Passive Income Via Real Estate Investing

There are two kinds of real estate investing: passive and active. Here, we are going to focus on those who earn a passive income via real estate investing.

When you become a passive investor, you become a limited partner in a deal. You provide private capital to an experienced, knowledgeable syndicator—like myself—who will use those funds to acquire and manage an apartment community.  

Gaining passive income through real estate is popular, in large part, because it is a low-risk approach. When you make these investments, you join an investment system that already exists, has been successful, and is run by a dependable syndicator with a proven track record. Just ensure that you understand the projected limited partner returns before investing, meaning the results are more certain. And, as long as the syndicator follows my Three Immutable Laws of Real Estate Investing, the project should exceed projected returns.

Partner with Experienced Syndicators

Passive income real estate investing can be risky because it requires you to place a lot of faith in your general partner. That person, along with his or her team, will be the one constructing the business plan.

This is why it is important to work with the right people. Since breaking into this industry, I have established myself as an investor you can trust. As I’ve gained control of more than $900,000,000 in real estate, I’ve helped people across the country gain the financial independence they seek through passive investing opportunities.

In this section of my blog, you will learn more about how to earn a passive income through real estate investing and how I seek passive investors for nearly all of my apartment deals. If you’re an accredited passive investor, please consider completing this form to potentially work with me.

The Pros and Cons of Opportunity Zone Funds for the Passive Investor

With the 2017 Tax Cuts and Jobs Act, the United States government created a new wealth building vehicle for investors. This legislation established opportunity zone funds as a way for investors to improve struggling communities while receiving capital gains tax breaks. The investment vehicle offers a means for a passive investor to gain wealth while helping others.

 

What is an opportunity zone?

Throughout the 50 states and US territories, there are more than 8700 areas and projects that qualify as opportunity zones. These locations are often properties that have fallen into disuse and require extensive upgrades.

In cities, an opportunity zone project might be a warehouse or factory in a former manufacturing area. The opportunity zone fund will provide investment capital to renew the property for different use.

This program hopes that these initial investments will spur other investors to improve local properties. As a new housing project begins through the opportunity zone fund, investors will improve other properties to redevelop grocery stores and other commercial ventures. Soon, a whole region will see improvement because of the original investment.

 

How does an opportunity zone fund work?

Opportunity zone funds are a vehicle for passive investing. Individuals who contribute to the fund pool their resources so that the fund manager can invest in a real estate development project. At the end of the project, investors receive income from the sale or lease of the property.

An important difference from other real estate investments is that opportunity zone funds must improve the property as well as acquire it. The government is not looking for dilapidated properties to transfer between owners. The program intends to create a win-win project that benefits both the passive investor and the opportunity zone communities.

 

Who can invest in an opportunity zone fund?

A major overhaul of a building requires a large amount of capital. To meet the expectations of potential buyers, properties will need both basic repairs and new infrastructure. No company will want to open a branch in a building that does not have adequate resources for a wireless network.
For this reason, opportunity zone funds are not open to every potential investor. People who want to participate must be accredited investors who can meet specific guidelines. The investor must have a net worth of at least $1 million. Alternatively, investors must prove that they have had two consecutive years with an income of at least $200,000.
Also, this opportunity is for larger investments. Typically, fund managers are looking for a buy-in of at least $100,000. This amount increases the ability to make significant improvements to a property. However, it will put this program out of reach for the majority of investors.

 

The Benefits of Investing in an Opportunity Zone Fund

Without incentives, investing in financially-stressed communities might not be appealing. The legislation that creates opportunity zones also includes several financial benefits.

 

 

Deferred Capital Gains

Capital gains taxes are a frustrating reality of wealth building. The better the investments perform, the more the taxpayer must pay. However, opportunity zone investing provides a loophole that allows investors to defer capital gains taxes and use the money to generate passive income.
By making an opportunity zone investment within 180 days of incurring capital gains, the taxpayer can defer the tax on the invested amount until 2026. With positive performance, the taxed money can create more income before it goes to the government.

 

Reduced Capital Gains

Improving an opportunity zone is a long project. This program awards investors who keep their money in the fund for an extended time. A five-year investment reduces the original amount taxed for capital gains by 10%. By keeping the money in the fund for another two years, the capital gains reduction increases to 15%.

 

Tax-Free Appreciation

If investors keep money in the fund for 10 years, they are eligible for another tax benefit. The appreciation for the opportunity zone fund investment is not subject to capital gains. Investors must still pay the gains taxes on the original funds from a decade earlier, but there are no additional taxes on the profits derived from the opportunity zone project.

 

The Risks of an Opportunity Zone Fund Investment

Every financial investment comes with uncertainty. It is up to the investor to decide whether the passive income is worth the potential loss. While opportunity zone funds may benefit both the investor and the community, they are not without risk.

 

Untested Investment Model

Since this program has only been around since 2017, there is not an established track record to assess the risks of this investment. Improving a property in a struggling community is a laudable idea, but it does not guarantee a high return. Even a well-developed property may have trouble finding tenants in a depressed area.

 

High Buy-In

Some investors will be nervous about the size of the initial investment. For many people, a six-figure investment represents the majority of their wealth available for passive investing. They may not be willing to tie up so much money in a long-term investment.

 

Uncertain Community Benefits

The goal of the opportunity zone program is to create an investment that benefits local communities while producing a financial return. As the legislation stands, community leader input is not a requirement of the development process. Unpopular projects could be stalled by legal challenges and protests. Without an understanding of the needs of local residents, investors might fund a project that raises the cost of living and gentrifies a low-income area.

 

Is an opportunity zone fund the right investment for you?

If you meet the criteria for participating in an opportunity zone fund, you want to do your homework. Potential investors should take some time to learn the details of the different projects seeking funds and the backgrounds of the managers and developers involved. While the tax benefits of this program are attractive, you do not want to lose money just to avoid paying some capital gains taxes.

After doing your research, you may find a project with great potential for success. An investment in the right opportunity zone fund offers fiscal benefits that will change a community for the better.

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JF2326: Highlights From 401(k)aos by Andy Tanner | Actively Passive Investing Show With Theo Hicks & Travis Watts

Investing in 401(k)aos: Highlights from Andy Tanner’s Book

The 401(k) retirement plan has taken its place alongside Mom and apple pie as a pillar of American wholesomeness. Most private-sector employees invest in a 401(k) where offered, and the public sector has its equivalent accounts. As workers, we learn that contributing to an employer-sponsored retirement account is the best way to fund retirement. Andy Tanner, in his book “401(k)aos”, questions this one-size-fits-all assumption. On this Actively Passive Investing Show podcast, we discuss Andy’s five main points and add our observations on the 401(k)’s potentially chaotic role in lives and markets.

1. 401(k) to the Rescue

To understand why the 401(k) is an agent of chaos, we need to look at its history. Invented in 1978 to help workers fund retirement, the 401(k) plan was meant to supplement other options such as IRAs, pensions, brokerage accounts, and personal savings. Ideally, the average American worker would draw from a diverse financial portfolio in later years. A financial strategy could include commercial investing and active investing in providing retirement income streams.

Fast forward to today, and many people rely on their 401(k) as their primary retirement strategy. They expect this account, along with social security and homeownership, to support them throughout retirement. In reality, most people won’t have nearly enough saved to cover their expenses. According to Andy, relying on the 401(k) has created a tragic and chaotic situation. He echoes the original architect Ted Benna in asserting that it was never intended as a primary retirement account.

Another aspect to consider is whether your financial goals are congruent with the 401(k)’s purpose. These plans build net worth, not provide cash flow. If you are involved in passive investing or commercial properties, you care about cash flow. Placing significant assets in a 401(k) may not be your best option, as withdrawing cash before retirement age could incur steep taxes.

2. The Peril of Mutual Funds

If you are an active investor, consider the lack of agency you have with a 401(k). These plans rely on mutual funds as investment vehicles. Further, they offer limited choices and stratify them according to risk. The conventional advice is that younger workers can tolerate more risk and should invest in riskier but potentially higher-yield funds. Older workers should invest more conservatively. Plans usually guide employees through a friendly online algorithm designed to help them allocate their contributions according to risk tolerance.

The issue here is with applying the same general investing strategy to all people. This approach also assumes that age primarily determines risk tolerance, irrespective of individual goals and circumstances. If you are an active investor, you know this view is shortsighted.

Andy flags historical mutual fund performance as a risk. Mutual funds generally track the stock market. If the S&P and Dow Jones indexes are down, your account probably is too. Reallocating a 401(k) is cumbersome and tied to specific time windows. You cannot react agilely to a volatile market, and you can’t plan to hedge losses.

The fundamental issue is that mutual funds are part of the Wall Street system and tied to its fortunes. Real estate and other assets can hedge against Wall Street, especially if they focus on people’s basic needs for goods, services, and housing. Retail shopping centers often survive market downturns. Other commercial properties, such as well-managed apartment complexes, usually thrive.

When you manage your own brokerage account, you can set a stop loss against sudden stock price drops. You can create other alerts that help you succeed with active investing. If your 401(k) nosedives, you wait for better days.

Retirement Fund Waiting Game

You may wonder if you need that flexibility in a long-term savings plan. After all, isn’t the 401(k) meant to be the ultimate vehicle for long-term passive investing? Don’t you want to let compounding and historical market trends work their magic? After all, many Americans lack the resources or knowledge to pursue commercial investing.

Let’s think back to the Great Recession. In many cases, the value of conventional retirement plans dropped by 50% or more. People lost half their retirement savings overnight. While the losses were unrealized, they quickly became real to the many people who needed to draw on the money within ten years. Employees approaching retirement did not have time to make up for the losses. Younger workers waited five years or more for their accounts to regain pre-recession value. If you were planning on borrowing against your 401(k) for an imminent home purchase, medical bills, or your children’s college expenses, you were out of luck.

If we look at the math behind the drops, the portfolio performance needed to recover is greater than the loss. If your account plummets by 50%, for example, you have to gain 100% to return to the initial value. In other words, you have to double your money to break even. This is an odd calculus for an investor, particularly when applied to mutual funds.

