As a busy professional or entrepreneur engaged in purposeful work but looking for a passive way to invest in savings, real estate investing may be the last thing on your mind. From a traditional and mainstream perspective, this is understandable. From this perspective, real estate investing is anything but a passive way to invest in savings.
It is no secret to most people that real estate investing is a wealth-building vehicle. Yet, the obstacles to the more commonly known hands-on approach to active real estate investing as a way to invest savings to build wealth can be overwhelming. If you want to know what to do with savings but do not want the headaches of active real estate investing, this article will show you the best way to invest savings in passive income real estate investing.
Different types of Active Real Estate Investing
Many people devote their life to real estate investing from this very traditional active, and hands-on perspective. For these people, real estate investing becomes a full-time job. Some begin real estate investing as a side gig. They soon discover that if they want to scale it to become financially independent, it will take an enormous amount of time and effort. It grows to become anything but the passive income and a good way to invest savings that they thought it would be.
Some began by buying and flipping. This usually takes the course of purchasing and rehabbing and, hopefully, selling for a profit. They hold some properties for rentals and begin to build a portfolio of single-family homes. Passive income, as the best way to invest savings, they hoped to moves further down the road as the business consumes more and more of their time and effort.
There are many variations in these hands-on real estate investment approaches. Wholesalers purchase properties at a discount and sell to fix and flippers. Buyers and holders for rental cash flow can buy from wholesalers or buy directly. Eventually, those buying and holding may graduate to larger and larger multifamily units. As the buy and hold portfolios increase, so do the headaches of landlording. The toilets, tenants, and trash syndrome grows in magnitude. Often management is then turned over to third-party managers. Now the landlord has the headache of managing the 3rd party manager.
Challenges of Active Real Estate Investing
Going down this route, even the thought of getting started in real estate investing is challenging. You have to locate the properties that are viable as an investment. This requires finding a real estate broker who understands real estate investing or spending enormous amounts of effort searching for and locating the properties on your own.
You soon realize that either way, locating viable properties is extremely competitive as the experienced professionals already dominate the field and are the first to find the deals. You may also find that the local market is simply not a viable market for an investment property. All in all, finding a viable investment property is enormously time-consuming and demanding.
Once a property is located, offers have to be submitted and purchases negotiated. More time is required, and along with the time consumption come challenges of developing real estate negotiation skills. This is only the beginning of the purchase process.
Unless you are paying cash, which is highly unlikely, you must now deal with lenders and mountains of documentation. You’ll be dealing with municipal regulators, attorneys, closing agents, insurance agents, and contractors. With all these obstacles, one can understand why professionals and entrepreneurs of all stripes who are satisfied with their purposeful endeavors and looking for passive ways to invest in savings are prone to disregard real estate as a viable investment option.
On top of the time and effort considerations, there are risks. Any investment comes with a level of risk. Even placing your money in an FDIC-insured savings account comes with risk. In this case, the risk is largely that of losing value to inflation, but also there is the fact the FDIC only insures up to $250,000. Bonds are considered less risky than stocks as they usually come with a fairly predictable interest payment, but they are not often insured. Blue Chip stocks are considered the less risky stock market investment, but they carry no guarantee.
Real estate, like any other investment, comes with its own risks. Real estate markets are cyclical. Buying at the top of a market cycle can be devastating to an investment portfolio. Knowing when to buy and when to hold only comes with experience and an understanding of market cycles.
As Don Schlitz articulated in “The Gambler,” the song made famous by Kenny Rogers:
It is not only cycles that can be a barrier to successful real estate investing and wipe out your savings. When buying a stock, liability is not something you will be concerned about, but owning real estate comes with liability. Real estate owners are accountable for things that can happen on their property. People with wealth are a target for lawsuits.
Ways to make passive income
You can call up your financial adviser and tell them to shift your funds to another stock or mutual fund of your choice. It is simple and done instantly, and you have little worry or concern once the transaction is made other than the possibility of the stock market crashing. You can take the passive investment process even a step further by meeting only annually with your financial adviser and laying out the basic perimeters for your investment strategy. Then all you need to do is leave it to them to follow the markets and make the investment decisions they think are best for your portfolio. But is that the best return on investment on your savings?
