W2 professionals - passive investor or DIY?

99 Replies

@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.

@Allen Wu

I resonate with your ideas. Time is where I'm poorest. The return on my time (currently anyway) at my day job is higher than it would be in REI. I'm sure there's a tipping point where the reverse would be true, and that's maybe what I'm working towards. It just doesn't seem possible to actively do REI and my W2 job right now. I wish, but can't, create time :)

@Taylor L.

Love that. Thank you.

Personally I’m at an inflection point. Retail stocks were fun, but I’m plateau-ing after an amazing 250% increase in value over 3 years and I am getting bored. Or maybe I just hate Wall Street jargon.

So you’re right; projections and valuations and consumer “confidence” doesn’t give me warm fuzzies. I get the concept and give props to those who know how to play that game; but I guess I’m a bit more old-school and like “hard assets” as someone else on this forum mentioned.

Syndications seem like a BIG step though, right out the gate. Or am I mistaken? It feels a bit unnatural to step in the big(ish) leagues, although I did do 2 SFR for a few years to ride out the 2008 downturn in the RE market. Wasn't by choice; wasn't under water but was more profitable to rent bc of rock bottom selling prices.

Is there such a thing as a small syndication that’s still class A/B?

Originally posted by @Annie R. :

@Taylor L.

Love that. Thank you.

Personally I’m at an inflection point. Retail stocks were fun, but I’m plateau-ing after an amazing 250% increase in value over 3 years and I am getting bored. Or maybe I just hate Wall Street jargon.

So you’re right; projections and valuations and consumer “confidence” doesn’t give me warm fuzzies. I get the concept and give props to those who know how to play that game; but I guess I’m a bit more old-school and like “hard assets” as someone else on this forum mentioned.

Syndications seem like a BIG step though, right out the gate. Or am I mistaken? It feels a bit unnatural to step in the big(ish) leagues, although I did do 2 SFR for a few years to ride out the 2008 downturn in the RE market. Wasn't by choice; wasn't under water but was more profitable to rent bc of rock bottom selling prices.

Is there such a thing as a small syndication that’s still class A/B?

Yes, those exist. I wouldn't consider it a big step. You do need to learn how to analyze deals and find good teams, but that can be learned. Syndications are far more passive investments than single families.

This is a GREAT question and something I harp on all the time. If you are a busy professional with a good paying job and you have an interest in investing in real estate, don't give yourself another job trying to invest actively. Even the most 'passive' real estate strategies typically start to become quite a bit of work at scale. In order of most passive to least passive I would rank strategies as follows (not a comprehensive list of strategies):

  1. REIT's (stock market level returns and high liquidity)
  2. Being a passive investor in a real estate syndication (typically better than stock market returns, sometimes substantially better, tax benefits of real estate, but low liquidity, and takes networking to find reliable operators to invest with)
  3. Buying real estate notes (can be much better returns than the stock market, fairly high learning curve, and can become unwieldly at scale)
  4. Buying a turnkey property (stock market level returns, tax benefits of real estate, low liquidity, typically buying at or above retail)
  5. Buying a BRRRR property (better than stock market returns, can be high learning curve, very dependent on the team you build, can become unwieldly at scale)
  6. House flipping (better than stock market returns, high learning curve, a second job, not impossible but very difficult to scale)
  7. Wholesaling (better than stock market returns, high learning curve, definitely a second job)

Active strategies are almost always going to produce a higher return than passive strategies. That's because as a passive investor, you're giving up control to the active sponsor who is doing all the work.

If you are looking to invest in real estate syndications passively (as a Limited Partner), set up keywords alerts for "multifamily syndications", "self-storage syndications", "mobile home park syndications", etc.

Listen to podcasts that have syndicators on as guests. If you hear someone you like, reach out to them to set up a phone call. Don't be shy

@Jonathan Stone

Thanks! I was told that MF syndications can pass on losses and write-offs and depreciations to individual investors. Is that incorrect?

You make a good point about writing off your expenses and interest on your REI. Do you go through an LLC or is that a pass through to your individual tax returns?

@Tushar P.

I love it when someone has the cajones to swim against the tide! I agree with your opinion: stocks have been gangbusters, EVEN with the pandemic. But it’s all hot air though, isn’t it? Very WeWork and Uber. Idk - I have a love hate relationship with retail stocks, probably because I get frustrated with all the Cramers.

Positioning one's REI as a cash preservation vehicle, not growth, is definitely a unique stance. I've at least never heard of it put that way. At some point, the stock market will correct itself - can't keep growing at current pace forever. It doesn't seem like the RE market goes through those wild up- or down- swings as often.

@Lane Kawaoka

Were you not nervous doing remote rentals starting out, however turnkey? I’m assuming you had an in-market team. Everyone says the PM is key; well yes, how do you KNOW that the PM you interview via zoom is the one?

@Mark S.

Life is too short for property managing. Amen!

You sound like you dabble in a little of everything. How do you keep it all straight? Do you have a CPA who does your taxes?

@Scott Lundgren

Time is money, that’s true, but I imagine the DIYers doing it probably have critical mass. Meaning $50/mth for several SFRs - and maybe the numbers work out. I don’t know. I just don’t have the time or energy to do a good job at DIY-ing.

So tell me more about the Turnkey model. How is it truly differentiated from the SFR active investor model? Does it come all kit-and-kaboodle together - house, realtor, PM, contractor?

Hey Annie, I went the turnkey route for more of a hands on approach. Currently closing on my 2nd one this year. After my first TK purchase, i was hooked and started looking at means to increase my ROI.

