Best Passive Income Investments
Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votesBest Passive Income Investments
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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8yIndex funds...took a week or two to learn a proper allocation and takes a little time each year to reallocate and tax loss harvest, if applicable.
Done correctly, there are no passive investments in real estate...there are just some that are less active than others...or they are very active in the building years and then can be systematized.
I only spend a couple of hours per month on my active investments now...doing bookkeeping but I spent substantial time in acquiring and rehabbing them and getting the right management solution in place. I don't spend any time on my passive syndication investments...but I spend a lot of time analyzing hundreds of deals to select them.
102 Replies
- United States · Member since 2015 · 401 posts · 394 votes8y
Originally posted by @Steve K.:
Originally posted by @Michael Bishop:
Best way to lose your money is to bet everything on a handful of companiesyeah, don't be stupid and only invest in one company
;)
By that I meant betting everything on the next Amazon and Google as opposed to investing in ALL companies in the S&P or Dow etc (via an index fund). One company, three companies, or five companies.. all a risky approach compared to 500. Although some folks hit the jack pot with that fruit company in Cupertino ;)
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Charlene McNamara:
@Jay Hinrichs Really interesting read on your timber investments! I'm curious to know why the gains were all tax free? Always looking for ways to avoid taxes!
Mine were not at least in the quick flips the opposite ordinary income.. if you hold the tract more than a year cap gain.. if you buy the tract in your Roth ( which was not invented yet) but you younger investors its there for you.
all gains on investments in a roth are tax free.. but consult your accountant for accuracy.
bottom line with Timber it grows lumber Is fairly consittent and has been for the last 30 years in value all though up right now.. and you make money because tree's grow.. you get more of it over time.. and in the right growing areas you get a lot more of it quicker.. you can't say buy the same tract of timber in Eastern slope areas they grow much slower so returns are not as big over time.. this is why I prefaced it with PAc north west timber.. specifically the coast range from Eureka to Vancouver BC
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Bill F.:
@Jay Hinrichs where would you point someone who wanted to learn more about how to evaluate and buy timber tracks but had next to no knowledge on the subject?
timber I think is viable in your area.. consult with a forester.. in the area..
- 8yTyler GibsonBusiness MemberReal Estate Agent · Orlando, FL · Member since 2017 · 1k+ posts · 2k+ votes
@Mike Dymski or @Bill F. I have been hearing about the power of index fund investing but admit I know little about it. Could either of you recommend some resource that would help me learn more and get a solid foundation on the subject? Any books you would recommend would be great.
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
Thanks to all who have contributed to this thread. Could anyone speak to success they have had with private money lending. What types of returns has that made for you and what was the situation and how did you protect your investment.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Tyler Gibson:
@Mike Dymski or @Bill F. I have been hearing about the power of index fund investing but admit I know little about it. Could either of you recommend some resource that would help me learn more and get a solid foundation on the subject? Any books you would recommend would be great.
I have never read a book on the subject but I hear good things about The Simple Path Wealth by JL Collins. The Little Book of Common Sense Investing by John Bogle is the #1 Bestseller on Amazon on the topic.
- Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes8y
I have both an equity and debt position in private money lending. Returns have been from 10% to 30%. I protect myself by only working with local developers. Furthermore I'm on title in first position only. I don't do gap lending I won't take a second position. Hope that helps.
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Account Closed I’ve heard of private lenders who won’t take a second position. Is that based on principle or on numbers. Is there any situation to where the numbers would make sense for a private money investor to be in second position?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
I understand lending private money on long-term notes but not on short-term notes, unless you run a hard money lending business (or know the investor personally). The absolute dollars collected on a short-term note are not worth it for the time involved in vetting the investor and the deal (done properly) and, in many cases, the risk involved in a flip or a development deal. For example, invest $100 and get $110 back over six months or invest $100 and get $200 back over five years. You have to do 10 short-term deals to equal one long-term deal...lots of extra work and risk. Many short-term private lenders think they are getting a good rate of return at 8-12% annualized...beating the market, secured by a hard assets, and they don't realize that they are getting the short end of the stick. Hard money lenders exist for a reason and they have processes and market knowledge to mitigate risk and make short-term lending efficient and profitable.
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Mike Dymski what are good investments for private money investors then? If people can just use hard money short term, what use would an investor have for private money be if not for gap funding?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Shiloh Lundahl:
@Mike Dymski what are good investments for private money investors then? If people can just use hard money short term, what use would an investor have for private money be if not for gap funding?
Longer term notes or equity positions.
Gap funding/lending is best for professionals, friends and family (insiders), and people who don't know how to find better investments.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@Shiloh Lundahl my favorite passive investment I hold is ATT (T)stock. Solid brand that is the worlds largest telecommunications company. They own media, copper, fiber, cellular and satellite spectrum. We live in the information age and ATT is controlling a significant portion of that data flow. It is hard for competitors to disrupt because it is a very capital intensive business.