You may just purchase bonds and feel safe with them. Others put their savings in certificates of deposits. Each of these investment savings has their viability and are passive, which is attractive to busy people dedicated to their purposeful careers, but again, is it the best way to grow passive income?
You may have experience investing in real estate as a wholesaler, fix and flip, or buy and hold. These investments may be making good returns on your investments. You may even be able to, at this point, contain the time and effort commitments without interruption to your lifestyle. Yet, scaling to the point of financial independence through these active and direct real estate investments may be unattainable without giving more of your valuable time.
My Investment Mistakes
I began my real estate investing career building a single-family in Colorado while living in Guam. The intent was to rent a portion of the home and have a portion of the home for me to stay in when in the states. As is not always the case, the plan worked as designed. I held the property collecting rents to cover the mortgage and property management fees while having a place I loved to go to when in the states.
After moving back to the states but landing in a different state, I sold the property for a small profit. I did a 1031 exchange and purchased a single-family home in Appalachia, where I lived. I rented it as a single-family for a year before converting it to a tri-plex. By that time, I had already converted my primary residence into a triplex, rented two units, and lived in the third. Everything was flowing smoothly until 2007. The economy crashed, and I lost my job.
The properties were cash flowing but not sufficient to sustain me without a W-2 income. Maintenance issues began to mount. The real estate market in the region dried up completely. I was not able to sell and lost one of the properties to foreclosure. Fortunately, one of the properties did eventually sell at a profit. With the profit, I purchased a bank-owned property to fix and flip. With additional funds from a hard money lender, I rehabbed the home and sold it for a good profit. I took the profit and purchased a tract of land to build a spec home, partially financed by private money.
By the time the project was completed, expenses had exceeded the estimates by four times my projections. I should have listened to the Gambler and learned “to play it right” before investing everything I had.
Not only did I lose my initial investment, but I had to take out a mortgage on my primary resident to finish paying off the remaining balance on the second mortgage private money loan. Even though I suffered substantial loss, my investors (private money lenders) were paid according to the agreement. The second mortgage holder did have to wait for a full payout, but he earned the agreed interest the entire length of the hold.
I’m not sure what was more painful – the capital loss or the embarrassment and humiliation. During that decade, I had owned rental property and earned reasonable cash flow while providing attractive and livable homes to many residents. I had done a couple of fix and flips and built a beautiful spec home. I had spent a decade struggling to get back to where I was in 2007, only to end up further behind than where I had started. While the financial set-back hurt, the humiliation was crippling.
Having made good money through cash-flowing properties and profits from the sales, I know firsthand the excellent potential for a good return on investment through real estate. Having lost capital assets and money and felt the sting of humiliation that comes with loss, I know the real estate investing risks. While the profits have been pleasurable and the loss painful, it is the loss that has been the most educational.
Lessons learned from Investment Mistakes
The number one lesson learned is the rock-solid fact that trying to go it alone in real estate investing increases the risk by many magnitudes. There are a couple of reasons as to why. One, going at this single-handedly, provides no way to spread the risk. The other reason is that going it alone reduces access to more experienced and wiser operators. As I learned from doing my own renovations, there is a huge difference in final quality between an armchair handyman and an experienced professional.
One other lesson learned is that going it alone does not allow for a reasonable level of leverage to scale to an acceptable passive income level. One of the best advantages of real estate investing is the ability to leverage. However, going it alone will not provide sufficient leverage to scale my investing. I also need the leverage of experienced operators, so I do not make the same mistake I made with the spec home investment. My biggest desire is to leave the world in a better place than I found it. To accomplish this, I need passive income to have the financial resources and time freedom.
The secret strategy of making passive income in real estate
There is a solution, and if I were not such a slow learner, I’d have learned this a decade or two earlier. Investing in passive income-producing real estate provides the solutions. Passive real estate investing in multifamily apartments and mobile home parks spreads the risks. It puts the passive investor in a direct relationship with the experts who have the knowledge and wisdom through experience to know what makes a good passive income investment and what isn’t. Experienced operators “know when to hold ’em, know when to fold ’em.”
