What is Passive Income in Real Estate?
So this is probably one of the most overused terms in real estate investing - passive income...
Sounds cool right?
It is! But I don't think of passive income as a black-and-white thing anymore. I understood it a lot better when I started to look at it as a scale.
And I want to point this out, not to discourage anyone but because It helped me and I think it may help you understand the differences, it’s worth discussing.
This also has a slight real estate-specific spin to it, mainly because from everything I have looked at, real estate is actually one of the most passive vehicles when done the right way. And with some strategies, there is very little risk. Not all of them obviously.
This blog will go in order or passive to active and it will be timestamped in the summary if you want to jump around - feel free.
The purpose of the blog is to help you decide which strategies are most interesting to you so you can decide. In the end, I will also break down what I think you should do depending on what phase of life you're in. So buckle in!
So let’s start with the most passive (these aren’t all of them, but just a few)
And when I say most passive, this is defined like this, you put money into something and you literally don’t have to do anything. Other than checking that you get your check in the mail or return it on a screen. You will make money if you are surfing in Bali or sleeping in your home.
One other EXTREMELY important thing to consider is not just the time. But the impact of the time. If it’s something you hate doing, it may feel like a lot more time than it is and it might ruin your mood for days or weeks.
One of my favorite quotes on this topic, I first heard from a friend - Seth Spease from the movie: The Concept of Relativity
“Put your hands on a hot pan and a second can seem like an hour. Put your hands on a hot woman and an hour can seem like a second”
Link of the Video here: https://www.youtube.com/watch?v=uALXU5H_Efw
It's different for everyone, but something just kinda stinks.. And could easily ruin your day. They are different for different people, but it’s worth thinking about if a call from a tenant would bother you or if you might actually like it.
One other caveat, and a massive difference for the real estate-related ones is some are more passive or active depending on your team and ability to give away some control. Like a property manager or an employee to help manage the day to do. Owning rentals can be hands-off if you have no interaction with the property day to day. This has pros and cons but will also be a very different experience for someone who is self-managing.
I will try to quantify the amount of time/energy needed for each but it’s different for each person. The times will be based on my experience but it may be different for you.
Okay, let’s jump in!
1. Highly Passive Strategies
Stocks, bonds, ETFs, mutual funds, index funds. This might be a little boring for some of you risk-takers out there but hear me out for a sec...
This can be done on your own or with a financial advisor (I don't recommend going that route) but it’s highly passive. There is very little control here.
Limited investing in real estate syndications (no this isn’t REIT's). These are actual real estate deals people do and they buy them with partners. There is also very little control here but it says slightly more control than stocks because you can get to know the real estate sponsors personally before investing with them. I've interviewed a bunch on the podcast and gotten friendly with a few. DXE is even a podcast sponsor.
Lending people money. Some may believe risky, but it doesn’t have to be. It just means you give people money for projects and they pay you fixed interest.
Time needed:
Maybe 5 hours total? Sort of depends on how much time you want to be spending on this but in most cases, the only time needed is checking in a few minutes a month to make sure you're getting paid. You also need to do some research on the front end to understand the details. But on an ongoing basis, this shouldn't be much time...
Pros & Cons:
Pros:
You just sit back and collect money. You shouldn't have to do much!
You can focus on what you like doing or what you do to make money. Great for professionals such as doctors, lawyers, or just high-income earners who love what they already do and don’t need to or want to be that involved.
Cons:
Like in any investment - If you pick a bad operator or company, you could lose your money.
Lower risk in many cases means lower returns. But not always. In the last 10 years, real estate syndications have beaten most investments by 2x.
And the stock market has outperformed its usual expected 8% return. It really just depends on the timing or the company here.
I stopped here
2. Passive Strategy
Buying turnkey rentals. There are 2 types of turnkey rentals. We'll talk about one now and one later
The first option is - from a 'turnkey company'. What these companies do is find properties that need some work. Buy them, renovate them, put a tenant in place along with a property manager, and then sell them to people.
Time Needed:
1-5 hours to research areas and companies in areas of interest or from googling or spending time on FB groups to find some. There will be some more time needed during the purchase (maybe another 10 hours) but after that, it should just be weekly or monthly check-ins with your property manager
Pros & cons:
Pros:
This will likely actually be hands-off. You should get a decent return for very little time/energy.
Cons:
The downside here is, the turnkey company takes all the risk which usually means they take a higher portion of profits on the front end meaning your return is usually lower than if you did it yourself. But also remember as a beginner you would probably not be able to do it anyway.
Also, since they are the ones selling it to you, sometimes it gets awkward negotiating or they don't allow financing.
Before we go to the next strategy:
With all these real estate strategies you can also swap regular renters for short-term rental renters like Airbnb or furnished finder.com for nurses. I don't want to leave that out so let’s just call all of the real estate options rentals, not necessarily short or long-term.
3. Neutral Strategy
House hacking - It's something I have done multiple times and one of the best strategies to get started. The way I define it you buy a 1-4 unit property. You live in one portion of it and you rent out the other rooms or units. It's a great strategy especially because you can put 3-5% down and live for free or make money to live.
