Passively investing in passive income generation

17 Replies

Hello fellow BP'ers,

I have a friend who is starting his retirement but is anxious about no longer "getting a paycheck". The issue is psychological, not financial. He's been financially fortunate working in high tech, is frugal, and logically knows he'll be fine financially. However, as I understand, it's normal for one who has worked hard and saved, seeing that savings number go up all the time, to freak out at the idea of seeing it go down, forever. For my part, that's why I got into real estate investing, for the financial and psychological comfort of passive income generation without depleting your capital, but he doesn't have the inclination to be a landlord. He would qualify as an accredited investor.

I'm encouraging him to look at passive income generation outside of stocks and bonds. I mentioned to him two alternatives:
A) Hard money lending

B)  Investing in a real estate syndication

Questions to you helpful folks:

1) Do you have other avenues you'd suggest?

2) Regarding syndication, are there posts, sites, or books you could point me to that I could pass on to him? I only have passing knowledge and have wanted to learn more anyway.

Thanks in advance,
Kevin

PS. Honestly, it really is a friend of mine, it's not me asking like, "I have a friend who has this embarrassing rash..."

Kevin, some other alternatives for alternative passive investing income are litigation finance and life settlements. Also there are hard money lending syndication/funds, that will give your friend a much larger and diversified pool of notes, for the same investment as buying a single one (plus no headaches of having to handle foreclosure yourself if things go badly).

For syndication, one of the best books I've ever read was written by Paul Kaseburg (under the pseudonym of Sean Cook). Paul has sample size of the table and over $1.7 billion of real estate deals and his book covers everything moving needs to understand from asset selection to evaluating sponsors to capital structures. For proceed challenges conventional wisdom and exclude sacred cows by exposing hidden conflicts of interests and misalignments that many in the industry won't admit to. The book is called "Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding". https://www.amazon.com/Investing-Real-Estate-Private-Equity-ebook/dp/B01IW0G0S0

Updated about 1 month ago

Wow, my voice software really mangled what I was trying to say about that book. I was trying to say: "Paul has sat on both sides of the table on over $1.7 billion of real estate deals and his book covers everything a novice needs to understand, from asset selection to evaluating sponsors to capital structures. For pros, he challenges conventional wisdom and explodes sacred cows by exposing hidden conflicts of interests and misalignments that many in the industry won't admit to. The book is called "Investing in Real Estate Private Equity: An Insider’s Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding". https://www.amazon.com/Investing-Real-Estate-Private-Equity-ebook/dp/B01IW0G0S0 "

Syndication and HML are great options. From my observation, hard money lending seems to require more industry knowledge and deal volume than syndication passive investing - but I say that as a syndicator and passive syndication investor, without HML experience.

For syndications, I like "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures" By Frank Gallinelli, which can be found on Amazon. It'll be a breeze to read for a tech guy and it'll give your friend a solid introduction to the financial side of commercial real estate.

Jeremy Roll is a great guy to follow. He is a professional passive investor and has a ton of knowledge. Super nice guy.

Brian Burke from Praxis Capital is another fantastic font of knowledge on syndications. He's an active syndicator with significant experience, before and after the GFC in 2008. It'd probably be a good use of time to just read every post he writes, and see if your buddy can get a few minutes with him to chat on the phone.

I would also recommend that you and your buddy go to every single local real estate networking event you can get to. Pick a few to become regulars at and always go.

Another option for your friend is turnkey residential properties. 

To be honest, it can be very difficult to lead the retired horse to passive income water. If he's not open to it you could be banging your head against the wall.

Originally posted by @Taylor L. :

Syndication and HML are great options. From my observation, hard money lending seems to require more industry knowledge and deal volume than syndication passive investing - but I say that as a syndicator and passive syndication investor, without HML experience.

For syndications, I like "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures" By Frank Gallinelli, which can be found on Amazon. It'll be a breeze to read for a tech guy and it'll give your friend a solid introduction to the financial side of commercial real estate.

