I talk to people who are enthusiastic about passive real estate investing all the time.
It’s almost like they took the red pill and now they know the unsettling truth that earned income is both a blessing and a curse. It’s a blessing because everyone needs to put food on the table and pay their bills.
But it’s also a curse because it steals their only non-renewable resource—time. With earned income, one exchanges one’s time for heavily taxed dollars.
Unfortunately, they’ll never get that time back.
They know that passive real estate investing can partially or entirely free them from trading time for money over time.
What is Passive Real Estate Investing?
If you’re anything like me, you were groomed from an early age to work for earned income.
Study hard, get a degree, learn a skill, and work hard for decades as an employee. When it’s time to get paid, taxes are taken out of that check before you ever see a dime.
That’s earned income. There’s nothing wrong with it. It’s noble in many ways. But passive income is different.
Passive income is when you uncouple the time-for-money paradigm. You don’t work for passive income, and it doesn’t require your time. Instead, your money grows and spins off income that isn’t dependent upon your labor.
Active vs Passive Investing
One can invest actively or passively in multifamily real estate. Active investors tend to be asset managers or property managers.
They leverage their time, energy, and expertise to manage properties. These people you think of at property management companies that handle tenants, toilets, and 2:00 a.m. phone calls. After all, someone has to do it.
Professional active investors know how to buy, operate, and sell properties profitably and consistently. Novice active investors often make costly mistakes that undermine their success.
Passive real estate investing is likely the best option for those without the experience and expertise to manage rental properties actively.
Passive investing allows one to own real estate while leveraging the expertise of professionals. In this way, they don’t have to get their hands dirty. They can invest in apartments without becoming a landlord.
Creating Passive Income Through Investments
If you google “How to invest for passive income,” you’ll find lists of ways to create passive income streams.
Some of those ideas are practical, while others are less so. However, one tried and accurate method for generating passive income is multifamily real estate passive investing.
Examples of Passive Real Estate Investment Opportunities
For this guide, I’ll skip the more obscure ways to reach financial freedom.
I won’t discuss things like creating an App, selling stock photos, or renting your tools. It’s not that these and other ideas lack merit for the right individual; they are just narrowly focused.
Instead, I want to concentrate on passive real estate investments. This is the proven, time-tested way virtually all accredited investors can create passive income.
Passive real estate investing encompasses multiple options. One can invest in single-family homes, apartments, retail centers, offices, hotels, industrial warehouses, and more.
Like all investments, there are pluses and minuses to each. We focus on multifamily apartments because of their long history of solid returns in a low-risk asset class.
We’ll have more on that later. But first, let’s explore a few ways to generate passive real estate income.
Private Real Estate Investment Funds
Ultimately, when you invest in apartments, you’re investing in the basic need of shelter. In good times and bad, people need a roof over their heads. The demand for shelter makes this asset class very stable.
So what’s better than investing in one apartment building? Investing in two apartment buildings, of course. Please forgive my tongue-in-cheek response. I’m trying to make a point.
An important concept in investing is diversification.
Just as mutual funds were created to offer diversification in stock-based investments, private real estate investment funds provide diversification in real estate.
Within a fund, you can make a single investment that gives you ownership of multiple properties in multiple markets. This diversification has its advantages.
37th Parallel’s Multifamily Real Estate Fund II Investment Round
37th Parallel Properties is an industry leader in multifamily real estate investments. Since 2008, our investments have provided profitable returns for our real estate investors.
And that 100% profitable track record coupled with transparent communications has kept our investors returning repeatedly.
Fund II is our newest investment offering, scheduled to open in the late second quarter/early third quarter of 2022. It builds on the success of Fund I, which closed earlier this year.
In Fund II, we’ll purchase strategic value-added and core plus A & B-grade multifamily assets in high-growth markets.
This is our specialty, and we intend to utilize our deep knowledge and experience in this area to provide consistent cash flow, appreciation, and tax advantages for our investors.
If you’re an accredited investor and want to learn more about Fund II, click here.
Real Estate Investment Trusts (REITs)
As someone interested in becoming a passive real estate investor, you must know the difference between private real estate investment funds and real estate investment trusts (REITs).
Investing in a private real estate fund is an investment in brick-and-mortar properties. It can provide ongoing cash flow, appreciation, and the tax benefit of depreciation.
REITs are stocks.
Because they focus on the real estate sector, I think of them as flavored stocks. They are traded on a stock exchange. And like other stocks, they are highly liquid and highly volatile.
Since they are stocks, they do not enjoy the tax advantages that private real estate funds benefit from.
REITs also have a higher degree of correlation to the stock market than private real estate, which limits their ability to act as a diversification tool.
Now, that doesn’t mean REITs should or shouldn’t be in your portfolio. They have merits, but they are different from actually owning private real estate.
Other Passive Real Estate Investments
Multifamily apartments are not the only asset class available for passive investing.
There are many passive commercial real estate investment options, including commercial properties focused on hospitality, retail, office, industrial, etc. Each has its merits, depending on your portfolio needs and risk tolerance.
