6 Key Points of Real Estate Investing for Passive Income
You can invest in real estate in multiple ways, such as single-family homes, wholesale, fix and flips, multifamily commercial properties, long-term, and short-term rentals (like AirBnB), to name a few. However, unless it generates enough income to allow you to hire a manager, it requires your time and knowledge to do it right and avoid losing money.
Passive Real Estate Investing:
Passive real estate investing is primarily done in three ways: through a private company that pools assets with others on the same path, buying a large multifamily apartment, office, or strip mall where you hire a manager, or investing in a public offering such as a REIT, where you buy stock in multiple companies but don't own the real estate directly.
Advantages of Investing with a Private Firm:
In today’s uncertain market, investing with a private firm allows investors to take less risk, enjoy a higher standard of living, and put more savings into their retirement accounts, plus enjoy tax benefits that other methods don’t achieve. These are likely some of the best-performing assets today, with their potential for growth and appreciation.
Importance of a Diversified Portfolio:
Having a diversified portfolio is more crucial than ever in these volatile times, and investing in multifamily real estate with a reputable company handling the day-to-day is smart.
Understanding Cash Flow and Potential Growth:
One of the main attractions of real estate investing is significant growth potential, and each sector is different. Land banking is 100% based on future value growth and generates little, if any, income. It can be a good way to park funds when the economy is contracting, as the holding costs are relatively low.
Investing in Land with Crops:
Investing in land with crops can be beneficial, but it includes factors out of your control like the weather, which can devastate a crop and, therefore, your profits.
Residential and Commercial Rentals:
These include land with the added value of cash flow, making them more appealing to many investors. Investors must look at all factors, such as gross income versus net income compared to the amount invested, to determine if a particular investment is worth buying.
Investment Structure:
While there is an option to own real estate individually, it is often more beneficial to own as a group using an experienced company with the knowledge and expertise to source the land, make improvements, and create the cash flow you’re looking for. Public REITs offer this but often charge high fees and yield lower returns. REITs do provide liquidity as they are bought and sold like stock.
Private Group Solutions:
These offer less liquidity, but the potential for higher returns is significantly more. They are less liquid and are best for investing when you have longer timelines. Both REITs and Private Equity firms are completely passive.
Levels of Liquidity and Leverage:
Real estate is less liquid than stock, and when you buy, you must commit to the term it will take to create passive cash flow and growth appreciation. Sure, you can do fix and flips for quick money, but you must know how and do the work yourself to reap the benefits.
Does Leverage Make Sense?
In today’s world of low cap rates and high interest rates for the best properties, it is hard to create the cash flow necessary to make the deals worthwhile. Leverage adds risk and only makes sense to a certain level. It makes sense only when the net rate is at least 1% below what you receive in cash flow (better if it’s 2%). So, if you borrow money at 3% and receive at least 5%, it makes sense. But when rates are 6% and you receive 4%, it doesn’t.
Our Strategy at PPP:
We build our assets with cash, get them cash flowing at double-digit rates, and then pull our money out with a low-leverage (50%) loan while continuing to cash flow the property. This strategy is most sensible in a volatile world for safety and maximizing options.
Turnkey vs. Sweat Equity:
Sweat equity allows us to receive more because we start from scratch and create the property's value through our own work. Of course, with PPP, you don’t sweat at all; we do all the work, and it’s easy and fun for us.
Passive Income and Wealth Preservation:
All turnkey 100% passive investments require management, and that has a cost of anywhere from 15 to 25% of profits. Remember, real estate has three value propositions: gross cash flow, asset value growth, and tax benefits. For example, let’s say you put in $100k, and the gross return is 25%. The expenses, including management, are 30%, so your return is 17.5% after expenses. This is entirely achievable in multifamily senior housing examples.
Personal Value and Legacy:
This goes a bit beyond pure real estate investing. We want to keep in mind the quality of life and personal choices. Investing in something like a multifamily senior housing development may create less cash flow than cryptocurrency, but it has real tangible value and improves the lives of others while enhancing your life too
In summary, real estate investment, especially in its passive forms, offers a diverse range of opportunities and challenges. From understanding the types of investments available and their cash flow potentials to grasping the intricacies of investment structures and the role of leverage, it's a field rich with possibility. The key lies in making informed decisions that align with your financial goals, risk tolerance, and personal values.
Remember, while the landscape of real estate investment is vast and varied, the goal is not just to grow your wealth, but also to contribute positively to your lifestyle and the community. Whether it's the stability of multifamily properties, the growth potential of land investments, or the unique advantages of senior housing, each investment carries the potential to shape not just your financial future, but also the world around you.
Are you ready to embark on your journey into the world of passive real estate investing, or looking to expand your existing portfolio? Our team at PPP is here to guide you through each step, offering expertise and tailored solutions to suit your investment needs. Contact us today for a detailed consultation.