3. Feeding Wall Street

According to Andy, you should realize that the 401(k) was invented to enrich Wall Street. Though it may offer some advantages to individuals, its purpose is to promote mass participation in the stock market. Wall Street reaps fees and other profits from this vast investor base.

This doesn’t mean a 401(k) has no place in your financial strategy. Just keep in mind that the vehicle was not designed to benefit the individual. The tax situation illustrates this fact. If you want to withdraw from your account before retirement age, you face a stiff tax rate and penalties. To avoid this, you need to take a hands-off approach to that money or leverage the few exceptions, which still tax you at ordinary income rates.

Let’s take a mutual fund purchase as an example. If you buy a fund on your own through a broker, you can hold it for over a year and then sell at a long-term capital gains tax rate. This rate is 15% for most people. If you buy the same fund through your 401(k), hold for more than one year, and then cash out at retirement age, you may pay up to 37% in taxes on ordinary earned income.

Andy asks the question we should all ask ourselves: Do you plan on making more or less money in retirement than you do now? People’s answers vary depending on their goals. If you plan on making more, however, you are likely an investor. Does it make sense to take a 401(k) tax advantage now and pay much more tax later on that money in a higher income bracket? You may want to calculate scenarios in light of your investment strategy.

4. Abdicating Investing Responsibility

Andy points out an insidious side effect of mass reliance on the 401(k). If you trust your sponsored retirement vehicles to secure your future, you may forfeit owning your financial destiny. It becomes too easy to remain ignorant of basic investment and economic principles. Many people don’t learn financial literacy at home or in school. Without an incentive to learn fundamentals, they may pay excessive taxes because they don’t understand the system. Over decades of hard work, they may overlook opportunities and even risk life savings because they abdicated responsibility.

Structurally, the 401(k) reinforces dependence by offering limited investment choices. You typically have a small portfolio of mutual funds at various risk ratings, sometimes only one fund at each risk level. Your company may also offer a stock fund, but consider that you already invest in the firm by working there.

If you invest privately, you can choose from thousands of individual stocks, mutual funds, and other vehicles. You can complement real estate investments such as retail shopping centers or other commercial properties. Crucially, you can enter and exit investments as you need to.

5. Artificial Market Demand

Not only does the 401(k) affect individual financial habits, Andy describes its impact on the market. The millions of Americans regularly contributing to these plans create artificial demand for mutual funds, stocks, and the behemoth infrastructure that supports them. It is hard to cast the situation as a traditional bubble because retirement vehicles are funded so predictably and on a mass scale. We don’t yet know the consequences of this systemized influx.

The Takeaway

When viewed as an asset among several in your portfolio, the 401(k) offers some advantages. Often you can take out a loan against your vested balance. If your employer matches your contribution up to a certain percentage, you’re receiving free money. Before contributing above the match amount, consider weighing your particular situation’s pros and cons.

Andy’s key takeaway is that investing is a life skill we all need to own. You don’t need a degree in finance or a Wall Street job, but you want to understand tax code and market fundamentals. Know some history for context and be able to soundly evaluate your investment vehicle options. The better you can do this, the better you can invest in your financial future, not just Wall Street.

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How much to invest vs. keep in bank account as passive investor

How Much Cash Should a Passive Investor Have Available?

Whether you invest primarily in stocks, commodities or real estate, it is important to keep a certain percentage of your portfolio in a liquid savings account. The primary benefit of having cash available is that it allows you to quickly buy assets at a discount during a period of economic weakness. Let’s take a look at how much cash a passive investor should keep in the bank at all times.

Do You Have an Emergency Fund?
Before you start investing in stocks, bonds or other passive vehicles, it is important to build an emergency fund. Ideally, you’ll have enough money to cover at least six months of expenses. After you reach that point, you can start to begin to implement your passive income wealth building strategy.

Cash Should Make Up at Least 5% of Your Portfolio
Ideally, you will keep at least $5 for every $100 in your investment portfolio. If you are a passive investor, it might be a good idea to keep even more of your money in cash as you can earn interest and dividends on that money. In fact, depending on your approach to investing, it may be a good idea to put up to 20% of your portfolio in a savings or checking account. As savings account balances of up to $250,000 are insured by the FDIC, opening a savings or checking account can be an effective way to earn passive income while preserving your capital.

There Is a Point of Diminishing Returns
While you can certainly increase your wealth by collecting dividends and interest from a savings account, it may not be the most efficient way to do so. It isn’t uncommon for banks, credit unions and other financial institutions to offer less than 1% interest on money held in their accounts. Conversely, annual inflation in the United States can be upwards of 2% or more.

Therefore, if you kept all of your money in cash, you would be earning less than inflation. In such a scenario, your purchasing power would decrease even if your net worth increased. Historically, stocks have generated average returns of 11% per year while real property prices tend to appreciate by up to 5% annually.

Passive Investing Doesn’t Mean Staying Out Completely
There is a major difference between a passive investing strategy and staying out of the market because you’re scared of losing money. If you have a relatively low risk tolerance, you should consider putting money into government bonds, gold or index funds. You might also want to consider putting money into real estate investment trusts (REITs) that send out regular dividend payments.

Finally, you may be able to build wealth in a conservative fashion by purchasing ETFs. An ETF is similar to a mutual fund in that it allows you to purchase exposure to multiple companies or sectors in a single equity. It is also like a stock in that you can buy and sell your shares during the trading day.

How Long Are You Planning to Keep Your Money in the Market?
Time is a key component to any wealth building strategy. For instance, if you are only a few years away from retirement, you’ll want to take fewer risks in an effort to conserve your wealth. Therefore, it may be a good idea to liquidate equities in favor of cash.

However, if you have several decades before retirement, it’s generally a better idea to invest in riskier assets such as growth stocks or IPOs. This is because you’ll have an opportunity to recoup any short-term losses over the course of 10, 20 or 30 years. In such a scenario, you’ll want to have as little cash as possible in your portfolio.

It’s important to note that these concepts are generally true regardless of what your investment goals are. A financial planner may be able to provide more insight into how to allocate your funds to help meet any specific goals that you might have.

Regardless of how conservative you are when it comes to investing your money, it’s important to limit the amount of cash you have at any given time. Although it is possible to generate a return on that portion of your portfolio, you can grow your net worth faster by putting money into stocks, commodities or real estate. Furthermore, any profits or losses generated by the sale of these assets may receive favorable tax treatment.

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Tips for setting goals as passive investors

Passive investing is a strategy that’s designed for the clear purpose of maximizing the returns that you obtain by effectively minimizing any buying and selling. In many situations, passive investments are considered to be long-term investments that you hold for a lengthy period of time before selling. For instance, it’s possible for a passive investor to make investments in art pieces.

No matter the strategy you use for making passive investments, it’s important to set goals that will guide your decision-making in the months and years to come. However, setting goals with this form of investing can be tricky when the returns are difficult to calculate. This guide offers some tips on how you can properly set goals when utilizing passive investments.

What Is Passive Investing?

This is a portfolio strategy that centers around buying and holding investments until they have appreciated in value. Because of its flexibility, there are many types of investments that can be made with this strategy. It’s common for investments to be held onto for a very long time. Keep in mind that this type of strategy hardly uses any market trading.

Likely the most common type of this investment is index investing, which centers around replicating and holding a market index or indices. The primary benefits of using this investment strategy is that it’s considerably less expensive and less complicated when compared to an active investment strategy. Additional benefits associated with passive investments include:

  • Very low fees because of much less oversight
  • Your capital gains tax should be low each year
  • It’s far easier to create an effective strategy with these investments when compared to active investments
  • Can help you diversify your portfolio

How to Properly Set Goals As a Passive Investor

When you want to make passive investments, it’s important that you understand how to properly set goals for your portfolio. If your expectations are unrealistic, you could be disappointed in the returns on your investments. While the returns that come with passive investments aren’t exceedingly high, they can help you bring in passive income and increase your wealth. Before you start implementing a passive investment strategy, take a look at the following tips that can help you along the way.

Make Sure That You Set Modest Investment Return Goals

When you engage in passive investing, your main goal should be to obtain modest investment returns. In fact, you should rarely expect to get high returns that beat the market. While this form of investment comes with much less risk than the majority of active investments, it’s important to understand that the returns are generally random. Even though the returns for passive property investments are somewhat predictable, not all passive opportunities can be calculated beforehand. If you set modest investment return goals, you’re portfolio should be able to withstand a slightly worse return than you expected.

Use the Right Strategy

There are many different types of passive income investments that you can make, the primary of which include real estate, dividend stocks, index funds, and peer-to-peer lending. The strategy that you choose depends largely on your preference and your knowledge of the investment in question. Real estate investments are very popular because of the ongoing rise in property values that has occurred in most locations over the past 10 years. If you want to obtain long-term returns that you can count on, this shouldn’t be a bad investment.

If you invest your money into real estate for the purpose of bringing in passive income, you can gain ongoing income source from rental properties. You could also invest in REITs, which are designed to pay out around 90 percent of taxable income to investors as dividends. Crowdfunding is another great option that gives you the full tax benefits of being a property owner.

If you’re not interested in making investments in properties, you could look into dividend stocks, which are an easy way to generate income. When public companies earn profits, these profits are sent to investors as dividends. You could then choose to purchase additional shares with dividends or cash out. Keep in mind that the yields that can be obtained with dividend stocks vary with each company. Consider searching for companies that are classified as dividend aristocrats, which indicates that significant dividends have been paid out for at least 25 years.

As touched upon previously, among the more popular types of passive investments are index funds, which are mutual funds that are linked to a market index. Index funds are passively managed and won’t change significantly unless the underlying structure of the index changes. Management costs are very low with index funds. The fourth type of passive investment strategy that you should consider is peer-to-peer lending, which is also known as crowdfunding. Currently, crowdfunding is highly popular and is used for everything from buying properties to funding different types of loans.

Crowdfunding involves numerous investors lending money to a business entity or person via an online platform that connects the borrowers and lenders. These platforms include Lending Club and Prosper. Aside from funding the actual loan, you aren’t required to do much in regards to managing the fund. You can expect a return that ranges from 6-12 percent when making crowdfunding investments, which can help you with your wealth building efforts.

