Which Real Estate Investments Provide True Passive Income & Financial Freedom?

by | BiggerPockets.com

A lot of you have probably heard of the buzzwords like financial freedom and passive income. Every Bob and their dog is parading those two words, especially all the gurus out there. I do not like those folks, but I am going to leave that for another article.

Let’s talk about passive income and financial freedom. What are passive income and financial freedom? Since I started in real estate, I have bought and held on to a lot of properties that I have not sold to investors. At one time, I had about 25 single family homes in my portfolio that my in-house property management company was managing. Was that passive income or financial freedom? That portfolio was bringing in way more than the averageU.S. salary, but I’m happy to tell you now that wasn’t true passive income. In my opinion, it also wasn’t true financial freedom. Let me tell you why—because I still got the call. What call? “Umm, your roof just caved in because a tree branch fell off and it broke everything!” Or, “Hey, your tenant’s toilet is clogged and we can’t seem to figure out what’s wrong with it and we’re going to have to get Roto-Rooter out here. It’s going to cost $300.” And so on.

In my opinion, true financial freedom and true passive income are when you never get that call. So, how can you go about accomplishing something like that? Folks who are looking to buy turnkey and who think when you invest in 5, 10, 15, or 20 properties like I had for financial freedom and passive income are wrong. I think that is not true financial freedom and passive income because you’re still going to get that dreaded call. You’re still going to get that dreaded email from your property manager if you’re buying turnkey or even if you’re managing your properties yourself.

How Can You Achieve True Financial Freedom and Passive Income?

I think you have to compromise on the yield or the net return on investment. Hypothetically, if you’re buying turnkey; buying, fixing, and holding; or buying, holding, and putting a property manager in place, you are going to have to go into a higher end type area, more of an A-class area. Ultimately you’re going to have to go into a market where there is huge population growth and where there are many jobs. Also, you want something like they have in Sydney, Australia, where people are actually competing for rentals. That will make it truly passive income and true financial freedom.

Let’s backtrack a bit. So, you’ve bought in a higher end area, there’s a lot of population growth, there’s a huge demand for rentals, and there are people fighting over rentals. You’re probably going to have to pay more than you would in a lower asset class. So straight away you’re going to compromise on that net return. You’re also going to instruct your property manager to not bother you with any maintenance requests. I know that sucks, because you have to let go of the reigns and trust them. That’s why it is so important to find the right people first before you look at the stats and demographics of an area. Teamwork makes the dream work. Ok, back on track here. So you tell your property manager that you have $1,000 in the maintenance reserve and to feel free to use it as you see fit.

This, in my opinion, will be true financial freedom and true passive income. You are going to invest a large amount of capital into buy and hold properties, and you’re going to be completely hands-off. You’re not going to have any control and trust the people in place. If you can get anywhere from 4-6% net on your investment in a true financial freedom and passive income way, I think you’re doing really well. If you want to be a little hands on, you should be getting 8% and up.

No phone calls, you’re sipping piña coladas in the Bahamas, and the rent is coming in. I’d love to hear from you about this, especially from someone who has a great structure in place and has true financial freedom and passive income.

You think I’m right, you think I’m wrong?

Comment below.

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo” is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

8 Comments

  1. David Krulac

    Engelo, my friend, very thought provoking!

    1. There are bargain purchases in every class of property; might be harder to find in A Class properties, but there are some bargains. I bought a $330,000 for $30,000. Right set of multiple set of circumstances; unfortunately can’t find a deal like that every day.

    2. Triple net lease properties, in my mind are about as passive as you get. Around here there was a new big gas station/convenience store and a national restaurant, that the real estate was sold for $5.1 million in less than 30 days with a 5 cap rate. So the purchaser will net $255,000 per year for their investment, and no phone calls about trees falling down and clogged toilets. For this passive income and financial freedom, the kicker is that the investor either needed $5.1 million in cash or had access to the $5.1 million. Therefore it was not attainable investment for a beginning investor with no cash and no access to $5.1 million, which is probably 99% of beginning investors. I know I was in that category when I started with nothing.

    3. I met a person not on Bigger Pockets, who’s family owned vacant land that had timber quality trees. He had about 1,000 acres and once every ten years they would do a selective cut, only cutting the largest trees on the property. Once every ten years he would call a logging company to come in and selectively cut the trees and he would net $1,000 per acre. Which equals $1,000,000 divided by the ten years to $100,000 a year pro-rated. He effectively made $100,000 a year by making one phone call every ten years. Just about as passive as you can get.

    4. Again the kicker is how do you get 1,000 acres of timber to get in that position to have that kind of passive income? If you’re just starting out and have no money, both of the last two examples are pretty much out of reach.

    5. Starting out with nothing, something I know a lot about, you need to hunt for the best deals that you can find and over time improve your portfolio by what I call thinning the herd, keeping the best properties and getting rid of the less desirable properties and building the class of you properties.

    David Krulac

  2. Right on Dave, farm land will do the same. Rent out your land to either a farmer growing crops or a dairy farmer. Property tax on farm land here in Oregon is very low, same with forest land.

  3. Kevin Sapp

    There are lots of ways to be more hands off or a little hands on.

    Notes are a great example. Longer term performing 1st will do better than the 4%. Personally, although a little more hands on, I like short term rehab notes. 12% all.day.long. when evaluated and funded properly decent safety margin.

  4. Tiffany Johnson

    I only invest in A-class, manage some of the properties myself, and it’s still mostly passive income. For one, I have almost zero turnover because the tenants love the neighborhoods, schools, etc. And they have pride in their homes and take care of them, so maintenance calls have been less than once a year. Appreciation and cash flow has been excellent, but that’s from buying and renovating foreclosures 3-4 years ago. I’m in a hot market (Seattle suburbs), so now I’m buying out-of-state. A-class is tough to find with turnkey companies, but it’s possible. Bought one last year, and will stick with my strategy.

  5. David Roberts

    What about being a lender? I started off wanting to own a bunch of rentals but now I kind of like the idea of flipping and lending the money out. Eventually I wont have to flip anymore.

    It keeps you in the game and sharp, and lending is 100% money working for you. Just a thought.

  6. Adam Britt

    I hear you man, I see lots of references to real estate as “passive investments,” but it seems to very rarely look passive any time I peek at these forums or listen to a Podcast. I have always thought that passive was an option for those willing to overlook some profits in trade for a hands-off approach. Makes sense to me, though I have zero experience.

    It also seems that many here are already stating that you have to have money in the pot to get money out. Starting off in real estate, it seems unreasonable to expect passive income until you scale up to a level where you can afford to overlook some cash for convenience. And that is assuming you fully trust your management company.

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