W2 professionals - passive investor or DIY?

99 Replies

Originally posted by @Todd Harris :
Originally posted by @Tony Kim:
Originally posted by @Jonathan Stone:
Originally posted by @Annie R.:

@Jonathan Stone

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.

This is the beauty of the married filing jointly W2 worker and full-time real estate professional (spends 750 hours per year on real estate, no other full-time job, AND substantially/materially manages the passive income rentals) because our passive losses offset ACTIVE  income even from the spouse's W2. This is why I self-manage my smaller properties and have a large portfolio, so my asset management of my professional property managers is essential to the functioning of the properties. We work closely with our mortgage lender to make sure our tax returns are optimized to get personal mortgages so our earned income isn't shot by all our losses because on paper it can look pretty bad! 

@Joseph Vu , l have heard some great news about REI Nation and it looks like they are one of the best turnkey providers in the real estate industry. They try to work with their clients on significant repairs detected after selling the property. Most turnkey properties look nice above ground, but have a lot of issues below surface, including sewerage system and foundation. I have recently had an interesting experience with a turnkey provider in Kansas City that l'll be posting more information about later.

@Annie R.

@Tushar P.

Not sure cash preservation is the word I would use, but solid cash flowing REI behaves much more like a bond than a stock, and That is how I position it from diversification standpoint. That is not because of the rate of return or the risk...those will very greatly based on what u Invest in.

@Annie R. Joe is right

I was going to say something very similar

Look at it this way...would your company pay the same salary you get to me? The only difference is I won't actually show up nor do any of the work... the other option for you, and it can be difficult, is to be the equity partner for the diy'er. I'm a gc, built a ground up duplex. I provided none of the cash, bit all of the work. Returns are great for both of us. It just has to be someone you REALLY trust.

@Annie R. Well, it’s really just about doing what your comfortable with. The 4 properties in Jacksonville have a PM for a reason...I knew they would be higher maintenance and more issues. The other 4 that I self manage, I believe you can (often times) “train” your tenants to contact you less frequently (or less intrusively) for minor nuisances, and by keeping the property to a certain standard less issues arise. Obviously some of it is luck, but a lot of it is screening for the right people.

@Annie R. This is such a great question and one that comes up in the forums often in one form or another which is why I created and posted a video comparing active verses passive investing.

You asked in a post above something to the effect of why you couldn’t just be passive and get high returns. And the answer is found in the law of the harvest “you reap what you sow.” If you don’t put in that much work into real estate investing, then you likely won’t be able to get much out of it. You have to put forth the work if you want to get something out of it. I would like to work out once or twice a week and I’d like to have the body of a cross fit trainer, however, if I don’t put in the work I won’t likely get the same results.

Now there are hybrid ways of investing that give you much better returns than purely passive. But it does require more time up front to get things set up and to get the knowledge necessary to be successful.

For example, I (along with a business partner) own 200 units. I also own a therapy practice and I meet with about 20 clients a week so I am not about to dedicate my full time to real estate. So the majority of my time in real estate includes analyzing deals that come to me, calling wholesales or real estate agents and making offers, making sure we keep enough money in our accounts, raising money for our fund that returns 8-10% to the investors, and working with bankers to get long term financing for the properties we acquire. Once we have the property and it has a long term loan on it, then the amount of time it takes me with that property is almost nothing until we need to refinance the property, 1031 exchange the property or sell the property. Then I need to sign some documents. But until then, my assistant and partner and his assistant handle all of the day-to-day things that happen with the property.

In other words, I planted the seeds, and I took really good care of the seeds and watched over them and protected them and watered them when they were little until their growth got to a point where they they needed very little tending to. Then I just enjoyed the fruit on my labors. So to get high returns with real estate investing there is often an upfront cost in time and effort and some times money in order to create large returns that can become very passive over time.

My goal in the next 1-2 years is to go from active multifamily investor to all passive, throwing money into my colleagues' deals. We'll be heavily weighted on real estate with some diversification. Putting money into funds, single and multi offering for both debt and equity, for various types of commercial real estate and maybe even some non-real estate funds like ATMs or auto loans, crowdfunding platforms, stocks in ETF's, BTC and ETH crypto, and a few angel investments in specific types of tech and sports startups we have a background in, provides a lot of diversity while still focusing on my strength in real estate. The goal is to FIRE, work optional, fill our time with a passion project, not work forever, not even as an active real estate landlord.