Each of the four aforementioned strategies has its own positives and negatives that you will need to take into account. With the right approach, all four options can provide you with sizable returns that you can use to increase your wealth or to open up additional investment opportunities. The goals that you make can be dictated by the strategy you choose.

Identify How Much Money You Should Save

Whether you want to make passive investments to bolster your wealth building efforts or to increase the amount of money that you have for retirement, it’s important that you set a goal for the total amount of money that you want to earn and save from your investments. When saving for retirement, it’s recommended that you set aside enough money to cover 70-85 percent of the income that you bring in before retirement.

If you want to travel the world upon retirement or invest in a new hobby, your savings may need to be even higher. Other investment firms recommend that you save around 10 times the amount of income you generate in a single year by the time that you turn 67. If you earn $100,000 per year, this means that you should have around $1 million in savings by the time that you’re 67. Once you know how much you want to save, you will have a better idea of what your goals should be.

Know How to Overcome Investment Hurdles

There will always be hurdles and challenges that you will be required to overcome when making passive investments. If you want to reach the goals that you set for your investments, it’s important that you know how to overcome any challenges that you face. Even though passive investments are less risky than active ones, it’s still possible to lose money on your investments. Keep in mind that this type of investment is meant to be a long-term strategy, which means that you will want to sell your investments when they have reached an acceptable value that will allow you to generate a sizable return.

Along the way, you may notice that the investment dips in value at one time or another. Some investors will panic in these situations and choose to sell, which is typically a bad idea. Passive investments aren’t meant to fluctuate substantially in value, which is why you should be patient while awaiting favorable returns. The key to a successful investment is to react to volatility in the markets with a calm and measured approach.

Set a Clear Timeline With Each Investment

It’s highly recommended that you set a clear timeline with the goals that you have for each investment. If you want to net a return of 10 percent after 10 years of holding an investment, you should stick close to the timeline that you’ve set. By creating a clear timeline, it should be easier for you to avoid selling too early or to hold on too long while you await higher returns. Keep in mind that the right passive investments can be held until well after retirement age. If you set these timelines as early in your life as possible, it’s more likely that you will earn enough income to reach your goals.

If you want to be a successful investor, making passive investments is a great way to diversify your portfolio. Most of these investments are simple and easy to manage, which helps to reduce overall risk. Though goals aren’t always easy to define with passive investments, setting some basic ones should help you avoid making costly mistakes when you invest your money. With patience, the income that you generate could be higher than anticipated.

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Passive Investing Ideas For Your IRA

When it comes to passive income, holding property in an individual retirement account is as passive as it gets. Typical portfolios with a number of diverse assets require constant supervision and timely transactions. In this case, the IRA does all the work. Taxable income is deferred just as it is with other IRA investments, and investments in land and buildings are likely to pay handsome returns.

On the upside, then, this is an attractive vehicle for any passive investor interested in wealth building through real estate. Your IRA could buy commercial properties, apartment complexes, rental homes or even parcels of raw land.

However, the importance of playing by the rules — which are numerous — cannot be overstated. A small mistake could suddenly turn your entire IRA into taxable income. Carefully consider the pros, cons and risks associated with this form of passive investing.

The Rules for Investment Properties Within an IRA

The first thing to understand is that you are not the property owner. Your IRA is, and that will be stated on the deed. The second is that none of the income the property generates can directly benefit you; it can only benefit the IRA. Most of the other rules fall under those two presuppositions.

The IRA you use, whether conventional or Roth, must be held by a self-directed custodian. IRAs have been overseen by custodians for tax accountability since 1974, but traditional custodial banks and brokerages offer only limited investment options such as stocks and mutual funds. A self-directed IRA allows you to diversify your retirement portfolio with alternatives like investment property. That is one of the biggest perks.

There is another important difference between traditional custodians and self-directed ones: Custodians of self-directed IRAs, beyond directing you to IRS resources, do not give legal tips or tax advice. They manage transactions and report to the IRS as required to keep you in compliance with the rules, but their fees cover only those services. They do not provide an education or suggest best practices. You must make property investment decisions without their help.

In other words, when it comes to investing through the IRA, you are on your own for the most part. That is one risk that many passive investors are not willing to take.

In the eyes of the IRS, you and your self-directed IRA are completely separate entities. This arrangement is strictly for the purposes of passive investing. You cannot enjoy property-generated income until it is time to start making withdrawals from the IRA. Since one prohibited transaction can result in your IRA becoming taxable income, it is best to think of the account as a complete stranger you look forward to meeting someday.

For instance, if you purchase a home with funds from the IRA, you cannot live in it, work from it, start a business in it, or even stay in it on vacation. There is a long list of IRS-disqualified people who cannot benefit in any way from the property. The shortlist includes the following:

• You.
• Your spouse.
• Your children and their spouses, children, and grandchildren.
• Your parents, grandparents, and great-grandparents.
• Any beneficiary of the IRA.
• Plan service providers or any custodian, adviser, or an administrator.

Also, you cannot use the IRA to buy property from anyone, including yourself, who is on the disqualified list.

Purchasing Property

No one argues that buying a property through an IRA requires substantial wealth. Mortgages are hard to come by and are quite complex, so paying cash is the preferred alternative.

That calls for a very high account balance. Not only will you have to pay for the property itself, but most advisers recommend that you have enough saved for several months’ property expenses at the very least.

If you do find a lender who specializes in loans to IRAs, you are not personally guaranteeing the mortgage, so the loan will have to be nonrecourse. If you stop making payments, the only asset the lender can go after is the property itself. That means the lender will require a sizable down payment of around 40% to 50% and charge much higher interest rates than those in a conventional mortgage.

There is something else you have to watch for if your IRA makes a debt-financed purchase. Any revenue the property generates might be considered unrelated business taxable income, or UBTI.

Whether you pay cash or obtain financing, there is no tax consequence to buying, selling, flipping, and amassing properties within the IRA. You can freely roll funds among various projects.

Owning Property

Remember that the IRA owns the property. That is where things get a little strange.

You cannot manage the property, landscape around the pool, repaint the guest room or even change a light bulb. You must pay someone else to care for your property, and that someone cannot be anybody on the disqualified list.

If the IRA buys a ski lodge, say, you may not furnish it with antiques you have collected from around the world. If the IRA buys a chain of boutiques, neither you nor anyone on the disqualified list may work in the shops or purchase items from them. This is passive income at its most passive.

You are breaking the rules if you pay for repairs or ongoing maintenance out of your own pocket. Instead, you will fund the IRA to pay for expenses. That can get tricky because contributions are limited. If you have a string of expensive repairs, you could incur high penalties for overcontributing.

All rental income goes into the IRA. It is tax deferred, of course, until you withdraw from the IRA in retirement.

This is an excellent way to go about wealth building, but be aware that you are excluded from certain perks that traditional property owners enjoy. You cannot deduct mortgage interest, depreciation, property tax and other expenses associated with owning property.

Selling Property

This is a simple matter of negotiating the price and terms and asking your custodian to sell the property on your IRA’s behalf. Proceeds from the sale will go directly back into your IRA. No capital gains tax is owed, and the reinvestment is tax-free for now.

The Bottom Line

The IRA plan is not ideal for every passive investor. For example, if you had planned to purchase rental properties that you and family members could enjoy now and then, this is not the right solution for you. If purchasing property through an IRA would require a loan, there are better options with more favorable terms. If you lack experience in real estate investing in general, get some practice buying rental properties the old-fashioned way before you take this route.

Otherwise, you are a great candidate for investing in property with an IRA, and there are some great incentives.

Real estate almost always pays excellent returns over the long term. It is largely recession-proof. Property values are never as volatile as stock prices, and rental property occupancy rates tend to hold steady even in weak economies.

In short, there is much to like about this type of passive investing. It is a great vehicle for building wealth and diversifying your retirement savings.

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How to Grow Your Money In a Passive Manner

Historically, the cost of goods and services has increased by about 3% per year on average. Over the past 100 years, the S&P 500 has netted investors an 8% return on their investment. This means that your net worth would see an actual increase of about 5% each year if you had invested in that index. Let’s look at some additional ways to build wealth and how to decide if a given investment class is right for you.

What Type of Investor Do You Want To Be?

The first step in developing an investment strategy is to decide whether you want to manage your portfolio in an active or passive manner. A passive investing strategy can be ideal for those who take a more conservative approach to growing and preserving wealth.

Examples of passive investments include index funds and real estate that is managed by another person or entity. Putting money into an IRA or 401(k) may be another method of building wealth in a passive manner.

Active investing strategies tend to be better suited for those who are looking to maximize their returns over a period of several weeks or months. In some cases, active investors are referred to as traders or scalpers.

What to Know About Personal Retirement Accounts

The federal government allows you to place a percentage of your annual taxable compensation into an individual retirement account (IRA). A traditional account can be funded with pre-tax dollars while a Roth account is funded with after-tax dollars.

While it is possible to have more than one IRA, total contributions across all accounts cannot exceed the limit for a given tax year. In 2021, those under the age of 50 can put away up to $6,000 while those over 50 are allowed to contribute up to $7,000.

Generally speaking, funds in an IRA are invested in mutual funds and other conservative investment vehicles. However, if you want more freedom to manage your money, it might be possible to create a self-directed IRA. This enables you to put your money into stocks, startup companies or any other investments that have long-term wealth-building potential.

If you are under the age of 70 1/2, you will need to start making the required minimum distributions (RMDs) from your traditional IRA. Failure to comply with MRD requirements could result in penalties that equal half of your account balance. Any funds left in your account at the time of your death can be transferred to a beneficiary.

An Overview of Qualified Retirement Plans

Any retirement plan that meets Section 401 requirements is generally referred to as qualified. The 401(k) or 403(b) offered by your employer is a common example of such a plan. Typically, you must be at least 21 and accrue at least 1,000 hours of service before you are eligible to take part in such a program.

These types of plans typically invest in real estate, individual stocks, and index funds. In 2021, you can contribute up to $19,500, and if you are self-employed, you can likely make both an employer and employee contribution. There is an RMD requirement for those who have a traditional 401(k), and you must typically start withdrawing funds when you turn 72 or immediately after retirement.

