Most of the discussion on this forum seems to cater to the DIYers. I haven't seen much discussion on routes for passive investors to make similar or comparable CoC, cash flow, and equity as regular active investors. Is there a sub forum for those of us who have good W2 jobs that supply the investment capital, who want to be passive investors? Do returns on those types of arrangements typically beat the stock market? Looking to understand if the DIY model (regardless of niche and investment strategy) is where all the magic happens, and what the ballpark differential in returns is from the passive investor model. Thanks in advance for any insight!
@Annie R. First off congratulations for taking the initiative to create more financial security for yourself. You asked if there is a Sub Forum for those who have good W2 jobs that supply the investment capital, and want to be passive. While syndications and REITS do fit this description those options reduce your control and ROI dramatically. Have you concidered working with a Turnkey Provider of Rental Properties? The turnkey model would allow you to be passive, but still have control of the entire investment. Most of the posts focus on ROI and how much more you can make if you are DIY, which is accurate. We find that when people do everything on their own they could make 10-20% more than working with a provider. But there is aspect that nobody had addressed in this chain, and that is risk. DIY requires you to find the right markets in the country, then find the best neighborhoods in that market, then the best properties in those neighborhoods. After that you need to find good quality contractors, leasing agents, and Property Management. All of these have their own issues that if not done correctly could end up costing the DIY'er vs letting someone else take that risk on. Even with additional margin that risk isn't always worth the reward. Look at a typical rental that costs 100-150k, after all expenses you should net 250-300 positive cash flow. Let's assume it's 250 for this example. If you can make 20% more by doing it yourself the spread is 50/mo, or 600/yr. If you have any sort of hurdles, or mistakes that cost you more than 600 then you are already behind on the ROI. Even if you do everything perfectly you just traded a lot of time for 600. If you are looking to reduce risk and time, then 10-20% is your cost to make that happen.
If you're referring to syndications vs the market, say like the S&P - some deals beat the market, some don't. Some knock it out of the park, some lose money. The job of the passive investor is to find the teams and deals that they believe will perform in line with their goals.
I find it's somewhat rare to see syndications compared to the stock market, because they're just different beasts entirely. I agree it's oftentimes presented as "only active real estate investors can make a good return" but that's not true. I think the key is understanding how to recognize potential value in teams and properties, plus a good understanding of how to use money & leverage.
@Taylor L.
It might be unusual to compare the two entirely different beasts (no argument, they are), but think from an investor’s perspective. Someone with capital might wonder: why invest in real estate when the stock market is providing 10% sometimes greater growth? Both are unpredictable, cyclical, and can succeed or fail “just depends”. Both require research and some institutional knowledge. Is the upside in real estate THAT much greater?
@Annie R. - personally, I see real estate as part of a comprehensive investment portfolio. Each part of your portfolio should support your goals. For example, you would evaluate IRA versus Roth IRA based on your exit plans.
The return on my investment doesn’t matter to me so much as My ability to buy more houses than stock. I drive the appreciation of my real estate asset in a way that I could never do with stocks.
@Taylor L.
It might be unusual to compare the two entirely different beasts (no argument, they are), but think from an investor’s perspective. Someone with capital might wonder: why invest in real estate when the stock market is providing 10% sometimes greater growth? Both are unpredictable, cyclical, and can succeed or fail “just depends”. Both require research and some institutional knowledge. Is the upside in real estate THAT much greater?
Doesn’t have to be be either or
can be both
@Michael Plante
But the time investment for active investing in RE is overwhelming to me. My day job is taxing enough.
I think you would then be a hard money lender I don’t know much about that
They seem to make approx 10% Much too low in my opinion I borrow as much as possible, because I can make much much more than 10% but of course have to put in more work
The biggest difference to me is you have a hard asset that you can go see vs a business you hope does well. With a property, you can look at comps and yes things can go sideways but unlikely if you do your dd. A stock investment you may wake up in the AM and see the cfo cooked the books or the company didn’t perform. Happy to chat further pm me.
@Michael Plante
Thanks for the insight. 10% is what I heard as well. I’m sure there’s a +/- differential. To me, that’s not much different from a high-yielding investment through Yieldstreet or similar. Both passive, both at or slightly above stock market yields. If I’m missing something, please someone point it out.
@Jordan Silverman
Agree. My contention with stocks is they don’t scale quite as quickly. Unless, I guess, you’re on the inside and know when to buy low. The DD with buying stocks isn’t quite as straightforward as it can be for real estate. A lot of listening to gurus and ‘sentiments’ finger waving in the air.
