Two (Deceptively Complicated) Questions You Should Answer BEFORE Investing in Real Estate

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It may seem obvious what we are all trying to do by getting into real estate investing (REI), but I think it’s worth breaking it down. I think the reality is that we aren’t all necessarily in exactly the same boat in terms of our goals, so I say we throw them all onto the table! I think there are two components to this conversation:

  1. What are your goals with REI?
  2. What are you doing to achieve them?

Again, these answers may seem obvious or benign, but I believe there are some people out there who are trying to achieve their goals the wrong way. I’ll elaborate on that after I tell you my goals and methods.

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One Investor’s Goals and Methods

And by one investor, I mean me! I’ll tell you up front that the first book that really got my REI juices going, or maybe more specifically my understanding of money juices going, was Rich Dad Poor Dad by Robert Kiyosaki. I’m sure none of you can relate to that, huh? Kidding. I’ve never heard of another book that truly lit the fire under so many people.

Now, by no means am I an advocate of diving into his hugely priced programs, but I will say that his line of books are the reason I am where I am today. The main takeaway I had from Rich Dad Poor Dad was the idea of passive income, and I especially understood it more thoroughly when he explained the Cash Flow Quadrant.

The reason I tell you this is just because it’s a good lead-in to my goals and methods.

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My REI Goal: Lifestyle Design (via Passive Income)

I didn’t necessarily start out with lifestyle design as my primary focus because truly I didn’t get introduced to the concept until quite a ways into my journey, but the passive income idea is what really took me once I started reading the Rich Dad books, and I later began to equate passive income to lifestyle design.

Related: Working With Purpose: How I’ve Found Focus By Developing My “Why”

The reason I invest in REI, aside from the fact that it’s extremely fun, is because I want passive income. Or more generally, I want free money. Nothing beats having money show up in my bank account without me having had to do anything for it other than throw down my initial investment. By having free money show up in my account, I’m then allowed to have more freedom in my daily life because I’m no longer dependent on a 9-5 job that I hate.

Or if I am still dependent on that job, free money still opens the door to get the ball rolling to create different options. Or if replacing a salary isn’t the goal of passive income, passive income can allow for more fun stuff to be bought, more vacations, more financial security and diversification, and just overall more options. For me, I want my entire income to be passive. Why? Because I want to sleep in every day if I want to, I want to be able to say yes to a lunch invite with a friend, I want to be able to travel whenever I want to, and I don’t want to have to report to anyone, or work if I don’t want to. I’m not to the point of not having to work at all yet because I don’t have that much passive income, but I’ve gotten a great start with it! (If you don’t believe me, check out “Don’t Believe Passive Income is Awesome? Check Out the Diary of My Week!“)

My REI Method to Achieve Said Goal: Rental Properties

Here’s where things get interesting, and it’s driving towards why I’m writing this article at all. My goal is lifestyle design, but via passive income. A big misnomer about REI is what is and what isn’t actually passive income. You could look at it in terms of what the IRS deems passive income versus active income, but let’s just look at it as the income you don’t have to work for versus the income you do have to work for.

Flipping gives you active income. You have to physically be present and work in order to make money flipping. The only way to not have to show up is to hire enough people under you to do the actual work — but then that falls under the category of starting a business that you outsource (which is the other way to make passive income outside of rental properties). There are some components of flipping I would consider to be passive income, sort of, like the additional equity that gets built in by improving the property. Wholesaling, however, is actually a job so there is nothing passive coming from that (again, unless you make an outsourced business out of it). See the similarities here? In both flipping and wholesaling, you have to work for the money.

For more information on active vs. passive income, check out “The Truth About Active Income vs. Passive Income.”

Now, in comparison I don’t do jack for my rental properties. I literally make money in my sleep with those things. I do no work on them, I put no effort into them, and I usually don’t even think about them. Does that sound passive to you? It does to me! Now, here’s where I’ll continue to hint towards people being confused. There is a big difference in how passive the income is on my rental properties versus the income of other rental properties. I use a property manager on my properties, and therefore he’s the one doing all the work on them. I don’t do any. That is very different from landlording your own properties.