If your employer offers to match your contributions, it is generally in your best interest to take advantage of that offer. An employer match represents a guaranteed 100% return on your investment without having to do anything to earn it.

Real Estate Can Provide Multiple Revenue Streams

Acquiring real property can be an effective wealth-building strategy because there are so many different ways to generate a return on your investment. Getting started as a landlord can be easy as renting out your home’s garage, attic, or basement. Doing so will allow you to collect a monthly rent check while also benefiting from the appreciation in your home.

Buying land can also be an effective way to earn passive income over a period of several years or decades. If your lot is vacant, you won’t need to pay a monthly fee to a property management company to oversee it.

Investing in commercial buildings can be advantageous because commercial tenants tend to do a better job caring for the buildings that they occupy. Furthermore, companies that make use of office, warehouse, or retail spaces are generally responsible for the cost of maintaining them. Therefore, you get to maximize the return on your investment while offloading most of the risk associated with owning the property to another party.

Alternative Investments Can Be Attractive to a Passive Investor

Stocks, bonds, and cash are what financial professionals think of when they imagine a traditional investment. Depending on who you ask, acquiring residential or commercial properties can either be labeled as a traditional or alternative investment.

Looking into alternative asset classes may present you with an outstanding opportunity to generate a passive income and diversify your portfolio at the same time. In some cases, you won’t have to store the asset on your property or even take delivery of it.

For example, an art collection might be stored at a local art museum while a bottle of fine wine can be kept in a secure cellar. If you like to invest in coins or other precious metals, your holdings can be kept in a vault at the bank as opposed to in your home.

As long as your items are kept in good condition, they will appreciate in value regardless of where they are stored. It may be in your best interest to purchase an insurance policy on any asset that you purchase for investment purposes. If an insured item is lost, damaged, or stolen, the policy will help you recoup a portion of your losses.

Buy a Professional Sports Franchise

If you’re a millionaire who is passionate about both sports and making a passive return on investment, you should strongly consider buying a football, hockey, or basketball team. As the owner, you have the freedom to appoint a president or other executives to run the team on your behalf.

At the same time, you’ll still be able to have input on who the franchise should draft to play quarterback or should be named as the next head coach. Franchises typically make money from a ticket, merchandise, and concession sales, and they may also make passive income from television deals and other sponsorship agreements.

If you can’t afford to buy a team on your own, it may be possible to buy a minority stake in an existing franchise. This might be easier than actually owning an organization outright because you won’t have any significant role in running it.

Should You Keep Money in a Savings Account?

As a passive investor, your goal is to make as much money while doing as little as possible to earn it. Depositing checks into a bank account may be among the least strenuous activities that a person can engage in. These days, depositing or transferring money into a checking or savings account can be done with a few taps on your smartphone.

However, just because keeping money in a checking or savings account is easy doesn’t mean that it will meet your passive investing goals. It isn’t uncommon for banks to offer annual yields of less than 1% for balances of $1 million or more.

Generally speaking, it is a good idea to keep at least some of your money in a bank or credit union. This is because up to $250,000 per account is protected by the Federal Deposit Insurance Corporation. Furthermore, having cash on hand can make it easier to buy stocks or make other investments in a timely manner.

How to Properly Diversify Your Portfolio

Ideally, you’ll invest in a combination of stocks, real property, and alternative investments. Doing so allows you to maximize returns during periods of economic prosperity and minimize losses during economic downturns.

Of course, simply buying a bunch of different assets isn’t enough to protect your money. Instead, you’ll want to take a look at how those assets are correlated to each other. For example, the price of gold tends to move in unison with the price of the S&P 500. This means that a portfolio that is primarily invested in stocks and gold has the potential for outsized gains as well as outsized losses.

However, the price of oil tends to move opposite of the price of gold. Therefore, it may act as a better hedge against any potential losses in the stock market. It is important to note that most of the global stock indices are roughly correlated to each other. Therefore, this type of strategy could work whether you have money in the S&P 500, the Dow 30, or the Nikkei 225.

There are few greater joys in life than watching your bank balance grow despite the fact that you spent zero hours at work today. In addition to securing your financial future, passive investment strategies may allow you to spend more time with family members or volunteering in the community.

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How You Can Invest and Create Passive Income in Real Estate – Step by Step

Examining the Benefits of Passive Investing – How You Can Invest in Real Estate

When you invest in real estate, you can examine the value of each property, the location of the real estate, the features of available homes, and the prices of nearby houses. Typically, an investor could also evaluate the average rent in each geographic region, and once an individual purchases a house, the investor may quickly find new tenants. Additionally, an investor can review detailed charts that indicate the historical values of many homes. Subsequently, the purchaser may study predictive forecasts that could examine long-term profits, various types of expenses, and relevant trends.

Choosing a Strategy and Increasing Wealth

If you would like to create a passive income, you could purchase high-quality houses that can accommodate multiple tenants, and the owner could provide a detailed contract that can describe the monthly payments, the duration of the lease, the terms of the lease, and the initial deposit. When the tenants rent a home, the renters can consistently provide monthly installments that could increase the profitability of the investment. Once the investor receives these payments, the investor could purchase additional properties, complete renovations, or create new listings that describe available homes.

When you implement a strategy that involves passive investing, you could purchase a home that may accommodate more than three tenants, and each tenant can sign a separate contract. Several reports have suggested that more than 50 percent of investors usually purchase larger houses that may contain multiple tenants. According to numerous surveys, this strategy could increase the investor’s revenue by approximately 29 percent.

Studying Reports That Indicate the Average Rent in a Geographic Region

Before you purchase a house, you should view detailed reports that examine the median rent in each city, and you may also view interactive maps that indicate the average rent in specific neighborhoods. If an area does not contain a large number of available homes, many owners could substantially increase the rent, or the investors may purchase houses that are situated in nearby suburbs.

Estimating the Values of Many Homes

While you examine an available house, you could evaluate the bedrooms, the bathrooms, the kitchen, the dining room, and the home’s exterior. Some investors frequently purchase houses that have extra features, and you may select a home that contains a fireplace, extra rooms, a hot tub, and a game room. Several reports have indicated that these features could augment a house’s value by more than 20 percent. If a home provides additional amenities, many individuals may request guided tours, and typically, the seller could receive multiple offers.

Before you purchase a house, you can evaluate many houses in numerous regions, and you may examine the price of each home, the features of similar houses, many listings, and the number of available homes. Once you study detailed reports, you could estimate the current value of each house, and you can quickly submit a new offer.

Studying Relevant Trends

Each investor can view detailed charts that indicate the historical values of houses, and these graphs could examine emerging trends that may influence many buyers, affect the prices of homes, increase the overall demand and reduce the availability of houses. Once you examine relevant trends, you may also review predictive forecasts that could indicate the prices of homes in the future.

Increasing the Profitability of Each Investment

When an investor is managing a property, the owner could complete numerous renovations that can significantly augment the value of the home. The investor could renovate the kitchen, modify the bedrooms, and improve the design of the basement. The owner can also install energy-efficient windows, new siding, outdoor decorations, and high-quality doors, and some reports have suggested that renovations may augment a house’s value by more than 35 percent.

Many investors install new roofs that feature stylish shingles, durable felt, and various types of flashing. The owner may also hire roofers who could add new vents, which can protect the ridges of the home. Typically, the vents may considerably reduce energy costs, decrease humidity, and improve the flow of air. Numerous reports have suggested that a new roof could augment a house’s value by around 15 percent. Additionally, a durable roof can protect the ceiling, the walls, and insulation.

Understanding Several Factors That Could Affect the Values of Homes

Before you purchase a home, you could tour houses that are located near well-known destinations, and when you evaluate specific areas, you can examine local parks, shopping centers, restaurants, nearby businesses, and fitness centers. Multiple surveys have indicated that approximately 71 percent of buyers prefer houses that are situated near various businesses. Usually, many buyers search for homes that are located within 20 miles of popular attractions.

Once you evaluate available houses, you should also examine nearby highways, bus stations, large airports, and other types of transportation. According to recent reports, more than 50 percent of tenants would like to rent houses that are situated near bus stations, and most buyers prefer homes that are close to highways.

Evaluating the Overall Demand

After you create a long-term strategy, you can evaluate the number of available houses in each area, and once buyers purchase nearby houses, you could examine the prices of similar homes. Typically, a passive investor can also review reports that describe the median income, the school district, the population growth, and the population density. Moreover, some reports can indicate the number of citizens who have relocated to a specific area, and if many residents are searching for rentable homes, the value of houses could quickly increase.

Choosing a Lender and Examining Available Loans

Before an investor purchases multiple properties, the individual may search for a financial institution that can provide a sizable loan. Once the investor submits an application, the lender can evaluate the applicant’s income, credit score, available assets, and investment plan. The creditor could also examine the cumulative value of other debts, and the lender can examine personal loans, credit cards, and automotive loans.

Joe Fairless is an experienced investor who offers an educational program that could help investors, and the expert can provide instructions that could allow investors to find numerous lenders. When you are searching for loans, you should examine the interest rate, the monthly payments, the duration of the loan, additional fees, and the reputation of each lender.

Creating High-Quality Listings

While an investor is managing a property, the individual could create detailed listings that indicate the size of the home, the number of bedrooms, and the number of bathrooms, and the listings can describe extra features that may considerably augment the value of the house. The listings could also examine the layout of the home, the design of each room, and the house’s exterior. The owner may utilize online tools that can provide a virtual tour, and according to detailed reports, these tools can significantly increase the number of customers who contact a seller.

Managing an Open House

If an investor would like to sell a home, the owner can schedule an open house that could attract buyers, and the investor may create advertisements that describe the home, feature many images, and indicate the duration of the event. The passive investor could hire a real estate agent who can provide guided tours, describe the features of the house, and answer questions. Several reports have indicated that an open house could substantially increase the number of buyers who submit offers, and once an owner manages an open house, the event may augment the price of the house.

