W2 professionals - passive investor or DIY?

99 Replies

Originally posted by @Michael Plante :
Originally posted by @Annie R.:

@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 

Exactly.  Most months I take a portion of income from RE investment, & put that into a stock that pays a quarterly dividend.

As for the stocks vs RE investing comparisons, investing money into stocks is generally done with post tax money, where Real Estate invest in general is done with borrowed money.  I don't know of anyone that's got a loan from a bank to buy stocks.  You can buy stocks with Margin, however if the value of your portfolio goes down enough, the brokerage can liquidate your stock to get their funds back.  With Real Estate, the bank isn't going to come to collect because the property value has gone down.  Each investment has their own pros & cons.

Originally posted by @Tony Kim :
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.

 Bingo.  As a w2 (high) wage earner, the last thing I would want is more ordinary income.

I would seek that happy medium of control and tax advantages.  The stock market (outside IRAs) doesn't really offer either. 

There has to be a way to partner with an active investor that has time and knowledge.  One could be an equity lender partner.  

I'm not suggesting myself, but some of us have depreciation deducions coming out of our ears and no job, so plenty of time.  Find that person and  be an equity partner. A straight lender will give you no tax benefits or future passive growth. 

Originally posted by @Annie R. :

@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.

 dont be sorry at all! I love to help as much as I can because I was in your shoes a few months ago.

So what REI nation does is that they purchase distressed homes and remodels them. They then sell this property to you with a tenant in place. The great thing about REI nation is that they also have an in house property management group as well as general contractors/ handyman. REI nation is as turn key as they get. They even have lists of insurance providers and loan agents that you may use, but this is optional. During my REI nation process, it was pretty much hands off. All I had to do was select a property I wanted, turn in my loan paperwork and signed closing documents 1-2 weeks later.

I havent closed on my Rent to retirement property yet as it is currently in the process of behind Rehab. They are very similar to REI nation, but the only difference is that they do not have an in house property management group. They vet property managers in the area of their properties.

If you have any other questions feel free to PM me!

Great topic here! After speaking with passive/active investors over the years, I've found that a good investment is in the eye of the beholder. What looks good to me won't necessarily be important to you.

Example : 

  • The retired 65 year old won't be ambitiously looking at potential C class BRRRR or flip opportunities.
  • The recently graduated 23 year old won't be jumping into a long term 5 year hold syndication with his/her only $25k.
  • The married couple with four kids won't be rushing into fully managing a 10 unit apartment complex.
  • The highly taxed working professional might be more concerned with tax benefits of syndication then investing into similar returns from turnkey properties.

So return is just one of the aspects of a good investment. However, since it is typically the ONLY common element to compare against stocks it becomes the main comparison point. And on that point, real estate is able to deliver much better returns in my opinion.

@Daniel Han

Again I’m no the tax pro. But if you make under 100k AGI there is allowable RE deductions against active income (w2). That is expanded for being a RE professional who works within your RE business. Yes there are restrictions and you have to follow the rules. However this can allow you to shield a significant portion of your income from federal income tax and that savings invested over time is very likely to beat “passive” investments that do not have the same tax advantage.

@Annie R. I’m surprised leverage hasn’t come up yet as a topic. Sure, you can buy stocks/options on margin, but you don’t get margin calls in RE when bad news happens overnight. That is true for W2 or DIY.

Plus, the tax advantages in RE are now-not when you reach a magical age that may be decades away, so the present value of money comes in to play.

I look at the financial landscape of the US, I only see higher taxes coming, and I don’t want to defer taxes until then 🙂. Great forum topic.

@Annie R. I consider myself a W2 investor who is mostly DIY. I manage 4 properties myself and have a PM for 4 others, but I am managing the PM. I hear from a tenant on avg about 1 time per month and I have more control than someone who is fully passive. 1 time a month is easily worth the “hassle”, at least in my opinion.

Originally posted by @Jonathan Stone :
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.

Hi Annie,

Accelerated losses from syndications do get passed through to the individual LP's. But be wary of any syndicator that tells you that these accelerated losses can be used to offset your W-2 income because that's absolutely incorrect. There is one syndicator who frequently posts here that likes to incorrectly tout that as a benefit and I find that kind of misinformation extremely annoying. In order to be able to offset any of these losses with your W-2, you have to be considered an active participant in the investment. As an LP Investor, you would not qualify. Also, most accredited investors have an AGI greater than 150K, which is another disqualifier. I don't really consider this a downside though because you'll be able to carry-forward these losses to future years and when the syndicator exits the investment, you'll be able to offset these losses against any gains on the sale.

Offsetting your passive losses as an active participant is more for directly held properties (no 3rd party PM) owned by individuals who meet the income limit requirements.

This is not to be confused with someone who can be considered a real estate professional as that's a whole different ballgame.

Originally posted by @Matt Leber :

@Annie R. I consider myself a W2 investor who is mostly DIY. I manage 4 properties myself and have a PM for 4 others, but I am managing the PM. I hear from a tenant on avg about 1 time per month and I have more control than someone who is fully passive. 1 time a month is easily worth the “hassle”, at least in my opinion.