If you are the landlord, there is a good chance you are throwing that “passive” concept right out the window. See the difference? I do no work on my properties, so my income from them is truly passive. If I had to do all of the work of landlording, that income wouldn’t be quite as passive. Now, if you are a really good landlord with good systems, you likely don’t have to do a lot of work on your properties, so keep in mind this explanation is case-dependent. Regardless of how your properties are managed, the IRS will still consider them passive, so that’s exciting (better tax benefits), but don’t forego the idea that your income may not be as passive as you think if you are having to do that much work for it.

To get back to me and my methods now, when I set out to analyze an REI deal, I keep in mind that my goal with REI is lifestyle design, and therefore passive income. Knowing that, I first decide whether an opportunity is in support of that. If someone came to me and asked if I was interested in wholesaling, I’d say no way! Because it’s not passive. I’m not in the market for another job, and that’s what wholesaling is. If my goal were something different, like just income period, I may consider the wholesaling idea.

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A Common Misconception When Considering REI Goals

I’ve already alluded to it: Opportunities many might consider to be for passive income really aren’t all that passive. Actually, let me break it down into different phrasing that is better and more clear:

Not all investments are just investments; many of them are actually work.

That’s the misconception — investing versus working. Be very clear on this. Wholesaling is the biggest example. Not one ounce of wholesaling is actually investing. Yes, it’s related to REI and can give you tremendous skills in the REI field, but wholesaling is 100% work. Only by working will you earn any income with wholesaling.

Flipping is more of a combination of investing and working. You have to do a lot of work to succeed with flipping, but there is an investment component in it because if you exert X amount of work and Y amount of money into a flip, you are oftentimes going to earn an income worth more than what you put into it.

Wait, does that make sense? Let’s say you buy a property to flip. You put $50,000 into the materials and supplies, and you work X amount of hours that equate to, who knows, like $10,000. But you sell the house for $100,000 over what you got it for. You invested $50,000 into it (cash for the supplies), and you worked the equivalent of $10,000 worth. That totals to $60,000 and you got $100,000, so $40,000 of that is definitely free money in your pocket, but really that $50,000 was just an initial investment, so more accurately, for $10,000 worth of work, you made $40,000. How ‘bout that! See the combo of investing and working in there?

Rental properties, assuming you use a property manager to make it purely passive, doesn’t have a work component. Maybe five minutes a year, as it is with my properties, but I hardly think that counts against the passivity of the income. If I was landlording, I would begin to consider some portion of my income passive and some of it from “working” on the properties.

So any time you are presented with an REI opportunity, or if you are just pondering different ways to go with REI, really understand the level of work versus investment the opportunity presents and compare that to your goals. Find what fits best, both for your goals and for your skill set.

Related: 7 Tips to Help You (Actually) Achieve Your Entrepreneurial Goals This Year

This explanation is really just a sidebar to what I really want to know, which is…

What Are Your REI Goals and Methods for Achieving Them?

This is what I really want to hear! What better way to learn more about REI and the opportunities in the field than to hear about what other people are doing? I doubt I even know all of the options out there! It’s also a good way for people to hear things, even goals, that maybe they haven’t considered before and would like to incorporate into their own lives.

Some common goals with REI include:

  • Financial security to varying degrees
  • Financial diversification (do you not trust the stock market anymore?!)
  • Lifestyle design
  • Something to pass onto kids and grandkids
  • Having a challenge
  • To have fun!

What are your goals with REI? I know you have them because you are on BiggerPockets! And then what are your methods for achieving your goals? Have you already done them, or are you just starting out? Let’s see how many people we can get responding to these questions so we can build a huge encyclopedia (okay, maybe the more current word would be Wikipedia) of REI options!

Ready… Set… Go!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

18 Comments

  1. Good Read and excellent points. Much of the passive income on rental property so depends on a very good property manager. Vacancies, bad tenants, and horrible repair work does not allow you to play a passive role.

  2. After retiring from Nursing……. I saw an opportunity in 2009. Houses were foreclosing at bargain prices, in my new neighborhood. My plan buy ,6 , rent, hold and pass on to 2 children. Yes my income is Passive, but comes at high cost for property management. All have appreciated 100K average.
    Considering at 75 years old, gifting to children now. My tax hit is crazy, in Ca. I live a simple lifestyle. I am over
    Fancy stuff, Cruising, Vacation Homes…been there, over it.
    Its a nice problem. But I will get advice from my Real estate Attorney and CPA, before the gifting.
    Anyone out there know a better way?