One thing to consider when you are doing it yourself or having a property management company is where your market is.  I have tons of rentals in northeast Ohio and get people from out of state that wants to invest there because the numbers of rent to what people make ratio is so good in different areas.  However! Finding really good property management companies in, say, Cleveland, can be a lot harder than in other areas.  If you want to be more of a business owner/investor you do want to go more the property management route if you can.  Different areas do make this easier or harder.  So you do want to do your due diligence as there is a vast difference in the quality of property management companies.  A person that say they can do property management is almost like someone who says they can paint, a lot can do it, but few do a real quality job that won't end up being more trouble than they are worth.  So look to find the right ones to find the right deals.  

In reference to the stock market vs. real estate, since I invest in both, the advantages of real estate go beyond tax advantages and just ROI. There are so many different ways you can make a deal happen if you are able to work to make it happen. I have helped workers, with not the best credit, that now no longer work with me get their own rentals by finding other investors that wanted to get rid of their rentals and willing to sell them on land contract. Just one example of many, but part of the advantage of real estate is there are often many ways to get a deal done and have someone else pay for your investment.

The big thing is action.  When I was younger I taught some financial skills to some run away and homeless teens as an Americore member.  A couple that sat in that class listened to what I said about what some were doing to take over a property, rent it for more than a person who couldn't sell it for bills were, and put it under contract to buy.  I am not explaining quite right, but I did not go out and do that as a young 20 something and they did.  They ended up financially free much younger than me as they went and put that plan into action and the money they made off those deals they saved and put into other deals.  I am fine and happy with that as I helped some people out as I also help people with credit and other things that have now bought their first house or got out of debt.  It is good to pay things foward.  I digress.  

Long story short, and sorry for getting off track, yes you can make more money.  Also, people will always need a place to live, they may not always need to have money in stocks.  There are a ton of reasons I think real estate is a good place to be.  Sorry for the tangents.  Lol.

The syndications work good until they don't. It's a bull market and I could see a lot of these syndications resulting in a loss of capital if we see a downturn. With SPY or buy/hold on 30 year mortgages you can just hold throughout the ups and downs. I would avoid syndications unless willing to risk a total loss. For buy/hold lots of people (most people) have full time w2s. As long as the properties are in class B or better areas it's surprisingly little work managing these. Most of my clients don't even use property managers and practically all of them work full time jobs. 

There are companies that are well thought of that can take your money and pool it for specific real estate investments. These are not publicly traded REITS.

@Annie R. - many people have been trained to believe that diversification is good.  The flip side to that coin is worth consideration. Diversification is for those who are not fully informed.  They use diversification to control for lack of knowledge arbitrage.  Andrew Carnegie, the world's first billionaire said "put all your eggs in one basket.  Then watch it like a hawk."  Warren Buffet often quotes that.  We are putting nearly 100% of our wealth into Florida multifamily for this reason.  I picked up and moved to Florida to be able to invest locally and watch the properties like a hawk.  Most are not willing to go through the pain of uprooting their life to take such a drastic approach.  Regarding syndication, you might check out the multifamily forum.

@Annie R. Hey Annie! So theres different types of deals you can lend on and different ways of structuring those deals.

I, like a lot of others, raise private money for single family home investments. Typically how we structure the deal is our lender gets a 1st position mortgage and promissory note on the property they lend on. In return they get a set % return for the time that their funds are in play.

Since they are not 'owners' in the deal, they do not share in the cashflow, appreciation, etc. Their return is simply the fixed agreed on rate.

Depending on the investor you're lending to and where they are buying you can get started with very little capital technically. For example I've borrowed as little as 25k to purchase a house. If you're lending to a flipper in Boston obviously that's not going to be the case.

I know of some apartment investors that raise capital from private lenders also as part of what is called a syndication. Some of these investors will offer a small piece of equity to their private lenders and those lenders will get to participate in the cashflow, appreciation, equity, tax benefits, etc.

Again the terms can vary quite a bit and typically these investors need to be accredited to invest in these types of deals.

@Annie R. I’m not exactly a DIYer nor am I just a passive investor. I guess I’m somewhat in the middle. Yes, I do own my own rental investment property but I have a team in place that does the repairs for me. They get the property ready and I build these costs into my numbers. I might not get those grand slam results but I do get good solid returns.

Currently I am doing the tenant placement and the management of my buildings once they’re rent ready. With my returns I could place them with a property manager and be more hands off and still get decent returns if I wanted to.

My tenants not only have my telephone number but also have the telephone number of my handyman in case they need repairs. This makes for quick turnaround times if something goes wrong.