In brief, a passive income investment in real estate is made through a legally formed entity that pools passive investor money to purchase large-scale real estate properties that one person alone would never be able to do. These real estate passive income legal entities spread the risk and increase the leverage. Best of all, passive income investing in these real estate entities allows the passive investor to tie into the wisdom from several investors’ experiences.
Advantages of Passive Real Estate Investing
Passive real estate investing through legal real estate entities provides a diversified non-correlated asset that is less susceptible to market swings than are stocks and bonds. There are real estate market cycles, but they move much slower than the Wall Street markets’ erratic and constant swings. Stock market cycles are like a Quarter Horse that can turn on a dime and outrun any other breed at a quarter-mile. Real estate market cycles are like Clydesdales that are much slower to respond with much less flexibility but have the power to move tons.
A passive income-producing real estate entity is formed via a limited liability company. Generally, the passive income-producing real estate entity is composed of two LLCs. The management team, who form the parent LLC membership, is referred to as general partners or sponsors. The passive real estate investor holds membership in the child LLC that has the title to the property. The passive investor is a limited partner. Limited partnership removes the passive income investor from day-to-day management responsibilities. The limited status also further shields the passive investor from liability. The passive income investor (limited partner) provides equity for the real estate purchase with their capital investment. In many passive income real estate investments, the limited partners receive preferred return status. That means that the limited partners receive dividend payments and profit distributions before the general partners.
The general partners (the active investors) locate the asset, do the underwriting and due diligence, obtain the debt financing, secure equity investors (limited partners/passive investors), take all steps necessary for the completion of the acquisition, and oversee the ongoing property management through disposition. The general partners also provide the management of the real estate entity. In addition to providing their time, effort, and expertise in managing the business and the real estate property, the general partners often invest their own money.
What to expect as a Passive Investor
Below is a copy of the index page to an Investment Offering Memorandum (IOM). The IOM gives you a glimpse of what you can expect to be presented with when considering a particular passive income real estate investment, the best way to invest savings. The photos throughout this post are similar to photos you’d find in any standard IOM. Steed Talker Capital receives many of these IOMs every week. These and properties like them are what passive income investors can invest in as the best way to invest savings.
You can see the benefits of pooling investment funds. These properties would be out of reach for a single passive investor. Passive income real estate investing makes it possible to passively invest in these attractive properties. The beauty of passive real estate investing goes beyond the property because the real advantage is that you can do so along with an experienced team. The experienced team not only reduces the risk, but it is a team that will also be managing the transaction and the property, making the investment truly a passive income as a good way to invest savings.
How Can We Help? Steed Talker Capital Works for You to Develop Passive Streams of Income
The expectation is that investors in the passive income real estate business will receive quarterly dividends from the cash flow generated by the asset (the real estate property). It is generally expected that the rental income from the real estate property will produce profits from invested savings that will deliver dividends of at least an 8% return on investment. Frequently, the largest return on investment comes, not with the quarterly dividends produced from real estate rental income but with the real estate property’s refinance or sale. Upon the refinance or sale of the real estate property, the original principal investment (the equity) plus any profit that has been generated is distributed to all investors who took part in the passive income investment. It is not unusual for investors to expect double-digit returns on their investment, frequently in the range of 14% to 18%.
The Morgan Stanley Wealth Management Investor Pulse Poll discovered that 77% of millionaire investors say they invest in passive income real estate investments. The Federal Reserve Bank of San Francisco, in their 2017 Working Paper, The Rate of Return on Everything, 1870 – 2015, found that of all asset classes, passive income real estate investing provided the best rate of return over the 145 years that were investigated. Some of these millionaire real estate investors are active investors. Most, however, are passive income investors.
As the host of Creek Side Chats with Successful Real Estate Investors, I have interviewed over one hundred successful investors. The podcast interview explores more than their real estate accomplishments as the show is designed to unearth each guest’s personal characteristics. From the interviews and follow-up conversations with each guest, I have developed relationships that provide a comprehensive understanding of who they are as individuals and business operators. From these relationships, I know who to go-to for the most reliable passive income real estate opportunities.