Here is why I like the stock. It pays a 5-6% dividend and increased in value over time. Other stocks have done better in terms of value increase, but I prefer the dividend. That is cash in pocket. Stock value increase isn't real until you sell. The cash can be reinvested in more stock or rental properties (or live off if I needed to).
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
Another great insight that I have gained from this thread is many of the successful investors also invest in other things other than real estate. So even though some people on this site can be very negative about stocks or mutual funds, it seems that many people that are successful here also invest another asset classes. Thanks to everybody who has shared thus far.
- 8yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
In real estate, there are no truly passive investments. There has to be someone that takes the active role. Of course, they'll be compensated accordingly. If you don't have the time to do the initial research, stick with a simple index fund like the S&P 500.
ALL investments require upfront time to evaluate the deal and the operators. If you do more deals with the same operators, it gets a lot faster.
The returns mentioned below are what I'm seeing for the PASSIVE investor. If you are ACTIVE, your returns would be higher.
Looking at your initial list:
- Syndications: Lots of upfront time. Very passive afterwards. potential cash calls. The investment quality and operators are critical. Real Returns are all over the board, from a total loss to 20%+.
- Turn key properties: Lots of upfront time. Very passive afterwards. potential cash calls. Initial property condition and Property manager is critical. Anecdotally, it seems like real returns are in the upper single digits not including appreciation and tax benefits.
So for those two above, once you get past the initial research, they're very passive when you have a good team. However, they both have the potential to need cash injections in the future. I spend 10 minutes per month per property unless I need to deal with a specific issue that came up. Call it 15 minutes per property per month average then.
For the remaining three (except notes on the secondary market), to be passive, you need to have a mortgage broker who is finding the borrowers, then vetting them and the deal. Once you've found and vetted a broker to work with, then each new deal afterwards takes very little time (5-10 minutes). As long as you aren't the servicer, keeping track of them should be 5 minutes or less per month.
- Private money lending: Is either Hard Money lending or New Performing notes. See below
- Performing Notes (New): Some upfront time finding a vetting a broker. Passive afterwards, very passive if you pay a servicer. Real returns on good high quality long term notes are 6-8%. (I service my own; for me the extra drama isn't worth the potential higher return for marginal borrowers.) Use a broker to create new notes that meet your specific need and tolerance level.
- Performing Notes (Secondary): Some upfront time. Passive afterwards, very passive if you pay a servicer. Real returns on long term notes are 6-10% unless you get into discounted notes or notes with a higher risk of default; then the returns have the potential to be a lot higher. The borrower data is stale, so their financial situation could be very different than when the note was created. Almost all the notes I see on the secondary market are higher risk. You need to do your own diligence on each note.
- Hard Money Lending: Some upfront time finding a vetting a broker. Passive afterwards. New deals take about 5 minutes to review and approve or decline. Real returns on long term notes are 9-11% unless you get into notes with a higher risk of default, then the returns have the potential to be a lot higher. Use a broker to create notes that meet your tolerance level.
I started with physical real estate, and still have a rental portfolio. I'm enjoying the notes a lot more, I get a better return on the amount of time it takes to manage them. 90%+ of my notes are to other investors. I do lose some of the benefits from the physical real estate, so doing a combination of the two works well for me.
@Tyler Gibson If podcasts are more your speed I would suggest Master in Business where he interviews Jack Bogle and or BIll McNabb the founder and former CEO respectively of Vanguard. Both very informative on the pros and cons of indexing.
@Jay Hinrichs thank a lot for the advice on timber.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Mike Dymski:
I understand lending private money on long-term notes but not on short-term notes, unless you run a hard money lending business (or know the investor personally). The absolute dollars collected on a short-term note are not worth it for the time involved in vetting the investor and the deal (done properly) and, in many cases, the risk involved in a flip or a development deal. For example, invest $100 and get $110 back over six months or invest $100 and get $200 back over five years. You have to do 10 short-term deals to equal one long-term deal...lots of extra work and risk. Many short-term private lenders think they are getting a good rate of return at 8-12% annualized...beating the market, secured by a hard assets, and they don't realize that they are getting the short end of the stick. Hard money lenders exist for a reason and they have processes and market knowledge to mitigate risk and make short-term lending efficient and profitable.
its for these exact reasons I created a 5 year note product and if I do short term the rates are substantially higher. and you have to have deal flow and I am blessed with that.. so your points are exactly on target.. for the average investor
Shiloh second loans to owners of properties that take all of the chips off the table are by far the most risky of all.