@Annie R. I think there is a whole spectrum of investment possibilities in real estate - on one end are the very hands-on, DIY projects that require a lot of time and effort, as you correctly noted, and on the other are the totally hands-off investments, like REITs and syndications. But there is a lot in the middle, many, many different options... and the forums have threads on absolutely every option. There are tons of "W2 professionals" on all of the forums trying to decide what to do and how to participate; I don't think it's accurate that most folks here are DIYers and that W2ers are the minority. =)
Say for example you buy a turnkey property (I'm not endorsing it, just bringing it up as an option) and you have it under property management. You might not get the greatest ROI, but that would be pretty darn hands-off. If you have a good property manager and good tenants - you collect rent. I think that's fairly passive. (But on any given property YMMV.)
Another thing to compare is not just returns but control. Even in my turnkey example, you have so much more control over your investment than you do an investment in a REIT or an index fund. You can raise the rent, lower the rent, refinance, sell the property, use it as collateral in a portfolio loan... with an index fund there is not a thing you can do to influence the returns.
@Nicholas L.
I’ll gladly stand corrected. I haven’t read every blog or post, I’ll admit. :).
Thank you for you insight. I see your point about control over asset. An analogy is with managing retail stock yourself or hand over money to a financial advisor to invest in return for a cut or fee. To be perfectly honest, I’m too inexperienced to be needing or wanting that much control.
Maybe a JV with someone more experienced could be a happy medium?
@Annie R.
I consider myself passive and semi-passive. Here are my thoughts:
1) true passive = public REITs or just an etf that track a basket of reits, private reits like fund rise, and syndications (I have not dabbled in this yet)
2) Semi Passive = work with an investor agent and hire a property manager. Just make sure you have a solid PM. Example, I work with an investor minded Pm and Agent, to manage the properties. All I have to do is spend hours finding the right property and make sure my pro forma indicates a cash flow. Also, i only invest in class A or B+/B areas. Less headache and more solid tenants. Less cash flow, but worth it for me as I’m more some cash flow + must have some appreciation.
3) Full DIY: just like #2 above but you manage property yourself. No thanks to that for me. I have a demanding job and literally have a property unit less than 4 min away from me, i still have a Pm since I’m so consumed by work. Rather dedicate time to grow my W2 income to buy more properties and leverage my team for that growth. Eventually, when i take a less demanding job, will then probably manage my self and be a true DIY
@Taylor L.
It might be unusual to compare the two entirely different beasts (no argument, they are), but think from an investor’s perspective. Someone with capital might wonder: why invest in real estate when the stock market is providing 10% sometimes greater growth? Both are unpredictable, cyclical, and can succeed or fail “just depends”. Both require research and some institutional knowledge. Is the upside in real estate THAT much greater?
From all the data I've seen, 10% is an overstatement of market performance in the long run. The S&P's long run return is typically stated at around 8%, and that 2% difference ends up being significant over time. Institutions actually do not beat the market consistently, nor do really any fund managers. Once fees are factored in, forget about it.
The big big big differences we have in real estate are:
1) Real estate is a far less efficient and far more opaque market than stocks. This means opportunity.
Inefficient markets create opportunities for business owners to find underperforming assets and drive value. We can find distressed owners, help them out of their situation, and acquire property at under potential market value.
Not so for stocks. Stock investing for the regular guy is far more like throwing a dart at a board and trying to ride a wave. Indexing and dollar cost averaging a la Benjamin Graham is intended to take some of the psychological biases out of stock investing and get individual investors to match market performance. Because again, nobody investing in stocks beats the market consistently over the long run.
2) Real estate allows us to actually implement a business plan.
In stocks, the everyday investor is not a big dog financial institution. Only big dog financial institutions are able to buy up enough shares to actually control and drive a business plan. We are not able to go into the stock market and actually change things and are thus unable to find value and implement a business plan to pursue or realize that value (and thus attempt to beat the market).
As real estate investors, we control the business plan. For a given property, we can make changes, raise the income, and drive the value.
Lastly, I believe any sponsor who presents you a real estate deal and predicts it'll beat the market is speaking out of turn and making dangerous predictions. Stick to the facts about the deal and let passive investors make their own decisions.
Of course, for my passive investing & asset allocation purposes, I wouldn't invest in a deal that didn't look like it had a reasonable likelihood to exceed index fund returns over the hold period, factoring in relative risks of both investment strategies. But whether that is a likely possibility is my judgement based on experience, not based on what a sponsor tells me in terms of IRR or CoC projections. Just investing in real estate for the sake of investing in real estate is silly, we need to consider all options.
