How to Lose the Management Headaches & Invest More Passively in Real Estate

by | BiggerPockets.com

Often, I’m asked by other real estate investors, “How can I invest more passively?” This is a question that I’ve even asked myself many times over the years, especially as I’ve become frustrated or tired of one investing strategy or style over another.

I think it’s quite normal to question one’s strategy over time because let’s face it, things change. Markets change, financing changes, and our individual goals change. But I also think some of the confusion comes from the government and the IRS. After all, the IRS calls real estate investing “passive” from a taxation point of view, but really, most the time it’s anything but passive.

So, what’s an investor to do? If you’re running low on time, or if you’re just plain tired of dealing with all the nonsense that comes along with investing in buy-and-hold real estate, how can you make things more passive?

Getting Help

Years ago, when I was just starting out in real estate, I was too busy doing everything to even have time (or money) to hire help. I did my own bookkeeping, taxes, sourcing of deals, marketing, leasing, property management, maintenance, turnovers, renovations, evictions, financing applications, raising capital, managing contractors and vendors, etc. You name it, and I’ve probably done it.

Related: Want to Cover Your Living Expenses With Passive Income? Here’s What You Should Know.

The good news is today, I don’t do many of those tasks myself anymore.

For example, I don’t do too much bookkeeping on my individual real estate deals, if any, and I rarely look for deals, as they seem to find me or I just buy larger tapes of assets. I still oversee things like marketing and raising capital, but I rarely manage contractors, and I don’t do any maintenance, renovations, or property management anymore.

In fact, when you’re really serious about becoming a more passive investor, you prove it by getting rid of all or most of your tools. This was by far the hardest thing for me since I was a contractor and property manager for many, many years.

who-invests-in-real-estate

But if you want to be more passive, you have to take a look at all you’re currently doing and ask yourself three questions:

  1. What am I best at?
  2. What will I make the most money doing?
  3. What do I enjoy doing the most?

If you find something that answers all three, you’re good to go.

But keep in mind, even as the boss of a business or the owner of properties, we can’t be afraid to ask for help.   

Perhaps you could get a strategic partner who has specialized skills and can take some things off your plate. Maybe it’s as simple as co-investing with a JV partner. Or perhaps if you want to maintain more ownership and control, you could just find a better money partner or even a general contractor.

3 Passive Real Estate Investing Strategies

Besides outsourcing or finding a partner, you can also adopt different investing strategies that are more passive.

Many investors, especially high income earners, choose this method if they don’t have the time to learn and operate a whole new business model. If that sounds like you and you’re looking for a quicker way to invest, there are plenty of options available.

1. REITs & Funds

Some folks will just invest in real estate investing companies or REITS (real estate investment trusts). There are also all sorts of funds one can invest in. For example, there are hard money funds, real estate funds, note funds, tax-lien funds, peer-to-peer lending funds, insurance policy funds, apartment and commercial real estate funds (mobile homes, storage centers, office condos, strip stores, etc.), and even hydroponic farming funds (marijuana and Stevia). The list goes on and on.

2. Financing

Just investing in the financing side of real estate (i.e. hard and private money or notes) can be much more passive than dealing with tenants, toilets, and townships. Investing in paper, backed by real estate, absolutely has its merits. In fact, performing notes have been one of my own personal favorites when it comes to investing passively.

single-mom-duplex

Related: Passive Investing: How to Have a True “4-Hour” Real Estate Workweek

3. Commercial Real Estate

When it comes to buy and hold real estate, I must admit that these days, I’m more drawn to larger commercial real estate projects, mainly because with larger projects I can afford to have a team in place to handle management or maintenance without needing my pretty face in the day-to-day operations.

As I’ve gotten older, I’ve become more concerned with safety and diversification and less interested in investments that come with a whole lot of aggravation. Maybe this is why my focus has shifted more towards passive investments like private money,  notes, private placements, and other businesses, such as leasing land, garages, storage centers, and apartments.

But enough about me. Let’s talk about you.

[Editor’s Note: We are reposting this article to help out our newer readers.]

Are you simplifying your life and making your real estate investing more passive? If so, what strategies or investment opportunities are your favorite?

If you’d rather be more active, that’s great too! What are your plans for investing in the future?

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

11 Comments

  1. Hey Dave! Great Article! I’m starting to sell paid-off properties and have been taking back the mortgages – much more pleasant to sit back and collect mortgage payments and not deal with tenants and toilets! I want to put some money with hard money lenders and am looking into that. I had a firm in mind but the owner is also winding down and can’t take any new money. As I approach 60(yikes!) it’s time to simplify life and relax! What is the best way to investigate/vet/find note or hard money funds?