Finding Partners Who Can Manage Investments

During the last decade, numerous companies have created networks that can help investors to find experienced partners, and these experts can manage properties, increase wealth, review many types of contracts, describe the benefits of investing and find reliable tenants. Once you choose a partner, you could offer an initial investment that has a value of less than $7,000, yet the investment can consistently generate revenue. Joe Fairless provides extensive guidelines that could help an investor to find a partner, and the expert has created informative reports that describe wealth-building strategies, multiple types of agreements, and educational programs.

Creating a Long-Term Strategy and Accomplishing Many Goals

When you develop a new plan, you could evaluate the price of each home, the monthly revenue, various types of expenses, and available loans. Joe Fairless has written a book that can help investors to create numerous strategies, and once an investor evaluates the guidelines, the individual can overcome various obstacles, manage many properties, examine the benefits of investing, choose a new loan and maximize the profitability of each investment.

Learning More Information

If you have any questions about our services, you can evaluate our blog, various resources, wealth-building strategies, informative videos, and important updates. Joe Fairless has also developed a mobile application that can help investors to create a passive income, and the expert has written a book that describes many strategies, the benefits of passive investing, and inspirational stories. When you visit our website, you could also complete our contact form, and once you contact our experts, we can answer your questions, describe our educational programs, and provide a consultation.

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Tips on What to Do in Between Investments

Achieving financial freedom does not mean that you stop working. While passive investing requires less work than active investing, you may still need to spend your free time researching new investments or starting your next income opportunity. Because of this, there are plenty of activities you can work on between investments that can help you increase your wealth.

Being Financially Independent Still Involves Work

As an investor, your goal is to become financially independent. When you reach this stage of affluence, you get to choose how you spend your time. In most cases, wealthy individuals spend a lot of time going to seminars, visiting real estate meetups and networking with other affluent investors. The difference is that you will not have to work for money anymore. Instead, you get to pursue your passion projects.

After each investment, many passive investors spend time researching their next investment. They may spend time expanding their company or serving as an angel investor. Depending on how you earn your passive income, you may want to spend your free time writing books or creating online courses.

Focus on Building Your Passive Income

In general, passive investing involves a buy-and-hold strategy. You purchase an investment with the expectation that you will hold it over the long run before you sell it. Index investing is one of the most popular examples of this investment style.

Because you do not have to spend time buying and selling your investments, you can use your time for other productive activities. Whether your goal is to retire early or develop intergenerational wealth, there are other techniques you can use. The following ideas can help you create new sources of passive income when you are in between different investments.

Create a Book or Online Course

Over the years, you have learned a lot about your career field, hobbies and investment choices. Most likely, those experiences have helped you learn interesting information that other people want to learn as well. All of that information can be packaged into an online course or book.

The beauty of this technique is that you can keep earning money for years after you make the course. In addition, published books and courses help you become a thought leader in your field. Eventually, those activities could lead to speaking events or new opportunities as well. At the very least, these books and courses will help you bring in a consistent revenue stream.

Buy a Rental Property

While renting an apartment building or home requires a bit of work, it can bring in a significant amount of revenue as well. For example, Michael Blank added $40,000 to his net worth for the year with a 12-unit complex. The initial purchase price of the building was just $530,000, and Blank expects annual returns of 15 percent per year for all of the building’s investors.

Other than renting a unit to tenants, you can also buy a property to rent on Airbnb. While the average host made just $924 per month in 2019, this figure is mostly based on people who are only renting out a spare room on the side. If you are renting out your second home or multiple units, your Airbnb earnings can quickly increase.

Once you sell your real estate property, you will be able to realize any gains your investment has made over the years. While your tenants or Airbnb guests were paying your mortgage and expenses, your unit increased in value. After you sell the property, you can put those funds into your other investments.

Unless you hire a property management team, managing a rental unit will take time and effort. If you want an easier option, you can try buying real estate investment trusts (REITs). When you buy a REIT, you are essentially buying a share in a portfolio of properties. You can generally invest in these properties individually or through a mutual fund.

Historically, REITs have performed about as well as mid-cap stocks. From 1990 to 2010, the FTSE NAREIT Equity REIT Index had an average annual return of 9.9 percent. During the same time period, mid-cap stocks had a return of 10.38 percent. Meanwhile, commodities returned just 4.5 percent per year.

Recently, REITs have performed even better. From March 2013 to March 2016, REITs had an average annual return of 11.21 percent. You can also select between different types of REITs. For example, you can buy retail, healthcare, office, mortgage or residential REITs.

Try Peer-to-Peer Lending

During your free time, you can also focus on wealth building through peer-to-peer lending. This lending style is when individuals make loans to borrowers through a third-party institution like LendingClub or Prosper. Basically, you get to take on the role of the bank. This means that you get to earn interest from loan payments just like a bank does.

Like bank loans, peer-to-peer loans also involve risk. If the borrower does not repay the loan, you will lose your investment. You can reduce this risk by lending to multiple people and diversifying your portfolio. At companies like Prosper, you are not required to fund the entire loan amount. Instead, you can do your research to find multiple qualified borrowers. Then, you can invest and start earning interest from your investments.

Become a Better Investor

As you wait for your next investment to appear, you can also become better at making passive investments and wealth building. To start with, you should determine your motivation. Are you interested in capital preservation, financial security or building your net worth? Do you need a steady income stream or appreciation? What is your risk tolerance?

You also need to become talented at screening deals. To find the right fund or company, you have to figure out your investment window, risk tolerance and need for cash flow. You will need to consider the company’s experience, industry knowledge and geographic market. In addition, you should look at the potential return on the investment, management fees, private placement memorandums (PPMs) and exit strategies. A defined exit strategy is important because you need to have a way to withdraw your initial investment and profits. In addition, you should see if the investment has a PPM. If it does not, then the investment is probably a scam.

Once you find a decent investment, you need to review the company’s financial statements and how they plan to use the funds. Ideally, the company should clearly detail all of its funding sources, management compensation and projected income. Because every investment has risks, you should clearly understand the market, industry, legal, management and company risks involved in your investment.

If you want to earn a profit, you have to do your due diligence. In general, managers are happy to help you with any questions that you may have. If the management team is unresponsive to your questions, you should be extremely cautious.

Once you decide to invest, you need to be fully committed. Most passive and private investments are for the long run. If you plan on withdrawing your money within five to seven years, you should choose a different investment type.

You should also be prepared to walk away from a prospective investment. Many investments sound good initially, but the financial statements do not make sense. If you want to continue wealth building, you have to do your research and be ready to move on when an investment turns out to be a lemon.

How to Spend Your Time If You Are Truly Finished With Working

What if you truly are a passive investor and have no other investments left to make? In that case, you can start enjoying an entirely different style of living. As a passive investor, you can spend your days relaxing on a Caribbean beach or hiking the Camino in Spain. Passive investing allows you to take control of your time and your future.

While most people imagine wealthy investors driving a Ferrari and sipping margaritas on a private yacht, this is generally not the case. Once you are done building your wealth, you will quickly realize that upgrading your vehicle from a Lexus to a Ferrari will not make you any happier. Instead, savvy investors spend their money on financial goals that make their families happier. They focus on activities like traveling and taking time off instead of just buying a more expensive car or a fourth house.

Once you make so much money that you never have to work again, you will also realize that vacations are only fun for part of your time. You have to have something interesting to do. Even world-famous investors like Warren Buffett spend most of their time learning and exploring new topics. Each day, Buffett spends five to six hours reading five newspapers and hundreds of pages of corporate reports. Bill Gates is said to read an average of 50 books per year.

Like Buffett and Gates, some investors decide that they love running a business and keep working, but they do work on their own terms. Other people pursue passion projects like starting a charity, writing a book or learning a language. The magic of being a passive investor is that you get to determine how your time is spent. Rather than waste your day in an office, you can devote your time to activities that bring you happiness instead.

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Resources To Stay up To Date on Apartment Market as a Passive Investor

If you are interested in the world of property investments, it’s vital you keep updated on the latest apartment values in your area. Properties make a fantastic investment opportunity for anyone looking to replace or supplement their income.

You enjoy many rewards and boost your profitability to a whole new level. You can earn more money than you once thought possible if you follow the right steps, and you will be pleased with the outcome. Make sure you check Zillow, commercial property blogs and other sources so that you don’t get left behind.

Why Invest in Commercial Real Estate

You could be asking yourself why you should invest in the apartment industry, which is a great question. Apartments are great for anyone interested in passive investing, and you will know you made the right choice when you see the outcome. In addition to earning a passive income, you get several other great benefits you don’t want to overlook. You want to explore the advantages and know what to expect. Another benefit of investing in commercial property is that your investment goes up in value over time.

Passive Income

One of the top benefits of property investing is that you earn a passive income. You get apartments and rent them out to your tenants, and you collect a paycheck each month. As a landlord, you must remember that you have a lot of obligations you must uphold if you want to stay in business.

You must take care of plumbing and other repair issues if your renters run into problems along the way. You must also make sure the HVAC system runs the way it should. Another issue is dealing with people who are late paying their rent, a problem you will have to encounter.

Combat that issue and save time by hiring a property management company, and you will know you are on the right track. Most property management companies can take care of those issues so that you won’t have to worry about them. Even though you sometimes have a lot of maintenance work to do, investing in apartments is still a passive investment opportunity if you know what steps to take.

Appreciation

You must consider how much a property will appreciate over time when making an investment. Some people buy cars or other investments but don’t consider how much they will go up or down in value over time, but that’s a factor you can’t afford to overlook if you want to earn money over the long run. Most apartments still appreciate even during the COVID-19 pandemic.

If you would like to earn as much as possible, you can buy an old apartment and fix it up. Painting the walls and floors works wonders for increasing the value of your apartment, but you can also take other steps. People always see the roof before they notice anything else about your building, so consider the condition of your roof.

A roof that is in bad shape turns renters away and decreases their odds of making a purchase. The cost of repairing a roof is an investment that pays much more over the long run. A new and attractive roof grabs attention and inspires interest, and people will be willing to pay that much more for your units.

Look into property values in your area to see how much units in better condition are worth before you move forward. You then know what to expect and how much you can gain when you purchase an apartment complex. Advertise your apartment to get it in front of as many prospective renters as possible, and you won’t have any problems moving forward.