I will do some gap financing but ONLY with long long time clients never with someone who is newer in the business or I don't and have not known for years and have many many transactions under our belt. one classic loan to own in reverse is the owner of a property taking out their own second loan then selling it to an investor then ripping the rent money not paying on the mortgages and walking away.. this is the up hill battle your fighting when you think you have this model that should be attractive to note investor when in fact its been done and abused horribly so any note investor who knows the game is not going to do that.. you can get NOOBs who know no better or people that know like and trust you .. but at the end of the day its not a viable not product. I mean why take the inherent risk of a second loan when you can get perfectly good firsts at basically the same rate or within a point or two..
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Darrin Carey thank you so much for your detailed response. That is exactly what I am looking for on this post. So for you, which of the passive investment has worked out best for you? Has one done better or have each of them had their own pros and cons?
- 8yTyler GibsonBusiness MemberReal Estate Agent · Orlando, FL · Member since 2017 · 1k+ posts · 2k+ votes
@Bill F. Thanks for the advise I will check it out.
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Jay Hinrichs That makes sense why you have written negatively about me creating second position notes on my properties and then selling them to investors for 11 to 12% APR. If other people have done similar things, but rather than paying on the first and second loans they instead pocketed the money and then took off, that makes sense why you would want to warn other people against that.
At first I was confused about why you were so adamant against being in the second position especially considering other investment types such as syndication or crowd funding where other people are in second position. But now I realize because of the actions of others and swindling people out of their money, You don’t want other people to experience the same thing. That’s admirable. And I think you’re right, as people get to know me, and vet me out and feel comfortable with me, It is much easier for them to do private lending to me.
I also agree that people with a lot of knowledge and experience with buying notes may not be as interested in the notes that I create because they have spent the months or years and the money in developing their education about note buying and servicing and they can find first position notes that may better fit they’re investing strategies. But for individuals who have not put in all of the time and investment it takes in learning about notes, but that just want a completely passive return, the notes that I create may be a good fit for them. Especially when they get to know me and our model and feel comfortable with investing with me.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Shiloh Lundahl:
@Jay Hinrichs That makes sense why you have written negatively about me creating second position notes on my properties and then selling them to investors for 11 to 12% APR. If other people have done similar things, but rather than paying on the first and second loans they instead pocketed the money and then took off, that makes sense why you would want to warn other people against that.
At first I was confused about why you were so adamant against being in the second position especially considering other investment types such as syndication or crowd funding where other people are in second position. But now I realize because of the actions of others and swindling people out of their money, You don’t want other people to experience the same thing. That’s admirable. And I think you’re right, as people get to know me, and vet me out and feel comfortable with me, It is much easier for them to do private lending to me.
I also agree that people with a lot of knowledge and experience with buying notes may not be as interested in the notes that I create because they have spent the months or years and the money in developing their education about note buying and servicing and they can find first position notes that may better fit they’re investing strategies. But for individuals who have not put in all of the time and investment it takes in learning about notes, but that just want a completely passive return, the notes that I create may be a good fit for them. Especially when they get to know me and our model and feel comfortable with investing with me.
Your note model I get why you want to do it.. but its just on the extreme far end of risk for the investor..
no one in their right mind would buy those unless they are your relatives or friends or someone I guess who takes a liking to you personally.
the way I look at it and underwrite it personalities and such aside I am sure your a great guy with great intentions.
But here is what I have seen you post.
1. you buy a property and put a normal first on it.. you or your investor puts the cash into the deal .. that's great.
2. you lease option it to a buyer or rent to own buyer.. now again your new to this so you have no way of knowing how many if any of these will actually buy.. my experience of doing this the last 30 years and have done probably more than 50 lease or rent to buys is VERY very few will buy.. I have had some that do.. but to base a business model on that as being an exit is highly risky.
3. your then creating your own second with you and the trustor ( borrower) and you as the Bene ( Beneficiary) and you proceed to rip all your own cash out of the deal so in essence you have created 100% financing put in a lease option tenant and now have no real skin in the game.
4. your seconds are probably of some shorter term than the first most likely.
so as an underwriter of a loan
we have a 100% ltv loan first and second your now in second and if there is a default you need to clear the first.
you have a lease option tenant that if they dont' pay you may need to do a judicial foreclosure to clear that document.
and you as the sponsor took the money you got on the second and bought another property or took a vacation or what have you.. it becomes a house of cards and like I said highly risky.
these lenders your proposing just need to be what they are capital partners and you should include them in upside to couch this as some sort of great note investment.. I get it that your new and probably never thought this through or even thought this could happen.. but this is reality.
this is why everytime you try to bring this back up subliminially like we all do selling our wares on BP.. I keep posting the same thing.. remember lots of newbies on BP that may not realize what your doing and just look at the rate and don't understand fully the risk or what your doing..