    • Dave Van Horn

      Hi Cheryl,

      Glad to hear your enjoyed the article.

      To answer your question, I always liked Dr. Kenyon Meadows approach to investigating funds, i’d recommend checking out his podcast he did here on BP. Episode #219

      Not sure where you’re based but I also started a group called SIA (Strategic Investor Alliance) where accredited investors connect in person every other month at events across the Greater Philadelphia Area (along with an annual full day event in the Spring or Fall). It’s a good way for investors to get to see what other strategies people are doing and we also host speakers from around the country on all sorts of passive investments. That way investors can vet many different passive investment vehicles and connect with others doing the same. If you want more info, feel free to PM me.

      Lastly, BiggerPockets is a good litmus test as well. Plenty of people on the site have invested in a multitude of things and seems to give pretty honest reviews.

      Best,
      Dave

  2. Great article Dave! I personally as i get older realize the advantage of this transition…..i still swing a hammer, but now I’m beginning to finance my own tenants into the homes they rent. If they have a stellar payment history and want to buy the home we draw up the note- keeping the payment the same or less… and they become homeowners- we request a waiver on inspection ( they know whats wrong if anything) waive survey, and for the waivers we even give them the year to date equity ( credit the current years rents as though they had the mortgage since January) this gives them a gift of a few bucks in instant equity – no penalty for early payoff and the note interest rate can be bought down- say 1000.00 per point ……what do you think? The homes have long been paid off so its all income now-

    • Dave Van Horn

      Thanks Dave!

      And sounds like a great strategy! One other thing I’ve added to those types of deals is a Home Warranty. They’re only about $400 or $500 and they really give the tenant a piece of mind. Plus you can build that cost into the deal.

  3. Chris Soignier

    Hard to argue w/ your logic, Dave! I’ve been through it all, and now my primary focus is on building multiple streams of passive income. I love multifamily investing, and have just one single family rental left as I’ve shifted most of my capital to that asset class.

  4. Chad Clinton

    Hey Dave,

    I really enjoyed your article and I enjoy your newsletter as well. It’s filled with great information. However, it seems like a lot of your content is more beneficial to ‘high net worth’ investors, and I’d like to know what you recommend for those who aren’t at that point, but very interested in the industry.

    I’m in my early 40’s and am in the process of rebounding from some real estate mistakes when I was in my 30’s. I certainly understand the value of diversification and entrepreneurship, especially in this current economic and political climate. I’d appreciate any feedback. Thank you!

    Chad

    • Dave Van Horn

      Hi Chad,

      It’s funny you say that, I’m actually writing an article about this right now.

      There’s no one size fits all answer to your question of course. It depends on a large variety of factors including everything from what your age is, how much reserves you have, what your housing situation is, where you live, your insurance, retirement, etc.

      Tax liens, commodities, oil and gas rights, timber and mineral rights, saving bonds, livestock, ticket resales, structured settlements, foreign currencies, US Treasury Bills, the list goes on and on. (*I actually pulled some of this list from an IRA company website – you can find many of those types of investments and resources in places like these) The point is, there are almost as many passive investments as there are ideas. What it really comes down to is, you have to invest in what you know and like. So the best advice is to get educated in that, do your due diligence, and find a mentor in the space if you can.

      In the note and real estate world, I think the internet will continue to change things and probably make it easier for the average person to invest. I see crowdfunding for both notes and real estate becoming more and more of the norm. There are also private funds that take unaccredited investors as well. I also have always been fond of P2P lending (i.e. unsecured notes). On sites like Lending Club, a person can get started with as little as $25. With such a low price point of entry, a person can really spread out their risk while still making a solid return.

      Hope this can help point you in the right direction.

      Stay tuned for the future article!

      Best,
      Dave

  5. Camilla Sauder

    My husband and I are at this point also where we are getting tired of managing the manager who really doesn’t want to be managed on our 20 rental houses. I don’t want this headache for another 20-30 years!! I’m ready to start diversifying into just getting a check every month without bookkeeping nightmares and tons of e-mails going back and forth trying to get answers to our questions, some of which never get a legit answer.
    Who to trust and where to head with this is the biggest question since there are so many new avenues to be explored and it takes a lot of time to be educated in each area so thanks for the article.

    • Dave Van Horn

      Hi Camilla

      I can relate! This is exactly why I’ve continued to diversify into more asset classes that were less management heavy. But you’re right, it isn’t easy. It took quite a bit of due diligence and recommendations to find what was right for me.

      Hopefully my article has helped point you in the right direction.

      Best,
      Dave

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