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Financial Freedom with Passive RE Investing

How to reach financial freedom with passive multi-family real estate investing

When people think about multi-family investing they typically think that they need to purchase their own properties, rehab, and manage them. Some people start this process but don’t scale quickly enough. These mom-and-pop operators may own a few properties, but do not get the results that they desire. They are stuck in the daily routine of managing rental properties and never reach the dream of financial freedom.

Of course, others have started from humble beginnings and built a large portfolio of rentals. This becomes a business and will require years of dedicated attention to be successful. 

But, what if there is a way to reach financial freedom or even just earn a substantial side income by investing passively in multi-family real estate? 

This article will share some ideas and tips about how that can happen.

What is Passive Investing 

We all know about investing in stock, bonds, mutual funds, and other traditional paper assets. This is the most common form of equity investing that most people do, either through their retirement account or at a brokerage account. This could be considered passive investing. A participant in a retirement or brokerage account saves money on a regular basis and hopes that when they are ready to leave their job, there has been enough growth to live off of the accumulated equity. Of course, as we have seen in 2000, 2008, and 2020, the stock market can take wild and unpredictable swings. Quite often these swings happen at the wrong time. 

These gut-wrenching experiences cause many people to stop investing in the stock market altogether, impacting their ability to have a realistic chance of retiring.

An alternative approach is to invest passively in real estate. Again, this can be done through paper asset investing in Real Estate Investment Trusts (REITs). However, these trusts have been shown to have high fees, lower returns, and unfavorable tax treatment. 

The best opportunity to invest passively in real estate is through syndications or private placements. I wrote about syndications in detail in this article. In summary, a syndication is when a group of people comes together to purchase real estate property with the expectation of making a profit. The syndication group has general partners who manage and operate the deal and limited partners who invest passively for cash flow and appreciation. 

Since the investor deals directly with the team syndicating the deal, there are fewer layers of management which leads to better returns to the investor. The tax benefits are also great in a syndication. Please refer to my syndication article for the details.

How to Get started

The idea of archiving financial freedom through passive real estate investing may be a new idea to some. But it is also an attractive idea. There are a lot of high-income earners that do not have time to become an active investor. They may already have a great job or career that they want to focus on.
For that person, connecting with syndicators is the first step. Unfortunately, a lot of the deals are not advertised due to various regulations. So billions of dollars are invested in private deals without the ability for regular investors to participate. That being said, there are still plenty of opportunities out there.
To identify these opportunities, there are a few options:

  1. Crowdfunding Platforms 

There are several crowdfunding companies & websites where an accredited investor can browse and invest in commercial real estate deals. These platforms can have good deal flow. However, it is harder to have a personal relationship with the sponsor of the deal, so a lot of due diligence is required on the investor’s behalf.

  1. Personal Relationships

Most things in life happen through personal relationships. When we are looking for a new provider of a service, we usually ask other people for advice. The same principle can be used for connecting with syndicators. The investor can ask their network for recommendations. If that does not lead to quality leads, another option is to listen to real estate podcasts and find sponsors that way. Going to local real estate meetup events is also a great way to connect with potential sponsors.
Of course, these efforts take time, but since the financial wellbeing of the investor and his or her family is at stake, it is probably worth spending a few hours getting to know the right people and taking the right action.

  1. Vetting a sponsor

We have all heard stories of investors becoming victims of Ponzi schemes or other types of fraud. Therefore, it is important to perform proper due diligence on the sponsorship team. 

The first step should be to run a Google search on their name. 

It may also be a good idea to run a background check on team members. There are online services for that purpose

Also, ask for referrals from prior investors.

What is their track record? 

  • They should be able to share the performance and the latest monthly report on deals they currently are operating.
  • Have any of their deals gone full cycle? What were the returns vs. projections?

Another option is to find out who the broker was that sold the property. Call the broker and ask if the sponsor actually has the deal under contract.

How to earn $10K month passively 

Let’s look at what it would take to earn $10,000 per month from passive real estate investments. This scenario starts with a $100,000 investment which is invested in a deal that has a projected 2x equity multiplier over 5-7 years. That means the initial investment doubles every 5-7 years through a combination of cash flow and equity growth. 


For the above $100,000 example, it typically earns 8-10% per year in cash flow. That is $8,000-$10,000 per year. After 5 years, the investment has returned ~5x$9,000 = $45,000 in cash flow. The property is then sold for an additional profit of $55K for the investor. The total return over 5 years is then $100,000 plus the initial capital. The investor now has $200K in the bank. Let’s say the investor also has saved another $100K over the 5 years. That provides $300K to invest.

The following table shows that in year 15, the investor earns $135,000 per year or $11,250 per month in cash flow. In year 20 that grows to $23,250!

This simplified example assumes all money is reinvested and does not account for taxes.

Conclusion

This simplified example shows the power of passive real estate investing and the amazing compounding effect that investing can have. Of course, these are simplified examples. But we also know that some years these investments will return much better than 9%. Most people work their entire lives and save in their 401k or IRA to just have a modest nest egg after 40 years in the workforce. Imagine just working for just 10-15 years and retiring with over $10,000 per month in income?

*Disclaimer

Nothing in this document should be considered investment, tax, or legal advice. It is for education and entertainment purposes only. Always consult with your investment, tax, and legal professional before you make any investment decision.
Investing in private syndications is risky and you may lose all your invested capital.