Strategy/portfolio: Active vs passive (local and non local)

13 Replies

Investor gurus, I would like to learn from your experience. I am starting out my real estate investment for about half a year. I have been with 2 active deals (flip and sell). 1. Per your personal experience, at what point do you start passive investment (e.g rental property)? I do see active give me fast money, but is requires lots of work. Do you keep both active and passive investment eventually? 2. I live in Bay Area so rental property cap rate is pathetic, it is about 5-6%. - Anyone in Bay Area actually invest in rental property? How do you make the numbers/the deals work? Any tips? - Anyone experience in investing out of your market? I am looking for advice to invest rental property outside of my market, such as pitfalls/great experience working with turnkey companies, local agents, local property management etc ... Thank you very much, Kathy L.

If you find a cap rate of 5-6% in the bay area there are a lot of people who would buy that.  It is all about what you can handle, there are many people who only ever passively invest  if you can handle the work and are sure your success is due to skill and not luck you can take on as much as you can handle.

I only invest in rentals out of market. I can live wherever I want and my rentals still act the same. Never deal with tenants and often times repairs are already coordinated by time I am told or get back to my property manager.

It’s seemless for me. You pay for that but I’d rather have that then the increased stress of working and dealing with tenants.

Keep in mind rentals are not truly passive. If you invest out of state you must manage and stay in regular contact with your PM. You have a responsibility to manage the PM otherwise over a period of time your investment will slip. You will also need to regularly visit the property yourself to confirm it is being properly maintained.

Never allow trust to creep into your business investment plan.

@Kathy L. I actually started "passive" investment pretty quickly. I take the profits from flips to either lend privately or place into multi-family properties. I am also in the bay area (San Jose) so if you ever want to meet up down here let me know.

For investing in out of state real estate I would look at some Midwest markets and begin researching how the economics of the area are. Things I look at are the largest employers of the area and how they are doing, big projects the city is investing in such as public transportation, airport construction at the closest large airport, population growth rate are some examples.

@Aaron K. : Thanks so much! I think because investors betting on the appreciation of property in Bay Area, thus they are okay with 5-6% cap-rate. I have a rental property overseas (in one of the finest city in the world), it is very similar situation like Bay Area - high price, low cap rate. I just sold it off but it the appreciation is not there after 7 years holding it. It is hard to see long-term trend ... 

@Caleb Heimsoth and @Thomas S. : Can I have follow-up questions? How do you do due-diligence on the out-of-market investment? Do you fly there before buying the properties? Do you use turnkey companies or you just go with separate agents and PMs? I am entirely new so appreciate your advice! 

@Kathy L. I'm actually saying that 5-6% seems high for the bay area, and if you really are seeing those cap rates there are a lot of investors who would be very interested in those properties.

Using turnkey rentals for passive income could be a great way to supplement income while you're working on your flips. Also just a great way to diversify your investments. As @Sean Carroll said, the midwest can offer some great returns. If you're looking to buy with cash, single families ranging from $68k-$99k can give you a 8%-12% return. If you get into duplexes and fourplexes, you can get 15% return. If you're working with financing, your cash on cash can go up to 20%. I'm just speaking specifically about the greater Dayton, Ohio area and the properties we've been working with lately. Not only are the returns better than most CA markets, these are high rent demand areas with growing infrastructure. Truly a great place to invest.

Some clients we work with visit before their purchase. Some visit after. If you're working with a reputable turnkey company, you may not need to visit. But as @Thomas S. said, I would always advise visiting your properties at least annually. Property managers will provide monthly reports and annual or bi-annual inspections. But it's always a good idea to see your investment and make sure it's up to speed with your threshold of acceptable and good. 

All in all though, it really can be passive income with little to no involvement. As @Caleb Heimsoth mentioned, our property management team customizes plans with clients. Some don't want to be contacted at all so they take care of minor repairs before the owner even knows about them. Some prefer more involvement. It's up to you. You can make it as "passive" as you want. 

@Kathy L.

i live down in Seal Beach, Southern Ca and have invested in Memphis rentals using realtor and prop mgt combo

i take a video tour of the property, do an inspection and calculate maintenance costs to bring it up to rental stage

In some we bought leased properties and inherited tenants. 

Its doable.. i go twice a year to meet up with team and review any off market deals

Originally posted by @Kathy L.:
Investor gurus,

I would like to learn from your experience. I am starting out my real estate investment for about half a year. I have been with 2 active deals (flip and sell).

1. Per your personal experience, at what point do you start passive investment (e.g rental property)? I do see active give me fast money, but is requires lots of work. Do you keep both active and passive investment eventually?

2. I live in Bay Area so rental property cap rate is pathetic, it is about 5-6%. - Anyone in Bay Area actually invest in rental property? How do you make the numbers/the deals work? Any tips? - Anyone experience in investing out of your market? I am looking for advice to invest rental property outside of my market, such as pitfalls/great experience working with turnkey companies, local agents, local property management etc ...

Thank you very much,

Kathy L.

 All about your goals. Lots of people see flipping and rental property ownership as very similar things. They aren't. One is a very active business the other is more of a passive investment. What is your ultimate goal? Are you hoping to quit your day job to run a company or do you want a safe place to park your capital?

To the second part of your post about those low California cap rates. Tons of folks here on Bigger Pockets are investing out of state via turnkey providers, property managers and real estate brokers. As I am in that business it would be biased for me to give an opinion on whether or not you should go out of state so I will only say that if you are considering it you should setup a keyword alert for turnkey her on bigger pockets as it's a very widely discussed topic on the site.

@Aaron K. : I see. Well all I have is agents send me some deals with cap rate of 5-6%, and some properties on Loopnet is listed at 5-6%. I might have not done enough research. 

@Eric Jones

@James Wise

Thanks for replying. I do see myself investing in passive properties as it is the true way for freedom. Let me research a little more and I will reach out to you personally shortly. 

I haven't read other people's responses so I may be repeating things, but as far as when to start with passive stuff--that's totally per the individual's preference. My preference was to start with passive from the get-go and I've never flipped because I've never wanted to be active. Some people only ever do active. If you are doing both, you really have a unique opportunity to diversify and do both....which is highly advantageous. I would say flip as long as you like to flip, and in the meantime, casually start putting some of the returns you are making on flipping into passive investments. So during the time you flip, you are building the passive stream up so that when you decide you're tired of flipping, you may have built enough passive streams to help you financially through that transition.

Another opportunity you have, if it's something of any interest (may not be for a lot), is that you can start making your flipping more passive at some point. If you are good at it, then you can start creating systems and procedures for how to do it so that you can start hiring employees to implement the bulk of the work for you. So then eventually you own a flipping company, versus you personally doing individual flips. If you are simply overseeing all the work being done, that is a lot less active than having to do the work yourself. So that's always another option in terms of becoming more passive as well.

As far as SF, it's very difficult to get rental property deals to work there. I live in LA and it's the same problem here. I know not everyone does, but I've just bought out-of-state because of it. The numbers work better over there.

You can also get into a very passive investment, such as a syndication.  Of course, you do give up control.  There are many options as a passive investor.  The main issue for most new investors is finding the funds to invest, and finding someone they trust to invest with.

Get yourself educated first.

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