There is some work to find the property that works out with the numbers and some work to find roommates or tenants, but all things considered, I think its a fairly neutral strategy
Time Needed:
1-3 months 30 min per day.Learning about areas and strategies and finding deals.
There will be a few minutes a week of ongoing time spent if you decide to manage yourself. If you give to a property manager, you will not really have any time per week.
But house hacking is a great way to get your feet wet with real estate. So self-managing is a good idea here at least to start.
Pros & Cons:
Pros:
Live for free or get paid to live.
Put a tiny amount down to take ownership of a property.
If you did one of these a year for 3-5 years, there is a good chance you could retire comfortably.
Cons:
These are getting more competitive as people learn about the strategy
You do have to pay PMI on loans under 20%. In most cases tho - the PMI drops when you get to 20% in equity unless it’s an FHA loan - then its stuck for life until a Refi. We will do another video here
You may have roommates - or will have to live directly next to your tenants. Which can get weird sometimes.
You may not live in the nicest part of town or the quality of life you are used to. Most house hack opportunities are not in A-class areas
4. Active
Buying stabilized rentals out of state. Otherwise known as a turnkey property but the type you find yourself
you need to find the area, and the local team, buy the property and in some cases rehab the property.
This can also include a property you buy furnished property for Airbnb in a 2nd home location like a beach, mountain or lake.
We have done this a few times and while there is work that goes into finding the area and the neighborhood, if you think the property will do pretty well as is - you can try to buy it furnished and keep the property manager they have or find your own.
if you look in certain destination areas, There is a good chance they will sell it with furniture and have a staff that comes along with the property.
Airbnb Arbitrage - a whole separate topic but this just means you find properties to rent and then re-rent them on Airbnb. It's totally legal if you have a sign-off from the landlord and highly profitable if done correctly.
Time Needed:
Similar to the time needed for neutral strategies - 1-3 months 30 min per day minimum. Learning about areas and strategies and finding deals. If you manage yourself, it will be between 5-10 hours per unit on the front end to set things up and find initial tenants.
After that, it should be less than 30 minutes per week if self-managed. And very little as mentioned if you hire management.
Pros & Cons:
Pros:
You can keep more of the profits for yourself and in many cases learn about the details you wouldn't if you just handed it off from the beginning.
Cons:
A mistake I've made and see a lot of new investors make is thinking these strategies are easier than they are. These strategies require a lot more work and potential stress than letting someone else do it for you.
If you make a mistake, it could kill your profits and discourage you from doing another deal.
5. Highly Active / Full Time
Any form of starting a company:
Wholesaling did well
Flipping
Syndication
They will not be passive.
These are all likely full-time jobs if not full-time careers that take months if not years to build. In order of least to the most time needed to start and do at a high level.
Wholesaling (done well and consistently)- this is the process of finding off-market deals and selling them to investors.
I say the 2nd part because anyone can do a deal here or there. But building up consistent marketing systems takes time and energy.Flipping - I think we know what this means. Sort of obvious but find a property and instead of selling it to an investor, you fix it and sell it yourself the time and energy needed for wholesaling are required here. But then the entire additional layer of project management, financing relationships, and construction management.
Syndication - more complex but from a high level - is crowdfunding the purchase of apartment buildings and splitting the profits
These can all make serious money, but they require serious energy.
BRRR method for residential / Value add or forced appreciation method for MF.
Buy, rehab, rent, refinance.
This gets even more active when out of state. It’s 100% possible - do not let anyone tell you it cannot be done. It's just a lot more work/risk.
Essentially what you are doing here is finding an underpriced, oftentimes off-market deal either yourself or from a wholesaler, usually buying it with cash or hard money, fixing it up, renting it out, and taking it back to the bank for a refinance. If done correctly you can add rental income to your portfolio and get all of your original purchase cashback. Essentially buying a rental for free.
Time needed:
3-6 months of learning and a full-time work schedule after that. Depending on your ability to hire and delegate this can be 40-80 hours per week or much less.
Pros & Cons:
Pros:
Very high-income potential for flipping & wholesaling quickly. Syndication is slower but probably one of the best paths to building wealth.
You may have notoriety in the business as a leader
Cons:
All of these methods are very competitive right now. Finding deals is difficult and when I talk to my friends in each of these areas this is always the common complaint.
As most business owners will tell you, you are taking larger risks anytime you handle other people’s money
So what do you guys think? Did I miss anything? Did I get the order right?
Bringing this home. It’s cliche but it depends on your goals.
For most people I speak to it goes like this
If you are under 30 and have high ambition & willing to delay gratification, I say house hack and start a side hustle like wholesaling or Airbnb arbitrage. This is similar to my path. And a proven model for early retirement.
If you have a family and don’t get excited at the idea of lowering your quality of life and or spending lots of time actively involved in real estate I would recommend investing in a syndication as an LP, buying a turnkey rental, or just investing in things like stocks, bonds, ETFs
In any of these cases, if you don’t like your job and or you are passionate about real estate, any of the highly active models will work. Wholesale/flip/syndication.
it’s just a matter of which gets you the most excited.
Thats it! Let me know which ones you guys are doing in and what you like about it!
Visit my YouTube channel to see the video and part 2 of this video! 👇
