should be pushing high teens IRRs fairly safely. this is VERY PASSIVE and IMHO a fairly safe way to go.

I tell anyone who will listen this is where i would park my money if i wanted passive cashflow and some upside potential. 

Also, make sure the operators are taking out long term debt on deals, another critical factor to allow them not to get pinched in these downturns. As that fact alone has cause more sinking ships than a bad deal or operations.. the financing is critical piece here.

Great reply Adam...very helpful feedback.  Investing it all with 2-3 sponsors does not provide sponsor diversity.  IMO, this is where passive investing becomes more active...finding 20-30+ diverse opportunities.  And in some cases, like one of your examples, you have to vet the sponsor and the crowdfunding platform.  Like any important endeavor, it can take a lot of time...years.  Interested in your thoughts.

Wow, thank you all so much for the thoughtful and thorough responses.  I’ve got a lot to work with here and will get to studying!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Get the Ultimate Beginner's Guide

Sign up today to receive the popular eBook for free!