However, historically, multifamily apartments have been the top asset class. Over any long-term time period, they have had the highest returns, least volatility (standard deviation), and best risk-adjusted returns (Sharpe’s ratio) compared to these other asset classes.
Comparison of Holding Period Returns by Property Type (1987-2016)
Managed Property Ownership
As the above graphic shows, many strong reasons exist for owning your portfolio’s multifamily passive real estate investments.
Some own apartments for diversification, while others covet the tax benefits. The ongoing stable passive income that can force appreciation is also quite compelling. Multifamily performance in times of inflation and recession has outperformed many other asset classes.
This is true. But regardless of why you invest, owning apartments without becoming a landlord is an attractive option that all accredited investors should strongly consider.
Benefits of Passive Investing
You can reap the benefits of passive real estate investing by leveraging industry experts who employ proven, conservative business practices. That means you don’t get your hands dirty. No tenants, no toilets, no 2:00 a.m. phone calls.
Someone has to do it. But it doesn’t have to be you.
Instead, you can leverage the experience and expertise of property management professionals who do it for a living.
Many Deals Don’t Require Lots of Capital
Multimillion-dollar properties come with multimillion-dollar down payments. So historically, these properties were only purchased by institutional investors and very wealthy individuals.
Affluent investors were primarily priced out of these investments and left to invest in single-family homes, duplexes, triplexes, and quads.
Fractional investing opened these more considerable assets to the average accredited investor.
For example, a $50 million property might require a $15 million down payment. That would exclude all but the wealthiest investors.
However, fractional investing allows for a $15 million down payment to be raised by pooling smaller sums of capital from multiple investors.
Creating Real Estate Passive Income
When you invest in real estate, there are potentially four ways in which you get paid.
- Cash Flow / Yield
- Appreciation
- Amortization
- Tax Savings
Taken individually, each benefit is essential. In combination, their benefit is hard to beat.
The passive real estate income or cash flow that spins off these investments can supplement one’s income. Alternatively, it can be saved, accumulated, and reinvested into another property.
Less Time Consuming Than Other Investments
Passive real estate investing is just that – it’s passive. You put the time in upfront to vet the syndicator and the investment.
Once you invest, you’re leveraging the real estate syndication company’s experience and expertise. They manage the property, and you manage your mailbox as the checks roll in.
It sounds simple, and in many ways, it is. However, matching the right syndicator with your investment goals is critical. The syndicator should have years of experience and an impeccable track record.
Their business and acquisition models should be in line with your financial goals.
Building & Diversifying Your Portfolio
Diversification is a key concept when building an investment portfolio. Modern portfolio theory demands diversification to maximize returns without introducing unacceptable levels of risk.
Despite that, too many people only hold stock-based paper assets. They put their money in the stock market year after year, hoping it will provide for them in retirement.
Bonds were a reasonable way to diversify one’s portfolio in past decades. Unfortunately, prolonged anemic returns in the bond market have made that option unacceptable for most.
Fortunately, multifamily apartments remain a good option for risk-averse investors looking to maximize their returns and diversify their portfolios.
With low correlation coefficients, high returns, and low volatility, multifamily real estate is ideally suited as a diversification tool for a stock-heavy portfolio.
Growing one’s wealth in a hard asset that isn’t subject to wild valuation swings gives investors peace of mind.
Tax Advantages of Real Estate Ownership
And that peace of mind grows when you understand the tax savings that come with passive investments.
Years ago, the government tried its hand at public housing. Unfortunately, it failed, so it turned to the private sector.
The government began offering tax breaks to encourage investors to provide housing for others. The cornerstone of those tax breaks is depreciation.
Depreciation, accelerated depreciation, and bonus depreciation allow investors to take the cash flow from their properties while deferring taxation.
1031 Exchanges allow investors to sell their investment properties and exchange them for another while deferring taxation from that sale.
When investors pass away, they can pass their real estate onto their heirs on a stepped-up basis. This eliminates capital gains tax and depreciation recapture.
Choosing an Investment Firm for Passive Real Estate
Passive real estate investing is compelling. However, it’s not 100% passive.
When you invest with a syndicator, you’re investing in them as much as in a property. So, it’s incumbent upon you to do your due diligence before you invest.
You should know things like:
- How long have they been in business
- What is their transaction volume
- What is their track record for success
- How transparent is their reporting
- Does their business model align with your financial goals
These are just a few of the things you should know before investing. For a deeper discussion of this topic, check out our educational content – Private Real Estate Evaluation Framework.
37th Parallel Specializes in Real Estate Investing Management
37th Parallel Properties is a private multifamily real estate acquisition and asset management firm.
As an industry leader with nearly $1 billion in transaction volume, 37th Parallel knows how to make investors money.
Our 100% profitable track record reflects our conservative acquisition and operations standards. We know our investors work hard for their money, and it’s our job to grow their capital.
Contact Us Today For More Information
If you believe passive real estate investing might be right for you, you should check out the 37th Parallel Properties advantage. I invite you to schedule some time to learn more about how we can help you achieve your financial goals.