You will earn your money back in no time if you follow a solid business plan and keep yourself on track. Monitor your spending and earning over time to calculate your profitability to make sure your business is moving in the right direction.

Build Equity

Get property investments if you are looking for a passive investing opportunity that makes sense for you. You use your apartments to build wealth and increase your profitability over time. When you take the right steps and care for your apartment complex, you build positive equity and increase your wealth more than you once thought possible.

The apartment industry is a great place for anyone who wants to build a strong portfolio and earn a respectable amount of wealth. If this is your first apartment investment, you can get started with a small business loan. You can otherwise add additional apartments to your collection if you want to get the best possible return on your investment.

Zillow

Look at Zillow when you want to know what the property values are in your area. Zillow lists plenty of property values and commercial property values in your area. You can look for apartments similar to the ones in which you are interested and compare prices. Look at what price you will pay for similar apartments to yours in different areas, and you start getting a clear picture of what you should expect. Track the value of commercial properties over the last 10 years to get an idea of what to expect before making your investment.

Apartments

Apartments is a great website for anyone who needs to find apartments and compare prices. Some investors overlook the importance of simple search sites when it comes to looking up property values. Some of the most basic sites have great features you can use to check property values, and you can use it to research your next commercial investment.

Check out the various options and search filters to discover apartments near you that stand apart from the rest. You will soon have a wealth building strategy that makes sense for you over the long run. This website lets you enter the city in which you would like to buy property.

You then decide the type of apartment you want and how much you are willing to spend. Apartments.com gives you a list of apartments and shows you which ones make the most sense for your needs. The best part is that you see how much people are willing to pay for apartments each month.

Review the website several times per week so that you can track changes and updates, and you won’t have any trouble moving forward. The property industry always changes based on crime rates, the economy and other factors you must consider. Your wealth building profile expands each time you research and take calculated steps in the right direction.

ShowCase

ShowCase is another great website for the passive investor. You can look up countless properties in your area. Different websites list different prices for the apartments in your area, so keeping track of what different websites say is a vital step in the right direction. You review the listings on each one and write down the average listing.

CoStar

CoStar is a great website for anyone who wants to make smart investments. The site has a blog with tons of great information you won’t find anywhere else, and you get landlord advice and other great tips that boost your results to a whole new level.

In addition to getting tips, you also get the latest news related to the real estate industry. CoStar has several sections dedicated to giving you the top news in the real estate industry, and you can use this information to choose what investments are worth it over the long run. You will be glad you did.

Properties

The properties section has plenty of property listings in which you might be interested. You can search through the different listings and find more than 50 million properties across the globe. Use this information to decide what investments are worth making over the long run. When you look at each piece of information with an objective eye, you know what you must do to reach the outcome you had in mind.

Compare prices for different areas to discover what path is right for you and your business. You should find properties in your budget so that you can take your business up a level. No matter the type of apartments for which you are looking, CoStar has your needs in mind.

Final Thoughts

You should have no problem finding great resources that show you the value of apartments in your area and around the world. Staying updated on the market value of apartments is important for any investor who wants to avoid falling behind. You know you are doing everything you can to safeguard your business and boost your profitability to a whole new level.

The steps you take today make a difference in where you expect your results to go tomorrow, so don’t overlook the importance of proper research. Passive investing is one of the best ways to increase your earning potential because it’s one of the most scalable.

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Simple, But Not Easy – Investing Mindset

Today I want to share with you what I wish I had learned before I started investing in real estate in 2009 when I didn’t know what I didn’t know…

The overly complex investing approach that I initially decided to pursue led me to waste time, have unnecessary stress, unknowingly participate in high-risk investments, and ultimately start over with an entirely new strategy in 2015. This “discovery process” resulted in six years of hassle. My goal is to save you years of headache by sharing an investing mindset that helped me overcome these obstacles.

It’s simple to make money in real estate, but it’s not easy

Our modern world is complex and the massive amounts of advertising and marketing can be difficult to sort through. Divided beliefs about money complicate matters further. You surely will come across people who do not believe in real estate as an investment vehicle, and at the same time, others make millions in real estate. So how do you sort through the opinions and perspectives? How do you know what to believe?

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth – Marcus Aurelius

The first step to cut through the muck is to avoid extreme points of view. Someone advocating that real estate is the only asset class to invest in is most often incorrect. On the flip side, someone advocating that real estate is an asset class to avoid at all costs is most likely incorrect as well. The key is to find the middle ground. As Robert Kiyosaki points out in his lectures, there are three sides to a coin, heads, tails, and the edge. By standing on the edge, you can see both heads and tails. This is a critical part of an intelligent investing mindset.

Simple, but not easy

Let’s say your goal is to build wealth. The solution is simple – make money, spend less than you earn, and invest the difference. Over time, you will inevitably build wealth. Ah but it’s not that easy… How will you make money? How much should you save? How do you choose what to invest in?

Consistency and self-education are also necessary

What ties this framework together and produces results is consistency and self-education. Daily, weekly and monthly consistency and educating yourself on the subject at hand will lead you toward your goals. In the first six years of my investing journey, I learned that it’s better to grow wealth slowly and consistently rather than having inconsistent spikes and dips in your investing portfolio. For example, learn how to create $100 a month in passive income, then step up to $1,000 a month, then $10,000 a month, and so on, following a repeatable process throughout your journey.

Most people overestimate what they can achieve in a year and underestimate what they can achieve in a decade – Tony Robbins

Dedicating time to bettering your financial future is a worthwhile pursuit; becoming an overnight success is mostly a myth. I encourage you to get clear on your goals, be patient, educate yourself, view objectively from the edge of the coin, and stay the course. In ten years, you’ll be glad that you did. This is an investing mindset that can make all the difference.

 

To Your Success

Travis Watts

 

 

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How Much to Invest Vs. Keep in Your Bank Account as a Passive Investor

As a passive investor, you are in an enviable position. Unlike the rest of the rat race, you can earn money without having to work for it. However, you have to manage your financial resources carefully if you want them to last. Rather than investing all of your funds right away, you should make sure that some of your monthly income goes into your savings account instead. The amount depends on your expenses and how much you already have put aside in your savings account.

What Does Your Emergency Fund Look Like?

An estimated one out of four 20-year-old adults will become disabled before they turn 67. Other than long-term disabilities, a car repair, job loss, medical expense or home repair may become necessary at any time. These unexpected expenses require capital, so savvy investors always set aside an emergency fund before they focus on wealth building.

In general, financial experts recommend that you start building an emergency fund before you invest your surplus cash. You can put your emergency fund into a high-yield savings account. This kind of account has zero risks, but it still earns more money than a typical savings account. Unlike the stock market, a high-yield savings account is insured by the Federal Deposit Insurance Corporation (FDIC). Because of this, your account balance will not change because of market fluctuations.

Financial experts normally recommend that you save three to six months of expenses in your savings account. If your income fluctuates significantly, you may need to save more money. Likewise, you may want to put aside more income if your job is insecure.

  • Three months of expenses: This amount works for couples who have secure employment and two incomes.
  • Six months of expenses: Couples need six months of income if they are both employed, but their jobs are not secure. If one partner is not working, this is also a good choice.
  • One year of expenses: If you are a single person and have an insecure income, you should save a year of expenses.

You can also use your high-yield savings account for short-term goals like saving for a major vacation or an upcoming wedding. Once your emergency fund is full, you can use your surplus cash for your investments. Through passive investing, you can start growing your wealth.

How Much Should You Save or Invest Each Month as a Passive Investor?

If you think you will need the cash within the next five years, you should store it in a savings account or another liquid asset. Short-term savings must be accessible, so they should not be invested in the stock market, real estate or illiquid investments. If you do not have an emergency fund, you should put half of your savings into a savings account and half into your retirement account until your savings can cover three to six months of your expenses. To be extra secure, you may want to save even more.

Once you have an emergency fund set up, you can start putting all of your surplus cash into retirement accounts and other investment accounts. A high-yield savings account only earns an interest rate of 1 to 2 percent. You cannot put all of your financial funds in a savings account because they would never grow enough to fund your early retirement.

Max Out Your Retirement Accounts

If you are eligible for a 401(k) match from your employer, you should at least contribute enough to your 401(k) to max out your employer’s contribution. At many workplaces, employers will match your contributions up to 4 to 6 percent of your salary. With 401(k) matching contributions, you are basically getting free money from your boss. If you take advantage of this option, you will be able to quit your job and retire early. Best of all, your employer will be the one paying for your early retirement.

In general, you want to contribute enough funds to max out your employer’s contribution. The only exception is if you are struggling to pay your bills. Even when you are just starting your emergency fund, you can still do a 50-50 split between your savings account and your 401(k).

If you do not have a 401(k) account through your employer, you should set up an individual retirement account (IRA) or Roth IRA. Ideally, you should max out your retirement contributions each year because these accounts carry tax advantages. If you are 50 years old or older, you are also allowed to save an extra $1,000 each year as a catch-up contribution.

Pay Debts That Have a High-Interest Rate

Once your emergency fund has been set up, you should also pay off any debts that have a high-interest rate. In general, debts have a high-interest rate if the interest rate is at least 10 percent. Since it is difficult to find investments that consistently pay more than 10 percent a year, you will end up doing financially better if you pay off debts that have a high-interest rate first.

When Is Investing Better Than Saving?

If you want to develop passive income or become independently wealthy, you need to invest more money. No one has ever become truly wealthy by just earning a paycheck. Instead, most affluent households gained their wealth through investments. To decide if you should focus on your investment accounts or your savings accounts, read on.

  • You no longer have high-interest debts. Many people begin their careers with car loans, mortgages and student loans. While low-interest debt is fine, you should be wary of high-interest debts like credit cards. If your credit cards charge an interest rate of 20 percent, you will get a higher return from paying off your credit cards than you would through a typical investment. Once your high-interest debts are gone, you can focus entirely on investments and wealth building.
  • Your emergency fund is full. You need to have money set aside for a rainy day. While you only need three to six months of living expenses if you have a secure job, you should save more if you are single or self-employed. Once your emergency fund is complete, you can devote your income to passive investing.
  • Your long-term goals require a significant amount of cash. If you plan on needing the money within five years, you should put it into a savings account or an extremely liquid investment. For long-term expenses like retirement and college funds, you should put your cash into an investment account instead.