    • Ali Boone

      Hey Lin. Definitely, I hope someone chimes in. If not, also reach out to Amanda Han on here. She’s one of the blog writers. She’s an amazing CPA. I would definitely consult with an investor-friendly CPA to ask that question to, because I’m certain they are ways around the full tax hit.

      That’s so awesome about the $100k appreciation! Congrats!!

  3. margaret smith on

    I started investing in 2005, joined my local REIA, and just started to learn from gurus, locals, and doing small deals. Spent way too much on courses, made some huge mistakes in the real world of RE, lost some money, made a little, and was off to the races. Did some rehabbing, kept a couple for rentals, now I am a hard money lender, where my hard earned buy/sell/rehab/deal structuring experience has become vital to understanding my clients and their proposed deals. My goal is to invest within my self directed ROTH IRA, and this year the income I made in those accounts surpassed my regular income. The tax free SD IRA concepts changed my life, and I would suggest to everyone that, if you thought you would never attain the age of 59 1/2- You are in for a surprise! Go get an account set up- today, no matter what your age!

    If you are a newbie, you will find you have strengths and weaknesses, and will eventually land on an area of interest and (eventually) skills that you can build on forever.

    I certainly agree with Ali that it is important to understand the difference between an investment and a job. The gurus make it all sound so easy, but it is hard work to learn this business, and to profit from it in a consistent way. This is a career with independence and risk. Not for everyone, but… I am passionate about what I do, as is everyone I know in this business! Thanks, Ali.

    • Ali Boone

      You’re welcome Margaret, and thanks so much for sharing your story! It sounds like an amazing one, certainly with more details than I’m sure you shared, and it certainly sounds like you found your niche. And that’s a lot of what people don’t understand….it takes flops and failures and goofs to really find what it is you are meant to be doing! Fear shouldn’t be…well, feared…it should be appreciated. The sooner you get the fails out of your system, the sooner you will find your niche. And I couldn’t agree more about the misconception the gurus convey. You gotta work hard and with persistence!

  4. Mindy Zimmerman

    I “accidentally” got into renting the house I previously lived in. My way of thinking is really skewed sometimes! In my mind, it was easier to deal with a tenant than trying to sell the house when I moved for work (plus I thought the passive income would be great). It is an amazing feeling to spend only 5-10 min of work per month for that check! Now I’m hooked and my goals have gone from “financial security” to moving more in line with “lifestyle freedom”. Thankfully, I don’t hate my job; but it sure would be nice to set my own schedule and have time to travel and do all the things that a 9-5 prevents me from doing now.

    Sometimes the tortoise race of acquiring buy and holds frustrates me but it’s what suits me best. I’ve done some honest self-evaluation the past year and came to the conclusion that I simply don’t have the right personality to do flipping or wholesale. My goals for this year include finding other income streams to help support my real estate habit and speed up my acquisition rate.

    Here’s to a great 2016!

    • Marva Stephens on

      Mindy, you have put into words the feelings that I’ve had but have been unable to express. I do NOT have the right personality to do wholesales, something my husband continues to push. I firmly believe that rentals is the way for me, and I just have to find a way to add to my portfolio.

      I promised to be braver in 2016 and just go for it. Thank you for saying what you did.

      • Ali Boone

        Hey Marva! So awesome Mindy’s response helped and resonated. I’m in the same boat she is as well, so definitely reach out to either of us anytime (I guess I’m speaking for Mindy here….sorry Mindy! lol) and we can help support.

        Where do you live? Do you have the option to invest locally or do you have to look elsewhere?

    • Ali Boone

      Hey Mindy! Ummmm….are we the same person? 🙂 I’m exactly the same as you. I never planned for rental properties but when they started, I knew it was my niche. I wish I could flip, but, nahhhh.

      Where do you live and where are you buying? What kinds of properties do you buy?

      And yes….here’s to an amazing 2016 to everyone!

  5. Great job Ali Boone , did a great work on things a Pearson should kept in mind who is thinking of investing in Real estate.I am also handling such a Real estate website like Burrw.com as i love to visit BiggerPockets to read its blog and enhance my knowledge.

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