Passive ownership of commercial multifamily real estate can be a great way to create stable streams of passive income.
What many people don’t realize is that they can invest in multifamily real estate either actively or passively.
For many, active ownership has become synonymous with one word – landlord.
We’ve all heard the horror stories of being a landlord. Some people talk about the “terrible three T’s” – tenants, toilets, and trash. Despite the clear benefits of real estate investing, the fear of fielding 2:00 am phone calls keeps many people out of this asset class altogether.
After all, most people want to be investors, not landlords. For those people, passive investing is probably a better fit.
The difference between active and passive investing comes down to specialized knowledge and who possesses it.
The success or failure of the active investor rests in his or her own knowledge of acquisitions and operations and the ability to apply that knowledge to construct, hold, and grow a successful real estate portfolio.
Passive ownership of real estate can allow those without the expertise to successfully invest in real estate. They can leverage the specialized knowledge of real estate professionals and invest alongside them passively. In that way, they can enjoy the benefits of direct ownership without the responsibilities of management.
As a fractional owner or limited partner in a legal entity that owns real property, the passive investor receives all the benefits of owning real estate. They get their percentage ownership of the cash flow, the tax benefits, the appreciation, and the amortization.
The goal for the passive investor is to create stable streams of passive income (mailbox money) and equity growth without the headaches of management.
What exactly is passive income?
There are three broad categories of income recognized by the Internal Revenue Service:
- Portfolio Income
- Active or Earned Income
- Passive Income
Portfolio income is income that is not earned from business activity or a job. Instead, it is income that is generated from things like royalties, capital gains, dividends and investments that are not considered passive.
Most people are familiar with earned income. It is the income you derive from working at a job or owning a business. Earned income happens to be the most expensive income there is. The obvious question here is how can income be expensive?
The answer is that earned income is highly taxed and, even more costly, you have to trade your most precious resource (time) to get it. You know how it works. The average worker trades 40 hours a week, 50 weeks a year, and does that for 30+ years in exchange for heavily taxed dollars.
Passive income is different. It is narrowly defined by the IRS as income that is derived from only one of two sources. Those sources are from trade or business activity that you do not materially participate in or from rentals.
The difference between earned income and passive income can be boiled down to time. With passive income, you don’t have to trade time for money like you do with earned income. You can earn it while you’re having lunch. You can earn it while you’re watching a movie. You can even earn it while you are sleeping.
The point is that passive income isn’t you working for money; instead it is your money working for you.
In fact, if you create enough recurrent passive income to cover your monthly expenses then you are financially free and can spend your time as you see fit.
To me that is what makes passive income so powerful. The older I get, the more I realize how precious time really is. Life is short and it is important to me to not waste a minute of it.
Unlike money, time is nonrenewable. I think Silvia Hartmann said it best when asked which was more important time or money? Her response was, “There is no time lottery where you can hope to win an extra million days.”
What really drove this concept home was when I heard a financial author say, “Rich people buy time, while everyone else sells it.”
When I understood that, I made it my mission to stop selling my time. I started building passive income that allowed me to cut back to part-time work and eventually retire from medicine at the age of 45. It’s not that I no longer work; I just choose to do the work that I’m passionate about. I spend far more time with my family than I used to and no longer miss holidays, birthdays, baseball games, music recitals or any of the other important things in life.
That’s the power of passive income!
As if that wasn’t good enough, the icing on the cake is that passive income from commercial multifamily real estate is also highly tax-advantaged. The tax benefits afforded to apartment investors can allow them to defer taxes for years and in some cases even eliminate taxes altogether.
Utilizing passive investments in commercial multifamily real estate is a viable proven way to invest in real estate without having to become a landlord. You can leverage professional expertise to create stable streams of tax-advantaged passive income that can buy back your time from work so that you can do the things in life that matter most to you; and that is what makes passive income truly priceless.