My W-2 job allows me some income to qualify for financing with. My goal is to continue to lower my D/I ratio so I can keep qualifying for more properties. I have a fairly low paying job so a big key for me is to make sure the income in the properties I buy more than covers the loan so it doesn’t create headaches for me with my bank.

@Annie R. Hi Annie feel free to send DM me. I worked with a very reputable group for multifamily, you dont need to stay active at all. Just keep your professional w2 job and create passive income. Thanks

For passive investing, due diligence of the deal or fund, and the team is key. I would recommend checking out Verivest.com who specializes in due diligence on private real estate funds and teams. They have a list of quite a few that you can look at.

Originally posted by @Alecia Loveless :

@Annie R. I’m not exactly a DIYer nor am I just a passive investor. I guess I’m somewhat in the middle. Yes, I do own my own rental investment property but I have a team in place that does the repairs for me. They get the property ready and I build these costs into my numbers. I might not get those grand slam results but I do get good solid returns.

Currently I am doing the tenant placement and the management of my buildings once they’re rent ready. With my returns I could place them with a property manager and be more hands off and still get decent returns if I wanted to.

My tenants not only have my telephone number but also have the telephone number of my handyman in case they need repairs. This makes for quick turnaround times if something goes wrong.

My W-2 job allows me some income to qualify for financing with. My goal is to continue to lower my D/I ratio so I can keep qualifying for more properties. I have a fairly low paying job so a big key for me is to make sure the income in the properties I buy more than covers the loan so it doesn’t create headaches for me with my bank.

 Makes sense. Sounds like a solid plan. Good luck to you! 

Originally posted by @Mike Lorence :

@Annie R. - many people have been trained to believe that diversification is good.  The flip side to that coin is worth consideration. Diversification is for those who are not fully informed.  They use diversification to control for lack of knowledge arbitrage.  Andrew Carnegie, the world's first billionaire said "put all your eggs in one basket.  Then watch it like a hawk."  Warren Buffet often quotes that.  We are putting nearly 100% of our wealth into Florida multifamily for this reason.  I picked up and moved to Florida to be able to invest locally and watch the properties like a hawk.  Most are not willing to go through the pain of uprooting their life to take such a drastic approach.  Regarding syndication, you might check out the multifamily forum.


 I would have to politely disagree. Diversification does not imply lack of knowledge; it could be a deliberate choice. Whether one has knowledge in the category or not, does not preclude one from investing in it. And diversifying one's total pool of money into various or a single category of investments is not a zero-sum game. They could all lose, all win, or split the difference. In the end, does it matter? 

Originally posted by @Matt Groth :

@Annie R. Joe is right

I was going to say something very similar

Look at it this way...would your company pay the same salary you get to me? The only difference is I won't actually show up nor do any of the work... the other option for you, and it can be difficult, is to be the equity partner for the diy'er. I'm a gc, built a ground up duplex. I provided none of the cash, bit all of the work. Returns are great for both of us. It just has to be someone you REALLY trust.

That's the trick, isn't it?

 

Originally posted by @James G. :

@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.

There are some stocks that pay dividends, but yes, have to watch what it does to your income. Same for REI, and any investment really that provides an revenue stream.

@Annie R.

The riches are in the niches. If you look at the Forbes 400, the most wealthiest people in the world, you’ll find that they made their money through extreme focus on 1 or 2 vertices (excluding those who inherited their $). Wealth comes from leverage. Leverage is created by specialization.

@Mike Lorence most people are talking about yields from passive investments. Otherwise everyone is putting 100% of their time and energy in their main area of work.

And we are in the 21st century now, where passive investments can yield more than the active area of work. But since there are no guarantees, hence the diversification. Are you saying that no passive investment can beat your Florida multifamily active work? 

Annie,

Hard to compare RE investments and stock market at this phase in the cycle. This is an unusual time in the stock market, that is currently sky high but real estate is a point of diversification in an overall portfolio. REIT do not give that diversification from equities. In addition, for high income earners Syndications have a much more favorable tax treatment especially for not increasing ones taxable income when taking into consideration depreciation. I agree with many who said that the ideal is it a bit of both RE and equity investing. I myself as a busy professional choose passive syndication deals as an LP.

Duke

@Annie R. I don’t think it’s useful to compare the stock market return to the real estate. Simply put, they are different sectors and also one (stock market) is very broad, while a single RE deal is very specific.

They key thing here is risk management. How much risk are you willing to tolerate at the expense of being hands off? Thinking about what that threshold looks like will help you figure out your investment path. 

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