Jeremy Roll is a great guy to follow. He is a professional passive investor and has a ton of knowledge. Super nice guy.

Brian Burke from Praxis Capital is another fantastic font of knowledge on syndications. He's an active syndicator with significant experience, before and after the GFC in 2008. It'd probably be a good use of time to just read every post he writes, and see if your buddy can get a few minutes with him to chat on the phone.

I would also recommend that you and your buddy go to every single local real estate networking event you can get to. Pick a few to become regulars at and always go.

Another option for your friend is turnkey residential properties. 

To be honest, it can be very difficult to lead the retired horse to passive income water. If he's not open to it you could be banging your head against the wall.

I second @jeremy roll and @brian burke

I would also recommend @joe fairless and @david Thompson

all 4 of them have websites with tons of info on syndications on them

and for "your friend", I agree that loans and syndications are the most passive of real estate investments, but they due still require due diligence

Updated about 1 month ago

they "do" still require due diligence

@Kevin McGuire

A ton of great feedback from @Ian Ippolito (as always) and @Taylor L.

I suggest your friend actually checks out Ian's website. He has a ton of valuable insight for passive investors in addition to other names mentioned on this forum. 

In terms of the books, I have a number of books that represent each side - the deal sponsors and the passive investors. Feel free to reach out for my library link as I'm not allowed to post it here. 

Also, in addition to options suggested here, note investing and land investing might other options to review. 

I think your friend needs to read up on all of the various RE strategies and decide for themselves which one is the most suitable for them to learn and take action. It will also give them something to do during the retirement and they may decide to start their own investing club.

Here's a post I recently wrote on the passive investing as it relates to syndications topic: https://www.biggerpockets.com/member-blogs/10850/8...

My best!

My suggestion would be that if he does not already have a financial advisor he find one immediately. He needs to seek advice from a very good accredited financial advisor to point him in the right direction.  I highly doubt he will be advised to take on investing on his own behalf at this stage in his life.

He needs a trusted financial advisor not you or us to take that risk.

I don't think it is good advice to push him into hard money lending or syndication at this point of his life. Just too much risk for someone who is already freaked out. As the market continues to tighten, it will keep getting harder for syndications to perform at the level they have in the past. I am sure syndicators will argue that, but they can't argue that * that says past performance guarantee future results. I am just using logic here. If you have ever heard the saying that a "rising tide lifts all boats", it means when the market is going up everyone will see positive return. The problem is that within the next 1-5 years we are going to see the market flatten or pull back. There will be some losers when that happens. 

Has he thought about buying an annuity? 

1) I think investing in a syndication is the way to go for his situation, but I don't have experience with hard money lending and don't know the risks or how much upfront work there is to get started

2) I have nothing to add to the recommendations already given, accept that I would start attending local meetup groups that focus on multifamily to meet syndicators and to learn and network

Originally posted by @Joe Splitrock :

As the market continues to tighten, it will keep getting harder for syndications to perform at the level they have in the past. I am sure syndicators will argue that,  

Joe, I'm a syndicator and I won't argue that at all. I completely agree with you. Any real estate, syndicated or otherwise, is unlikely to perform in the future to the levels of the past. My last three full-cycle deals all performed above 20% IRR, even significantly higher, but I don't expect any that are acquired today to see those kind of results. Any sponsor that promises the performance of yesteryear is doing themselves and their investors a disservice.

Because we are heading into uncertainty, I have been preaching for a while now that the syndication sponsor's industry experience matters, and cycle experience also matters.  A growing percentage of syndication sponsors have been in the business for less than ten years, which means they have only seen what an up market looks like.  The danger is the failure to respect the power of adverse markets and the disadvantage newer sponsors possess in navigating them when they occur.

When and if markets move, some will survive and some will fail.  I know that if I'm boarding a plane about to take off in stormy weather, I want an experienced pilot at the controls.