Wow - you must have some amazing properties, or tenants, or both. I'd say if it were truly that low-touch, then it makes sense to be more DIY. I feel like you're not in the majority, though, but rather on one end of the spectrum. Which, honestly, more power to you! Hope it stays that way.

 

@Annie R.

One of my coworkers bought a turnkey SFR in Mississippi several years ago. Every month he gets a check for about $250 and no headaches. He might just be lucky because I've also read posts with negative reviews of turnkey properties. He's never even been to Mississippi, that's pretty hands free!

As far as comparing RE to the stock market, last year I was up 45%, this year to date, I’m down almost 5%. I’ve had days where my stock portfolio drops over $100k in a day, that doesn’t happen in RE. It’s all about diversification. Also, I can always sleep in one of my houses, stock certificates don’t even make a warm blanket.

Originally posted by @Annie R. :

@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.

Hot air? Like how Facebook was after IPO? ;) Zero effort index funds go 10x every 30 years - you can go back the entire century to track that. As for single stocks, I don’t invest randomly, and I have the capacity to dump more money when the stock declines. I have definitely lost money, but the gains will make the losses look negligible. Will my gains in real estate make the losses look negligible? Remains to be seen. 

Eventually you will need to understand your own risk tolerance and make the investment decisions yourself. There is no shortage of RE Cramers, so be careful ;)

 

There ain't no such thing as a free lunch.  LP investing or anything passive reduces liability (and thus some types of risk), but the large tradeoff is yield.  Allow me to introduce the term "perceived yield" in the discussion as well.  Many would-be and active sponsors and dealmakers conflate their time with "yield" in these discussions and laud their necessity as a virtue.  Need it be?  Absolutely not.  

The trick is to account for your time appropriately in the analysis when calculating YOUR returns.  That's it.  They're for YOU and you alone.  How much is YOUR time worth and how are you arriving at that number?  What is the market telling you?  How much is your time with your kids worth?  How much is the optionality to invest the time as you see fit worth in lieu of tying it down to projects that you're "in control of?"  What does control really mean?  If COVID and the government force you to stop collecting rents is that sought-after control really a good thing or would you rather be sitting on fungible capital to deploy elsewhere?  

What you're really trying to do is to minimize time invested and still get optimal risk-adjusted returns net of taxes or other expenses.  Work on the business; not in it.  Think like an entrepreneur and not a lifestyle business owner.  Use your capital as a tool and learn to generate value and overrides on the capital to attract even more of it.  With today's post-JOBS-Act environment there really is no excuse for stalled growth or artificial impediments to capital formation.  The real constraint is your mindset and willingness to work hard in pursuit of some form of actualization.  This normally tugs at autonomy, mastery, and purpose alongside financial returns and making sure you nurture your relationships and health along the way.  

I am a mixture of active and passive. Because my W-2 doesn't pay a huge amount, it doesn't make sense for me to only focus on passive investing. I need the outsized returns of active investing.

I actively invest in self-storage and short-term rentals (with house hacking), and I semi-passively invest in BRRRR's, and I have passively invested in a few multifamily syndications.

There are so many nuggets of wisdom here, honestly. Thank you all! I have now officially created the very subforum I was looking for. It started out (in my mind) asking a simple set of questions, but of course nothing is truly simple or operates in a vacuum. There are so, so many facets and interdependencies. 

I wish I could respond to each post and response, and maybe I eventually will. I just want to say THANK YOU in the meantime to everyone taking the time to weigh in.  

Originally posted by @Tushar P. :
Originally posted by @Annie R.:

@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.

Hot air? Like how Facebook was after IPO? ;) Zero effort index funds go 10x every 30 years - you can go back the entire century to track that. As for single stocks, I don’t invest randomly, and I have the capacity to dump more money when the stock declines. I have definitely lost money, but the gains will make the losses look negligible. Will my gains in real estate make the losses look negligible? Remains to be seen. 

Eventually you will need to understand your own risk tolerance and make the investment decisions yourself. There is no shortage of RE Cramers, so be careful ;)

 

Oh man, you are so right. There are Cramers everywhere. I am just learning to increase the signal-to-noise ratio. 

That being said, you and I will have to agree to disagree about stocks. I tried to love them, but I don't. Maybe I don't have the stomach for it? Maybe I don't understand it? Who knows. I just know I don't love it. And actually, I liked single stocks better than index funds, for what it's worth.

 

Originally posted by @Nick Barlow :

@Annie R. I’m surprised leverage hasn’t come up yet as a topic. Sure, you can buy stocks/options on margin, but you don’t get margin calls in RE when bad news happens overnight. That is true for W2 or DIY.

Plus, the tax advantages in RE are now-not when you reach a magical age that may be decades away, so the present value of money comes in to play.

I look at the financial landscape of the US, I only see higher taxes coming, and I don’t want to defer taxes until then 🙂. Great forum topic.