@Nicholas L.
Your point about control struck a chord with me. I count myself as a W2 investor and still have a lot to learn. The things I can influence, if not control are; finding deals, financing the deal, building a team, etc. with the stock market, there is no real way to control fluctuations.
After getting laid off not too long ago, I decided to invest in more rental property to ensure that I can stop depending on a paycheck as my main source of income. Another example of establishing control.
In my experience being DIY has increased my return on investment, but it takes time and skill. I have learned ways to reduce my time, so it actually becomes very passive.
With rental property, there are several advantages:
1. Monthly cash flow that is inflation adjusted
2. Equity growth through debt pay down
3. Equity growth through appreciation
4. Tax benefits that shield income from taxes
5. Investing with leverage, which gives you 5X buying power
Using passive investing techniques, it is hard to get great returns, but it is also low risk and low skill. The harder or riskier the investment, the better the potential for return. So when you say "passive" you are saying easy and low risk, which means low return.
@Annie R. The answer is all about leverage and taxes. I'm an active investor but I also help manage for passive investor and the returns are based on the loan the management and the tax plan. Keep in mind the stock markets return is taxed to pull it out and to put it in. Active real estate professionals can get it untaxed in and out with the right strategies and any investor can get untaxed dividends in real estate. Leverage is also a game changer. The range for real estate is normally 5-20% average return if you own it all cash. Some great some less but that's about where most standard markets are. If you get a 10% return property with no financing you would get a 10% return very similar to the stock market. If you get a 75% loan on the properties at 4% interest the 10% return properties makes you a return of 28%. Now say you had 90% loan with 3% your return is 73%. Now take the house hack example you put 3.5% down at 3% and your return on investment is 203% the returns are first year returns based on the  hypotheticals 10% return house. The extra leverage also increases the Tax benefits as the interest is a write off before you tap into depreciation. Also most every properties management decreases your return by less than ten percent of the houses number so 10% to 9% return house. often times they increase your return. As a passive investor you need to get a great property manager or syndicator that makes it passive but does a good job. my passive investments in real estate have had an IRR of about 50% a year the last 3 years my active even higher (appreciation has help that a lot) but they would still be more than double stock market average with no appreciation.
Most of the discussion on this forum seems to cater to the DIYers. I haven't seen much discussion on routes for passive investors to make similar or comparable CoC, cash flow, and equity as regular active investors. Is there a sub forum for those of us who have good W2 jobs that supply the investment capital, who want to be passive investors? Do returns on those types of arrangements typically beat the stock market? Looking to understand if the DIY model (regardless of niche and investment strategy) is where all the magic happens, and what the ballpark differential in returns is from the passive investor model. Thanks in advance for any insight!
Sweat equity over the long run will almost always beat passive investments.
You mentioned YieldStreet. I would stay away from YS as their due diligence has really suffered in the past year or so and they've suffered some impairments. Of course, there are also the other traditional platforms like CrowdStreet, Real Crowd, Equity Multiple, etc. But having access to these deals means nothing if you aren't able to collectively evaluate these deals with like-minded fellas. These platforms, by the way, are typically filled with deals the sponsor cannot fill themselves using their existing connections. There are other forums dedicated to these types of passive investments... DM me if you'd like more info.
Someone else mentioned HML. While this is an excellent strategy, tax is something that you will need to consider, and since HML is considered interest income, it's not a very tax favorable strategy for high W-2 income earners.
@Annie R.
Lovely conversation you started and already a ton of great feedback. For many like myself investing in RE is a combination of diversification and tax advantages. If I were to invest in passive investments only I wouldn’t see about half of the benefits from expenses and business deductions that my wife and I see annually. We are not large investors with a big portfolio at this point but shielding 10-15% of your income from taxes over a couple of decades could make a huge difference in returns vs Stocks or other assets.
I would also second many of the comments above from @Taylor L. And @Joe Splitrock
@Annie R. are you really expecting a majority of people on biggerpockets to tell you RE is not better than stocks? Most will compare a concentrated risk like sfr/flip/syndication with a diversified s&p return, rather than an equivalent comparison with a single stock (like Tesla). It’s also easy to ignore on biggerpockets that most people who dumped money in stocks a year ago have at least doubled their money with zero effort (or 5x in 12 years with zero effort, via index fund investing). I personally had a stock do 47x in 5 years, but it required the discipline to hold it for the first 4 years when it was under water. But stock investing is not for everyone - it requires a tough mindset to go against the crowd and have the stomach to embrace the volatility. Most people can’t handle that, even if they understood what they are investing in.