@Kevin McGuire Many multifamily syndications are getting too expensive. I agree that at this stage experience should be a criteria of the sponsor that you weight heavily. I'd treat any IRR projections north of 18% with suspicion and watch how they're projecting to push rents over time. I like funds right now. I especially like funds that hold mobile home parks and storage. With that you get diversification, sponsor experience and assets that perform better historically than multifamily. I'm weighting toward those assets more in 2019. Self Storage scores first place for recession resistance. But you need to watch supply. Again, the sponsor experience plays into this in a big way. Additionally, there are some other assets that are interesting, but not as risk averse.

@Brian Burke has a great take.

I might add education is critical. Any investment can turn out badly for the inexperienced/uneducated investor. That which you do not know that you do not know WILL destroy you. :)

A fool and his money are soon parted.

The best investment one can make is in herself!

All the best!

Originally posted by @Joe Splitrock :

I don't think it is good advice to push him into hard money lending or syndication at this point of his life. Just too much risk for someone who is already freaked out. As the market continues to tighten, it will keep getting harder for syndications to perform at the level they have in the past. I am sure syndicators will argue that, but they can't argue that * that says past performance guarantee future results. I am just using logic here. If you have ever heard the saying that a "rising tide lifts all boats", it means when the market is going up everyone will see positive return. The problem is that within the next 1-5 years we are going to see the market flatten or pull back. There will be some losers when that happens. 

 Sage advice and I would tend to agree. Investing in real estate passively or actively isn't for everyone. If this guy has a ton of money, then putting a small amount into a few syndications is ok, but if it by any means stretches him, then doing so at this time in his life is not a good thing. As someone that does syndications, this is an investor that I would hesitate to take a commitment from, until I really understood the entire situation. 

Unless he's comfortable lending I wouldn't recommend hard money lending. He probably won't have the interest to attend every RE meetup as well. He's going to have to want it on his own and want to do something on his own volition. He just needs to educate himself or provide him with the proper content to educate him. 

Or best way for him to see it is to show him some of your opportunities that you have in your portfolio.  

Why not recommend to your buddy that take half his money, put that into an account - that account he draws down at 4-5% per year, at least initially. While it's there, he invests it a balanced portfolio of 60-70% broad based index funds and the remainder in domestic bonds.

Then, with the other half, put 25% into syndication deals, 25% into dividend producing stocks, and 50% he dabbles with in things like HML, house flipping, etc. It'll be mixture of passive income along with some real estate - but by cutting his portfolio in half and living off just a percentage of that half, he'll be fine either way.

All, thanks for your comments. I was traveling then away on vacation and am just now getting back to this article.

@Ian Ippolito Thanks for the book reference.

@Taylor L. Good point on hard money lending, and thanks for the book reference and folks to follow.

@Steve K. Appreciate it.

@Alina Trigub Thanks, I'll pass it on and ask my friend if he wants more references.

@Thomas S. He does have an accredited financial advisor, whom I also consult with, but I find his advise, while sound and well-intentioned, to be limited in scope to the financial instruments he can offer. My friend is not looking for us to advise him, I am simply looking for pointers that he may broaden his financial education. Which is what I love about the PB forums!

@Joe Splitrock You may be right.

@Lauren Do He has already bought an annuity. But he recognizes that even that has risks (e.g. the company may not be around to pay out).

@Theo Hicks Thanks, the meetups might be more involved than he wants to be, but I might do that myself.

@Brian Burke Good point that you want a syndicator that has seen the dark days.

@Mike Krieg I too have been interested in mobile home parks and storage. 

(Apparently wordpress doesn't want me to add any more @mentions here!)

@Ivan Barratt I'm realizing through these comments that I may be more interested in financial education than he is, which is perhaps what this really comes down to: the degree one wants that education to be more self directed, or wanting others to just take of it all for you.

@Todd Dexheimer Good comment, shows integrity on your part as a syndicator.

@John Fortes Agree.

@Alan Miegel I like the model, thanks.

@Kevin McGuire  everyone has supplied valuable info. I won't beat a dead horse... but investing in yourself (education) first is very important. Secondly, the operator is more important than the deal. Why? Because a good operator doesn't bring bad deals to their investors. 

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