Some posts have referred to leverage in passing. It is a key difference between the two asset classes, so thank your for bringing it up. I'm finding that along with risk tolerance, there is something to be said about leverage tolerance as well. I mean, it is still debt after all. 

 

I'd say half of my investments are in Real Estate and half in the stock market. 10 of my properties are in Mississippi so they don't appreciate much (although they have this year) but the rents in relation to the property values can't be beat so i get plenty of income from them, so much so I don't expect to have to draw much money out of mutual funds when I retire this year. I also will delay collecting Social Security because I don't need the money. Mind you, my ending salary will be less than 60K but investing in Real Estate made all the difference for me. 

Originally posted by @Jesse Ottesen :

@Annie R.

One of my coworkers bought a turnkey SFR in Mississippi several years ago. Every month he gets a check for about $250 and no headaches. He might just be lucky because I've also read posts with negative reviews of turnkey properties. He's never even been to Mississippi, that's pretty hands free!

As far as comparing RE to the stock market, last year I was up 45%, this year to date, I’m down almost 5%. I’ve had days where my stock portfolio drops over $100k in a day, that doesn’t happen in RE. It’s all about diversification. Also, I can always sleep in one of my houses, stock certificates don’t even make a warm blanket.

 Hah! That made me chuckle :) Is that why it's called "REAL" estate? Everything else is virtual and lives in computers. 

I hear you on the TK experience. I have no insight to share other than it seems to work for a lot of people. I'm wondering now if there's a bit of survivor bias here. Are those with bad TK experiences not on BP? 

Originally posted by @Annie R. :
Originally posted by @Tushar P.:
Originally posted by @Annie R.:


Oh man, you are so right. There are Cramers everywhere. I am just learning to increase the signal-to-noise ratio. 

That being said, you and I will have to agree to disagree about stocks. I tried to love them, but I don't. Maybe I don't have the stomach for it? Maybe I don't understand it? Who knows. I just know I don't love it. And actually, I liked single stocks better than index funds, for what it's worth.

 

I’m not really crazy about stocks - both stocks and RE are passive investments for me. If I really liked any of these passive strategies, I would try to become an expert and get actively involved. But I’m too busy with what I like, and fully aware of the Dunning Kruger effect that Cramers will want you to forget ;)

 

@Nick Barlow The tax and cash-flow benefits available NOW for commercial property and residential rentals outweighs any anticipated increase in the tax rates. When you can realize 6% to 10% of a property's purchase price in after-tax cash-flow now, the time value of money is golden. If you reinvest that money at an 8% return which should be a given in RE and most thriving businesses, it is well worth doing a cost segregation study on anything purchased for over $200k. Why let the IRS hold that money when you can make use of it now? The stock market is higher risk in my opinion and my sad experience. Leverage that real estate which you have more control over than the stock market. The big guys have the first shot at making money in the stock market.

Originally posted by @Tony Kim :
Originally posted by @Jonathan Stone:
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.

Hi Annie,

Accelerated losses from syndications do get passed through to the individual LP's. But be wary of any syndicator that tells you that these accelerated losses can be used to offset your W-2 income because that's absolutely incorrect. There is one syndicator who frequently posts here that likes to incorrectly tout that as a benefit and I find that kind of misinformation extremely annoying. In order to be able to offset any of these losses with your W-2, you have to be considered an active participant in the investment. As an LP Investor, you would not qualify. Also, most accredited investors have an AGI greater than 150K, which is another disqualifier. I don't really consider this a downside though because you'll be able to carry-forward these losses to future years and when the syndicator exits the investment, you'll be able to offset these losses against any gains on the sale.

Offsetting your passive losses as an active participant is more for directly held properties (no 3rd party PM) owned by individuals who meet the income limit requirements.

This is not to be confused with someone who can be considered a real estate professional as that's a whole different ballgame.

 To your point Tony, PASSIVE losses offset PASSIVE income. W2 (normal job working for someone else) income is not considered PASSIVE income.

@Annie R.

Just my opinion, but I believe the answer is because of cashflow... It is not, and should not be the only form of investment if your using real estate as a passive investment vehicle.

My simple vanguard index funds and etfs yielded higher returns then my rental property however that money is tied up in my brokerage account. It's not the same as having cashflow coming in that I can use on hand every month. Additionally, at the end of the loan I'll have a property that I will have options with. There are also the tax differences when discussing investing in the stock market vs real estate.

The beauty of passive investing is the debt because you get much of the cash you put in BACK OUT when the property refinances. So you are double/triple dipping those funds into 2-3 deals before the first one even sells. THAT is how you beat the market and match active investor returns. And even though active investor returns tend to be a higher % ROI, they have very little cash in most of these, so it's less cash earned overall. Putting that money to work in a snowball approach, most people can be retired on passive income in 3-5 years, without ever being a landlord, especially when adding in the tax benefits. Often, it's faster to just get extra money to invest in RE by getting a side hustle in something you're already good at rather than starting from scratch as an active investor.

I'm an active multifamily syndicator with a goal to  be 100% passive in the next 2 years. It's a lot of work, and I didn't get into RE to have a new job! I wanted FIRE as fast as possible

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