Savings Accounts Versus Checking Accounts

A savings account pays a better interest rate than a checking account, but it also has certain limitations. Because savings accounts are made for deposits, you are generally given just six withdrawals a month. If you use more withdrawals than that, you will end up having to pay a fee.

Your savings account is where you can put your emergency fund. If you are saving for large purchases like a vacation, you can also put those funds in your savings account. As a general rule, your savings account is for money that you do not currently need for your everyday purchases.

While a checking account does not pay as much in interest, it is designed to handle more transactions each month. Because of this, you should fund your everyday expenses through your checking account. Your mortgage payment, utilities, grocery funds and other expenses should be in this account. If you do not have enough money in your checking account, you will end up having to pay overdraft fees. To prevent this from happening, you should put a buffer in your account just in case you spend more than you expected.

Focus on Passive Investing and Retirement Planning

As a general rule, you should always save an emergency fund before you begin real estate investments or other passive investments. The only exception to this rule is your 401(k) account. Because your employer only contributes matching funds if you contribute to your 401(k) as well, you should start saving for retirement right away. In most cases, you can put half of your savings in your 401(k) and the other half in your emergency fund until your emergency fund is full.

Once your emergency fund is full, you should focus on maxing out your retirement contributions, Then, you can move on to different passive investment sources. Depending on your unique situation, you may want to try generating passive income through some of the following methods.

  • Invest in stocks and bonds.
  • Bring in rental income.
  • Sell digital downloads on sites like Etsy.
  • Use peer-to-peer lending.
  • Sell information products like Udemy and Coursera courses.
  • Buy real estate investment trusts (REITs).
  • Earn money through affiliate marketing.
  • Bring in income from a blog.
  • Sell stock photos or books online.
  • Buy a storage center or laundromat.
  • Buy annuities.

As a passive investor, you know what it takes to save money and prepare for your future. Whether you are focused on wealth building or retiring early, the right investing strategies can help. Once you have saved an emergency fund and contributed to your retirement account, you can immediately start putting aside money in your investment accounts and passive income strategies.

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Making Investments as an Individual vs. a Corporation

In recent years, the increased availability of information has made a broader range of people more interested in both active and passive investing. Individual investors can now open a self-directed retail brokerage account online to get started in a matter of days. Information about making investments in real estate, startups, and other businesses can be easily found online. Consequently, there is growing interest in understanding how to earn passive income from active investment decisions.

When you first get started with investments, your ownership structure is relatively insignificant. However, as your capital contribution becomes more significant, you may want to invest in assets that have the potential to trigger losses that exceed your initial investment. In the world of business, individual investors are subject to the potential for unlimited losses while incorporated entities have the potential to limit liability to the amount of investment capital.

Therefore, investors have to consider the possible advantages of incorporation to enjoy the potential to limit losses. Additionally, investing your wealth through an entity can potentially lead to tax advantages and improve your ability to access certain types of assets. If you plan to make investments with your capital, you should read on to discover what ownership structure could be most advantageous in your situation.

Why Invest as an Individual?

There are many advantages to making investments as an individual. For new investors, the most significant advantage is that you can get started right away with no legal hassle. Passive investors can simply open an investment account to get started right away. Most reputable brokerage account providers will handle all legal considerations on your behalf.

In the U.S., only individuals can directly take advantage of 401(k) plans and other tax-advantaged investment accounts. Most investors who are simply trading securities to earn passive income for retirement get the most benefits from using tax-advantaged accounts. If you already have a retirement account, you can convert it into a self-directed account that lets you take full control over the portfolio of assets that you invest in.

The most common securities that self-directed investors gain exposure to are stocks and bonds. Additionally, the IRS has rules that can enable you to buy real estate, promissory notes, and even cryptocurrencies when you use a self-directed retirement account. However, unlike with corporations, individuals with retirement accounts are restricted to making investments in the limited range of asset classes that the IRS permits. Most of these assets are only useful for a passive investor. For instance, you can only invest up to $50,000 of your retirement funds into your own business unless you use Rollovers for Business Startups that are only applicable in a minority of instances.

Although retirement accounts are usually the most advantageous option, other investors prefer to keep their money in personal accounts to enjoy total flexibility. Individual funds can be invested into almost any asset class. You can also invest your money abroad with few restrictions.

Individual investors retain full control over how their money is utilized. When you invest as a corporation, your options are limited if you have a business partner. Some states insist that corporations have a specific purpose, so you could have to take your money out of your corporation to invest in other assets. When you withdraw your money, there could be significant tax consequences.

Few investors know that many of the tax advantages that corporations enjoy can be realized by individual investors. For instance, the section 962 election can enable individual investors to be treated as C-corporations for tax purposes. Therefore, individual investors are often able to get the same benefits that corporate structuring can provide when they plan ahead.

Finally, keep in mind that tax and corporate structuring is highly complex. Unless you have a substantial budget for legal fees and are aware of a highly competent tax attorney who you can trust, the cost of setting up a corporate structure to take advantage of complex laws often exceeds savings that could be realized.

Problems With Making Investments as an Individual

There are, however, many cases when the benefits associated with corporate structuring are more beneficial for passive investing. Not all corporate structures are complex. Many tax savings and liability avoidance strategies can be utilized by filling out a few simple forms.

Before diving deeper into some of the corporate structures that you could use, it is important to understand some of the problems associated with passive investing as an individual. Some of these issues include:

No ability to delegate: With a corporation, you can easily set up an authorized agent to sign documents and take other actions on your behalf.

Limited ability to deduct losses: Under the IRS code, investors are ordinarily unable to deduct more than $2,500 in investment losses on their tax returns. With a proper corporate structure, deductions can be unlimited and pass through to you as an individual.

Higher taxes: For certain types of investments, corporations can help to build wealth by reducing the effective tax rate that you have to pay on your investments. Corporations are especially beneficial when making investments in real estate or commercial assets.

Unlimited liability: As mentioned earlier in this article, you are liable for unlimited losses when you invest as an individual. When making investments in businesses or real estate, you should always use a corporation to avoid catastrophic losses when legal issues arise.

No ability to form partnerships: Taking on partners can multiply the returns that you could realize when making investments. Corporations are almost always necessary when doing business with other people.

Making Investments as an LLC

Limited liability companies are the most common form of corporation that investors utilize. When wealth building, the most significant advantage of an LLC for ordinary investors is the ability to get started quickly and at minimal cost. Most states let investors open an LLC by filling out a simple form and paying a filing fee of less than $200. Once your LLC has been opened, you can easily open a bank account and usually get a brokerage account with no hassle.

If you are trading actively managed investments, LLCs can help to reduce your tax liability. Investors can file IRS Form 2553 to have their LLC taxed as an S-corporation. As long as you pay yourself “reasonable compensation,” you can pay yourself dividends that are subject to neither the 15.3 percent payroll tax nor the 3.8 percent net investment income tax. For passive income investments that are not subject to the payroll tax, the 3.8 percent NIIT can be avoided in some cases with an LLC.

Another major advantage of LLCs is that you can easily take on partners to make investments by pooling capital. LLCs give you and your partners an enhanced ability to control operating agreement terms. You also do not need to have board meetings unless your LLC is taxable as an S-corporation.

As a passive investor, you should be aware that limited liability protection is one of the most substantial benefits of using an LLC. Opening an LLC is very easy, so investment professionals almost always recommend working through an LLC to avoid exposure to unlimited losses. There are cases when courts can “pierce the veil” to make LLC shareholders personally liable, but this legal mechanism is only used in rare cases.

In many states, the assets within an LLC cannot be seized by creditors. Instead, creditors can only put a lien on your shares. Leins require you to remit any dividends to lienholders, but you still remain in control of all assets within your LLC and can continue to pay yourself a salary.

Making Investments With a C-Corporation

In some cases, investing as a C-corporation can be a more advantageous wealth-building strategy than making investments through an LLC. C-corporations are relatively expensive and complex to create, and they have many rules that you have to comply with. Additionally, you have to pay both capital gains taxes and corporate taxes when operating through a C-corporation.

If you invest in foreign corporations, it is almost always more beneficial to own these assets through a U.S. C-corporation. Remittances to your C-corporation from abroad are not taxable. Instead, you will only have to pay the 10.5 percent GILTI tax on the corporate earnings of your foreign corporation and the 20 percent capital gains tax at the shareholder level when you eventually distribute dividends from your C-corporation. Many tax strategies are available to almost completely eliminate GILTI tax liability. In contrast, individual investors ordinarily have to pay a GILTI tax rate of 21 percent plus a 37 percent tax on the remainder.

It is a common myth that only C-corporations are considered separate persons under the law. As legal corporations, LLCs and S-corporations are also considered separate persons. However, C-corporations give you the strongest level of liability protection. Many mistakes that can lead to the piercing of the corporate veil when using an LLC do not entail similar consequences when operating through a C-corporation. In practice, C-corporations can also obtain their own credit score and can often borrow in their own name.

There are a monumental range of deductions and tax credits that can be claimed only by C-corporations. When making investments in real estate, careful tax planning can often almost completely eliminate your corporate tax liability.

C-corporations can also have an unlimited number of investors and can even go public. However, funds in a C-corporation are required to be distributed unless you have immediate plans to use them for active business activities, so these corporations are usually not advantageous if you are looking to invest in publicly traded securities. The bottom line is that you need to do your research before deciding on the right type of structuring, but making the right decision can save a significant amount of money while minimizing legal liability.

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Active Management Vs. Passive Investing

Investing in real estate can be a terrific wealth building strategy. But did you know that these investments come in two main categories? In fact, active and passive investing offer very different experiences.

Let’s explore these two types of investments. That way, you can figure out which one better suits your needs and lifestyle.

What Are Active Investments?

When you’re an active investor, you spend your own money to acquire a property. You can then offer it to renters while letting a management company handle the maintenance responsibilities, rent collections, and other details.

