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 their time for heavily taxed dollars.
Unfortunately, they’ll never get that time back.
They know that over time, passive real estate investing can partially or completely free them from trading time for money.
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. And 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. In fact, 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. 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
In the world of multifamily real estate, one can invest either actively or passively. Active investors tend to be asset managers and or property managers.
They leverage their time, energy, and expertise to manage properties. These are the 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.
For those without the experience and expertise to actively manage rental properties, passive real estate investing is likely the best option.
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. But one tried and true method for generating passive income is multifamily real estate passive investing.
Examples of Passive Real Estate Investment Opportunities
For the purposes of 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 are lacking 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 in which 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 its long history of solid returns in a low-risk asset class.
More on that to come. But first, let’s explore a few ways in which one can generate real estate passive 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, but 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 coming back over and over again.
Fund II is our newest investment offering scheduled to open in 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 be purchasing strategic value add and core plus A & B Grade multifamily assets in high-growth markets.
This is our wheelhouse and we intend to utilize our deep knowledge and experience in this area to provide consistent cash flow and appreciation with 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 who is interested in becoming a passive real estate investor, you need to 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 actual 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 like to think of them as real estate flavored stock. 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. This limits a REITs ability to act as a diversification tool.
Now that doesn’t mean that REITs should or shouldn’t be in your portfolio. They have their 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, and others. And depending on your portfolio needs and risk tolerance each has its merits.
However, historically speaking multifamily apartments have been the top asset class. Over any long-term time period, it has had the highest returns, least volatility (standard deviation), and best risk-adjusted returns (Sharpe’s ratio) in comparison to these other asset classes.
Comparison of Holding Period Returns by Property Type (1987-2016)
Managed Property Ownership
As the above graphic shows, there are many strong reasons to own multifamily passive real estate investments in your portfolio.
Some own apartments for diversification, while others covet the tax benefits. The ongoing stable passive income with the ability to force appreciation is also quite compelling. And multifamily performance in times of inflation and in times of recession has outperformed many other asset classes.
All of this is true. But regardless of why you invest, owning apartments without having to become a landlord is an attractive option that all accredited investors should strongly consider.
Benefits to Passive Investing
By leveraging industry experts who employ proven, conservative business practices you can reap the benefits of passive real estate investing. 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 largely priced out of these investments and left to invest in single-family homes, duplexes, triplexes, and quads.
But fractional investing opened these larger 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 richest investors.
However, fractional investing allows that $15 million down payment to be raised by pooling smaller sums of capital together 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
- Tax Savings
Taken individually, each benefit is important. 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 make the investment, you’re leveraging the experience and expertise of the real estate syndication company. They manage the property and you manage your mailbox as the checks come rolling in.
It sounds simple and in many ways, it is. However, matching the right syndicator with your investment goals is critical. They should have years of experience with an impeccable track record.
Their business and acquisition models should be in line with your financial goals.
Building & Diversifying Your Portfolio
When building an investment portfolio, diversification is a key concept. In fact, 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. Year after year they put their money in the stock market hoping it will provide for them in retirement.
In past decades, bonds had been a reasonable way to diversify one’s portfolio. 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 in a stock-heavy portfolio.
Being able to grow one’s wealth in a hard asset that doesn’t have wild swings in valuation 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, they failed. Therefore, they turned to the private sector.
To incentivize investors to provide housing for others, the government began offering tax breaks. 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.
And when an investor passes away, he or she can pass their real estate onto their heirs on a stepped-up basis. That eliminates capital gains tax as well as depreciation recapture.
Choosing an Investment Firm for Passive Real Estate
It’s quite clear that 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 you’re investing 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 speaks to 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 that passive real estate investing might be right for you, then 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.