As part of each passive income investment that we invest with, Steed Talker Capital vets all private placement agreements and property placement memorandums before making offerings to our passive investors. Throughout the passive income investment ownership, we provide comprehensive and understandable quarterly reports to keep passive investors up to date on operations without overwhelming passive investors with needless and superfluous information.
Beyond our relationship building through Creek Side Chats, Steed Talker Capital deeply vets every passive income investment offering we invest with before even looking at their offerings. Once confident in the investment offering, Steed Talker Capital analyses with a fine-tooth comb, so we are confident in the team making the offering with confidence in the presented real estate property. Before presenting offers to our passive investors, we have vetted the team and the offering. We know the team members and have confidence that they have the expertise to acquire and the wisdom to manage the real estate investment to bring our passive investors the rate of returns projected.
Before bringing offers to our passive income investors, we answer the basic questions. Is the team competent? Is the team experienced? Is the team knowledgeable? Are the team members ethical? Can the team be trusted to stand behind their promises?
More importantly, all passive income investors have a relationship with me before investing with Steed Talker Capital. Every passive income investor not only knows me as a podcast host, not only through email correspondence, but every passive investor knows me via direct contact through one-on-one meet-ups. Before passive income investors invest with Steed Talker Capital, we have a relationship.
Steed Talker Capital provides truly passive income investing opportunities in the alternative investment class with a proven historical record of outperforming all other investment classes. Investors do not have to deal with toilets, tenants, and trash to invest in passive income real estate investing. Passive real estate investing does not require the passive investor to be involved in property management.
If the investor has held real estate and experienced firsthand the headaches of personal ownership, passive income real estate investing can give the passive investor the benefits without headaches. Perhaps, the investor has experienced success but found that the more real estate assets acquired, there was less time freedom. Passive real estate investing can provide the opportunity to grow a savings portfolio while giving back time. If the investor has been successful in Wall Street investments, passive income real estate investing can help keep more of what is earned because of the tax benefits passive real estate investing offers that Wall Street does not.
To be able to trust in a private placement offering is of concern, first get educated and develop an understanding of passive income real estate investing. Knowledge goes a long way in developing trust. Once you have a basic understanding of the business of passive income real estate investing, vet the team, making the passive investment offering, and determine their moral and ethical character. Develop a relationship before investing. Ascertain that the team making the passive income offering not only tends to the interest of the investment but that they also show an interest and hold an understanding of the passive investor’s needs and investment goals.
Passive income real estate investing as an investment class has stood the test of time. It has consistently performed as well or better than other investment asset classes. It is a non-correlated asset class that helps to shield against market fluctuations. It is a real asset, not paper, and it provides a hedge against inflation. Real estate investing provides a better tax shelter than any other asset class.
By investing in passive income real estate investments, real estate ownership headaches are eliminated, making passive real estate investing the best way to invest savings and grow your wealth.
I hope the article has been informative. I’d like to hear from you. How does investing in real estate syndications feel for you? Have you ever considered real estate as a passive investment? Have you ever invested in real estate? If you have, what real estate investments have you made? Please let me know in the comments below. Or email me at allen@SteedTalker.com. I’ll do my best to help you sort it all out, so you can soon be on your way to prosperous investing to live more abundantly in all areas of life
Confused or Uncertain?
With so many investment options, confusion as to where to invest leads to inaction. Schedule a FREE – NO OBLICATION – NO STRINGS ATTACHED call. Or email me with your questions and thoughts at allen@SteedTalker.com. I’ll help you sort it all out, and you’ll soon be on your way to prosperous investing to live more abundantly in all areas of life.
About the Author - Dr. Allen Lomax
With careers in academia, podcasting, and real estate investing, Dr. Allen Lomax inspires us to break open our minds’ secrets to discover individual and universal well-being. Through passive real estate investments, he helps enlightened investors create time freedom to live abundantly in all life’s areas.