TK doesnt have the best ROI but so far it has definitely been hands off and passive. I used REI nation and Rent to Retirement. Both are great turnkey companies, but I think REI nation is more of a one stop shop since they also manage the properties for you once you buy.

Originally posted by @Annie R. :

@Jonathan Stone

Thanks! I was told that MF syndications can pass on losses and write-offs and depreciations to individual investors. Is that incorrect?

You make a good point about writing off your expenses and interest on your REI. Do you go through an LLC or is that a pass through to your individual tax returns?

I don't invest in syndications however it is my understanding that you can take losses or write offs but they would be against Capital Gains income. Within my understand of RE deductions we can deduct expenses from REI from my W2 income. This is actually expanded because my wife works in real estate and there are additional deductions we can take against our active income. All that said I am not a tax expert but am looking to minimize our tax burden while we continue to increase our assets.

We do not currently use an LLC although it is something we may consider in the future.

Not a CPA. 

My understanding is syndication would be considered passive income and considered differently than capital gain. You can't offset your stock gain with passive loss from the syndication.

In general, you can't deduct RE expenses from your W2 income unless you or your spouse is a real estate professional.  so most people can't deduct RE expenses from W2 income.

I researched before to reduce W2 income. The requirement is strict. @Jonathan Stone  You might want to be careful. Working in RE industry doesn't qualify you as RE professional. You have to work a certain number of hours for your properties to be qualified. There are enough horror stories IRS auditing hours being worked on your properties.

I guess there is scrutiny because it's a very popular method to archive large deduction for high income W2 earners.

@Annie R. , yes I do have a tax advisor.  I pay a mini fortune, but they know their stuff and I highly doubt anyone locally would be as knowledgable.  It’s definitely a large expense, but the way I see it:

1.) I like having a tax team essentially on retainer to answer questions as items come up throughout the year

2.) I can be confident my taxes are prepared / filed correctly

3.) Because of what I pay, I feel like I'm incentivized to keep investing in REI and almost "grow into" what I'm paying for

I could probably try to do it myself (before REI, I did my own), but I can almost guarantee I would make mistakes, possibly miss deductions, and worst of all pull my hair out (all while always wondering whether or not I'm "doing it right"). Some people try to do everything themselves and that's fine, but I am a big believer in the true value of having professionals on your team (tax, legal, etc.).

@Neil Henderson

THANK YOU!

I love when there’s concrete tips on how to put the next foot forward, and a direct answer to the original question. You have obviously been through this ringer before. I am starting out and this seemed like an obvious question that I wasn’t finding a cross-analysis or sub forum of thoughts gathered neatly in one place. But again, I haven’t read the entirety of BP because time-poor.

I’m tempted to put your bullet points into a grid and hi/med/lo color code everything to see which option is greenest but I think I’ve already gathered where in that spectrum I want to be.

May I ask, where in the spectrum do you play currently?

@Joseph Vu

Thanks for your insight on turnkey.

Do both REI nation and Rent to Retirement provide full turnkey service or just handover the keys to a turnkey home? Sorry if I'm being a pain asking for info that I can google easily but I like hearing first hand experience from a person.

@Daniel Han

Okay IRS tax nightmares sound awful. Which is now begging the question. Does your tax professional or CPA have to be local to your home state or can you work with any CPA across the country?

@Mark S.

I fully agree with what you are saying. I don’t trust myself to do all of those very specialized tasks well enough. Good for you! A person’s peace of mind and a good night’s sleep, not to mention, being able to travel and vacation without feeling tied to RE problems blowing up, those are quality of life benefits that are individual value judgements.

@Annie R.

When reading this and other comments I began to think perhaps you could try a house hack first. Might be nice set up while still rocking your W2 until you no longer need the W2.

I am using my W2 job to buy as much assets in all types of classes until my W2 job goes away(by choice or not by choice).

I’ll be in defense mode until I have no boss haha

@Annie R. - The true benefit of real estate is it locks in your investment for the long term and it can be really challenging to take funds out unlike traditional stock. I don't know about other investors here, but the most success I have had as an investor came from holding long term. Whenever I had a weak hand and got out of an investment early, it always cost me. If you can lock in an investment in the long term, through inflation and appreciation, it will pay you dividends for decades to come. 

But to your point, syndications and active real estate investing takes the same due diligence. I invested in a 132 building syndication and I did the same level of due diligence I did for purchasing a property. I ran the numbers, visited the property, acted like a renter to garner facts, and ran my own analysis. Success is built on doing the work up front and holding for the long game. 

@Justin Rea

Oooh house hacking is SO smart! Truly. Just not my thing anymore. I did it in college and grad school. Now I’m too old, and I like my space, and privacy. I know those sound like excuses to others, but quality of life is important to me. I’ve worked hard to get to this point and I always say “I don’t live to work, I work to live!”

Good luck to you, though. The city of Richmond does offer a LOT of house hacking potential with all the cute duplex/triplex options in the Fan.

@Annie R. I'm happy to answer any specific questions you have about RTR.  The short answer to your question is yes, we provide full, comprehensive TK services for all properties.  Properties are newly built, or renovated, leased & professionally managed.  We also have RE specific attorney's & CPAs to assist with entity structuring, tax strategies, etc. to help you build a successful business long term.  We always try to build a long term relationship with our clients to ensure they have the most appropriate business plan & strategy to accomplish your financial goals within the timeline that you've set.

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