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Jay Hinrichs I appreciate the kind words that you wrote out my character.
You are pretty accurate with the model that we use. You are also correct with regards to me being fairly new at this. My first real estate investment was in 2010 but I didn’t start investing more until 2014. However, my partner has been investing since the mid 2000’s and he has gone through the ups and downs of the market. We also follow a version of the Jon Burley model with our lease options which he has been teaching in Phoenix for 20+ years.
We have thought through several scenarios that could create issues. This is why we try to keep about $100,000 in cash available as a safety net to take care of any unforeseen issues. Also, we have four exit strategies. 1) the tenant exercises the option to buy the property. 2) We refinance the property after it has been paid down by quite a bit over the five year period and we pay out the investor. 3) We sell the property to somebody else and pay out the investor through the closing. 4) we just pay out the investor from our working capital.
The tenants that come in to the properties for the lease option, if they were to stop paying rent, then we would not need to foreclose. We would just go through the eviction process if necessary. The docs that we use have been created by lawyers to be compliant with the Dodd Frank act and are very specific in this regard. Also, we put end buyers in our properties that would more likely qualify to get financing in the next 2 to 3 years. We also hook them up with mortgage brokers to help them fix whatever needs to be fixed in order for them to qualify.
One of the things that you keep bringing up is us not having any of our own money, or skin in the game. Is that really a bad thing though? If I were to Have purchased a home for $50,000 and put in $10,000 of my own money, but now the home is worth $100,000 and I still owe $40,000 and the bank is willing to refinance a $60,000 loan for me on it or even do a line of credit secured by some of the equity in the property, I wouldn’t have any of my own money into the deal but there would still be $40,000 worth of equity into the property. Would that be bad? Our goal is to have each property be 75 to 80% financed and have them all cash flow during our building phase.
Another thing that we offer people in addition to the Interest that they make by investing with us is that we show them how to flip properties or how to do buy and holds or how to do the lease-option model. So in addition to getting interest on their money, they also get a learning experience.
I don’t do equity sharing because I had a bad experience with that. I partnered with another investor who was going to manage the investment property and he mismanaged the property and the sale of it and I ended up losing a lot of money because I was an equity partner. So in order for people not to have a bad experience with us, I just do the straight interest-rate so that they know what they can expect. So even if the deal doesn’t make money for some reason the investor still gets all their money back including their interest.
Also, during the process we teach them everything we know and introduce them to our contacts so that they can repeate the process themselves. So it’s like getting an education program that they pay for up front (the rehab costs) then they get their money back along with the interest and they can go do it on their own. We provide the same education to people that get the second position notes as well. We have done this with 12 or 13 people in the last year or so and they’ve all had really good experiences with it and I have been really pleased with the experience. So it’s more than just a note that they get when they invest with us, it’s the education piece if they get as well if they want it.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Shiloh Lundahl well you got what your after the mods let you do a total free advertisement on your model.. congrats.. glad to help :)
still risky still not something an experienced note investor would remotely consider..
best done with your inner close circle of people that as I said know like and trust you.
- Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes8y
@Jay Hinrichs I would like you to know that my purpose in starting this thread was to learn from others, not to advertise. I wasn’t even planning on bringing up the model that I use to invest in real estate during this thread. But you keep saying that what I am doing is so risky that I wanted to explain it in more detail so that people could see the model and not think that I am trying to take advantage of people.
I am not trying to attract experienced investors with this model. They already know how to invest and can find their own deals that work for them. I attract newer investors that would like to learn how to invest with this model. And so far it has worked great for everyone.
- Specialist · Carolina Beach, NC · Member since 2016 · 390 posts · 496 votes8y
I don't think you can get more passive, in real estate, than being a limited partner on a syndication. Aside from doing your own due diligence on the deal and the sponsor(!!!), there's not much more to it than cashing the checks and filing the K-1's.
I'll echo what many other's have said as well - outside of real estate, Vanguard Index funds. Low fees, totally passive (unless you obsessively rebalance your portfolio) and a great deal of diversification. Most of my portfolio is in real estate now but I still have a good chunk of my retirement account in a Vanguard Index 500 fund.
That said, most of us are Bigger Pockets members because we believe in the long term wealth building power of real estate. Cash flow, appreciation, inflation resistance and tax efficient.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes8y
My most passive investments have been my higher end rental properties. We've got hundreds of properties with rents in the $500-$900 range. Obviously the lower the rent the more management intense they are. However I have a handful with higher rents. Two that come to mind is a multi unit medical building with some rents as high as $4k/mo as well as some higher end single homes renting for $1,400/mo+. Note that these rents may not seem very high to some folks but that's very high for the Cleveland market.
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