I personally don’t see how RE can provide better return than stocks, if you compare equivalent risk profiles within each category. That’s why I use RE investment as a capital preservation strategy rather than capital growth. And since there is no guaranteed return for either stocks or RE, I diversify my risks accordingly. My current strategy is to not increase my RE investment to more than 20% of my total investments. While I have kept dumping money in RE syndications in the last 12 months, the RE weight has gone down over the last year from 17% to 11%, because of what happened with the stock portfolio. So I will continue to dump money in RE syndications (20+ so far), but that’s simply because of my diversification plan, not because I think RE will provide better return than stocks. The amount that I dump in stocks will always be much greater.
I started with turnkey remote rentals in 2009-2015 while working my engineering W2 job. Then went into syndications once my net worth went over 500k.
Here to help 🤙
As a general rule of thumb, the more active you are in your investments, the greater return you’ll make.
In real estate, if you're the one who finds the deal, rehabs it, manages it, etc. you'll have the greatest return. But you'll likely not have a lot of time to do much else. If youre shopping on the MLS, using an agent, a contractor, mortgage broker, property manager, etc, each one of those steps gets a pay out in some capacity, eating into your returns.
In stocks, if you spend a lot of time studying patterns, fundamentals, projecting growth, using options or other active trading strategies, you’ll likely find greater returns than someone who just throws it into a mutual fund.
If you’re looking for passive investing, my advice would be to complicate it as little as possible. You could look at being a private lender or a limited partner on a syndication. If you actually want to own the property, you may want to network with an agent or two in your market and find a good property manager. That’s what I did on my first investment and it’s very passive.
@Annie R., I am a high earning W-2 employee myself. I can barely change a lightbulb and have zero aspirations to DIY real estate. Life is too short for property management. I am all about being as passive as reasonably possible. Personally, I do a combination of real estate note funds, syndications (mostly multifamily, but looking to possibly expand into self storage or mobile home parks), and turnkey single family rentals. They all have pros/cons. I should also say that I am heavily invested in the stock market and will continue to do it all over time. My net worth is significantly higher than the threshold that Lane mentioned above, however, I am still a huge fan of turnkey rentals - especially with long term, 30-year fixed mortgages. He seemed to have a bad experience with turnkeys and evictions, etc. Although nothing is perfect and there will always be bumps in the road, my turnkey experience so far has been overwhelmingly positive. High level plan is real estate investing for early financial freedom and traditional market-based investments for phase two of retirement at a more "normal" retirement age (and also as a backup plan if my REI happens to blow up in my face). Hope that helps.
When you are a busy W-2 professional, you don't want to have another "job". I had some small residential units, but it was still a hassle with 3rd party management. I have found investing in private syndications with reputable sponsors to be the best investing avenue for me. I get all the tax benefits too. I am still in traditional Wall Street investments through my 401K but all of my other money goes to these "alternative" passive investments.
@Annie R. First off congratulations for taking the initiative to create more financial security for yourself. You asked if there is a Sub Forum for those who have good W2 jobs that supply the investment capital, and want to be passive. While syndications and REITS do fit this description those options reduce your control and ROI dramatically. Have you concidered working with a Turnkey Provider of Rental Properties? The turnkey model would allow you to be passive, but still have control of the entire investment. Most of the posts focus on ROI and how much more you can make if you are DIY, which is accurate. We find that when people do everything on their own they could make 10-20% more than working with a provider. But there is aspect that nobody had addressed in this chain, and that is risk. DIY requires you to find the right markets in the country, then find the best neighborhoods in that market, then the best properties in those neighborhoods. After that you need to find good quality contractors, leasing agents, and Property Management. All of these have their own issues that if not done correctly could end up costing the DIY'er vs letting someone else take that risk on. Even with additional margin that risk isn't always worth the reward. Look at a typical rental that costs 100-150k, after all expenses you should net 250-300 positive cash flow. Let's assume it's 250 for this example. If you can make 20% more by doing it yourself the spread is 50/mo, or 600/yr. If you have any sort of hurdles, or mistakes that cost you more than 600 then you are already behind on the ROI. Even if you do everything perfectly you just traded a lot of time for 600. If you are looking to reduce risk and time, then 10-20% is your cost to make that happen.