'Sweat equity' is something my dad taught me about early on (that and the 'escalator of appreciation').
The first home I bought taught me a lot about elbow grease...a huge reason why I love passive investing so much.
It was like a scene straight out of Indiana Jones.
The cobwebs to walk out the back door or down to the basement to do laundry. Add on the sinking toilet in the subfloor, the mice filth lining the perimeter of the living room, the peeling paint, and the driveway that looked like a practice zone for mud bogging.
Over the years of owning it, all of that changed and it turned into rental number one!
Sure it cash-flowed, but the 100-ish dollars each month came with the stress all the 'what if's' of owning a home from 1938 and reality presented.
What if they stop paying rent?
What if we can't find a new resident?
What if the sewer backs up?
We still have to replace the roof...
When we sold the property (literally when the floor fell through in 2008), I felt the weight of the world off my shoulders.
All this to say, I don't mind hard work, but I like to live life.
Contrasted by the fun memories my passive investing family collected while mountain biking and eating seafood in Seattle, I realized passive investing in real estate syndications is a pro move.
If you’ve ever experienced owning single-family or small multifamily homes, you know that these investments require time, energy and come with a fair share of underlying stress.
Investing in residential real estate can be challenging because, typically, you as the investor wear many hats throughout the seemingly never-ending process. Responsibilities include finding the property, funding the deal, renovating the property, interviewing tenants, and even performing maintenance.
The trouble is, it doesn’t stop there. You have to repeat most of the process over again when your tenant’s lease is up.
Why Investing in Multifamily Rentals Can Be a Lot of Work
Small multifamily rentals have some advantages over single-family homes. For example, if one tenant moves out, the tenants in the other units are still there to help cover the mortgage. Plus, it’s much easier to manage one property with multiple tenants than to manage multiple properties with one tenant each. But, even with a property manager on board to help with your rentals, bookkeeping, strategic decisions, and maintenance/repair costs are still in your court. You’re basically running a small business, which can be challenging if you’re working a full-time job.
The Case for Passive Real Estate Investments
On the flip side, there are fully passive investments in commercial real estate. These are professionally managed and operated investments so you don’t have to deal with any of the three scary T’s - Tenants, Toilets, and Termites. Oh my!
According to Forbes, once investors begin to understand passive commercial real estate investments, it’s common for them to move toward syndications. Here’s why:
1. Minimal Time Required
Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.
2. Opportunity for Diversification
It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets.
By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while resting assured that the professionals are taking care of business. This allows you to quickly and easily scale your portfolio while also mitigating risk.
3. Did You Say Tax Benefits?
Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications.
You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!
You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)
4. Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000.
You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.
5. Positive Impact
With personal investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.
Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.
Ready to turn pro?
Unlike most things in life, passive investors don't have to 'sweat' their way to success!
Joining the Three Keys Investor Club is free and allows you to get the first look at all the deals we offer. We partner with you to support you in achieving your investment goals.
You don't have to start the way I did, after all, adventure belongs on the trail, not investing.