As you’d probably guess, if you’re an active investor, you can make every decision related to your rental property. Which home will you purchase? Once you own it, how extensively will you renovate it? How much rent will you ask for each month? Will you charge additional fees? Will you try to refinance later on? At what point will you sell this property?

Then there are the tenant-related issues. What will your application process involve, and what are your criteria for accepting new tenants? If you have a tenant who doesn’t pay his or her rent on time, what’s your policy for dealing with that situation? And those are just some of the tricky questions you’ll need to answer.

Obviously, then, to be a successful active investor, you’d need a great deal of knowledge. Or you’d need to do a great deal of research. Either way, you’d have to be confident when it comes to making business decisions.

Of course, active investors don’t just make decisions. They also put those plans into place. And doing so requires due diligence and a lot of time. After all, you’d have to find a property, close the deal, figure out what improvements must be made, hire a management company, and so on.

Later, if any of your tenants complained about their home, you’d have to investigate. If you discovered that your property management company is somehow deficient, you’d need to intercede. You might even end up looking for a new company to work with. In short, this type of investment is extremely complex.

On top of all that, as an active investor, you must be willing to assume significant risk. That’s because you’ll be spending a considerable amount of money upfront, and there are no guarantees.

Indeed, you’re paying for the whole property yourself, and you’re also footing the bill for all of the renovations. And, unfortunately, all kinds of things could go wrong. Your property might be in worse shape than you thought, meaning a much more expensive rehabilitation. Labor disputes, bad weather, and other obstacles could lead to a longer and pricier renovation than you’d expected.

Making matters worse, you might have a harder time finding tenants than you imagined. If there are fewer people looking to rent in your community, it could have a negative effect on your profits. Or perhaps the neighborhood where your property is located suddenly becomes less desirable due to area construction, a natural disaster, or some other unforeseen factor.

Perhaps you simply overestimate how much rent you can collect, or maybe your tenant turnover rate is higher than you predict. In any event, it’s always possible that your property will be somewhat less lucrative than you hope.

On the other hand, your new rental property could be a big success, and it could contribute appreciably to your wealth. Maybe your renovations are minimal, and you can start collecting high rents soon after your purchase. In that case, since you own the property completely, you get to reap the major financial rewards completely.

Furthermore, as the sole owner of the rental property, you can decide when to refinance and when to sell. Passive investors typically have no say in such matters. Also, active investors are often eligible for more tax breaks and benefits than passive investors.

On the flip side, unless you’re a whiz when it comes to home improvement tasks, you’ll have to work with licensed electricians, plumbers, landscapers, exterminators, and other professionals from time to time. The cost of hiring those pros will eat into your profit margins somewhat. It’s something to think about before choosing the active route.

Be aware that other forms of active real estate investing exist. For example, if you buy a property, renovate it, and then sell it at a higher price — a process often referred to as “flipping” — that would be an active investment.

Alternatively, you might take care of all the management duties yourself instead of enlisting a management company. That’s another kind of active investment. Of course, if you were to own multiple rental properties, it could amount to a full-time job.

What Are Passive Investments?

By contrast, when you opt for passive investing, you can make payments to an organization called a syndication. Groups of investors fund syndications. And the people who run it will create the business plan, find the properties to buy, make the purchases, oversee the renovations and maintenance, and take charge of every legal and financial aspect involved.

The right syndication will be adept at choosing a building to buy. It will employ fund managers with deep knowledge of the market and many years of experience. Such individuals know how to evaluate a property for profit potential. They won’t overpay, and they won’t let a good deal slip away.

In sum, the syndication will make every business decision for you, and it will send you a report every month or quarter to update you on your financial gains. It will also deliver to you on a regular basis your share of the profits.

As you can see, you don’t need any knowledge of property management to become a passive investor. You just have to be sure that you’re working with a reputable syndication. Fortunately, you can always seek out a financial advisor for guidance when making that decision.

Because property management experts will make all the decisions and execute all the plans, you face little risk with passive investments. Indeed, at the outset, that team will provide you with financial predictions. Thus, you’ll be able to measure your performance against those expectations, and you shouldn’t have any disappointing financial surprises along the way.

Not to mention, with a passive investment strategy, you can spend only as much as you can afford to lose; other investors will make up the difference. If, for some unexpected reason, your property failed, you wouldn’t face any financial hardship as a result.

The passive approach can widen your investment opportunities, too. For instance, your syndication might have the funding to buy not just one home but a row of townhouses or a sizable office complex. Most people, even high-net-worth individuals, lack the disposable wealth to obtain such a development on their own. And, even if they did have it, they’d be unwilling to put so much money at risk.

However, as with almost everything in life, lower risks mean lower potential rewards. If you’ve invested in a lucrative rental property, you’ll only receive part of the profits. The other investors and the syndication will take their shares as well.

Even so, passive income can really add up over time. As such, it can give you and your family an extra financial cushion. And you have to consider what your time is worth. When you spend so many hours studying the market, locating properties, closing deals, making renovations, finding renters, and so forth, you could be missing out on other wealth building opportunities for your portfolio or other exciting side hustles.

For some people, active investing can lead to increased levels of negative stress, which can have costly health consequences. Plus, there’s another personal cost to consider: All the time that you spend on your active investments is time you could be spending with family members and friends, traveling, or enjoying fun hobbies.

Note that, as a passive investor, you may or may not be able to take your money out of the rental property if you find yourself short on funds. It depends on your syndication’s rules, which you ought to read carefully before making your investment. Additionally, you might want to consult an attorney or another expert if any of those rules are unclear to you.

Similarly, different syndications will offer different systems of fees and payouts. Therefore, it’s wise to do some comparison shopping ahead of time. That way, you can be certain that you’re getting a favorable arrangement.

In the end, both active and passive investments offer the chance for steady, reliable income. The active option can provide much more income, but it’s also significantly riskier as well as more work-intensive and more time-consuming.

For its part, the passive avenue is simple, almost unbelievably easy. With a dependable syndication making the choices and doing the work, all you have to do is invest your money and collect your passive income checks. It may sound too good to be true. But it’s very real, and it makes a real estate investment an appealing option for just about anyone.

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Commercial Real Estate Lending: What is the Ideal Multifamily Loan?

Do you know what the greatest ongoing expense is for real estate investors?

Assuming debt was secured to acquire the asset, the great expense is the ongoing debt service.

Since the debt service is not included in the net operating income calculation, it do not impact the value of the investment. However, it does impact the cash flow, which in effect impacts the returns to passive investors.

Therefore, being the greatest expense and impacting the return to passive investors, securing the best loan is of the utmost importance.

The purpose of this blog post is to help active apartment syndicators and passive apartment investors alike to understand how to know what the most ideal commercial real estate loan for a particular multifamily investment is. To accomplish this task, this blog post will outline the following:

  • What lender should be use?
  • Should an agency approved lender always be used?
  • Should a mortgage broker or a lender be used?
  • When is the best time to engage with the lender/mortgage broker?
  • What are the qualifications of the borrower, deal, and market?
  • What are the upfront reserve requirements?
  • Are renovation costs included in multifamily loans?
  • What should be looked at when comparing multifamily loan options?

What lender should be used?

The ideal multifamily loan is an agency loan for most apartment syndications. The main exception is if the business plan includes an early exit – via a refinance or a sale. When this is the case, a non-agency bridge loan is ideal because a borrower won’t be required to pay a prepayment penalty (more on this in a later section) at sale or refinance?

When pursuing an agency loan, what lender should be used?

With an agency loan, a lender provides a borrower with debt to purchase an apartment. Rather than holding the mortgage loan on their books, the lender sells the mortgage to an agency. Hence, an agency loan.

The agency pools together thousands of mortgages, which are sold to private investors and investment firms on the open market as mortgage-backed securities (MBS).

The two agencies that purchase and resell mortgages as MBSs are Fannie Mae and Freddie Mac.

Both agencies guarantee the MBSs. Since Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), the MBS are implicitly backed by the Unite States government. Therefore, in order to provide a guarantee, the agencies only buy certain types of mortgage from approved providers.

Fannie Mae was created first. Later, Freddie Mac was created to generate competition in order to drive down interest rates and fees for both the borrowers, the lenders, and the MBS investors.

Since Fannie Mae and Freddie Mac are buyers of mortgages, they do not work directly with borrowers. Therefore, to obtain an agency loan, a borrower must work with an approved lending institution.

Fannie Mae only buys loans originated from Delegated Underwriting and Servicing (DUS lenders). As the name implies, Fannie Mae delegates the underwriting and servicing of the loans underlying their MBS products to third-party institutions that meet their strict qualifications. Therefore, in order to obtain a Fannie Mae loan, a borrower must work with a DUS lender. Fannie Mae has a list of approved lending institutions on their website, which you can view here. Currently, 25 lending institutions qualify for DUS status.

Freddie Mac also has approved lenders called Optigo conventional lenders. The list of Optigo lenders is similar to the list of DUS lenders. You can view Freddie Mac’s list of approved lenders here.

Should an agency approved lender always be used?

One of the major benefits of an agency loan are the terms. Agency loans generally result in lower down payments and/or lower interest rates. Consequently, debt service payments are lower compared to non-agency loans, which means a higher cash-on-cash return.

However, as I mentioned above, the deal and the borrower (and their team) must meet the agencies strict qualifications.

So, yes, a borrower should always use an agency approved lender, assuming they and the deal qualify, and they projected hold period is longer than the prepayment period. If the borrower and/or the deal do not meet their criteria, or the plan is to exit the loan after a few years or less, the borrower may still be able to use an agency approved lender since most offer more than just agency loans. However, they will not qualify for the best rates and terms.

Should a mortgage broker or a lender buy used?

There is an exception when it comes to securing agency loans. Borrowers can secure an agency loan without working directly with an approved institution by working with a mortgage broker.

A mortgage broker acts as an intermediary between lending institutions and borrowers.

There are countless different multifamily loan programs offered at any given time. Rather than finding the best loan on their own, borrower relies on the expertise of a mortgage broker or lender. The borrower submits information about the deal and the mortgage broker or lenders returns the best loan program option/s.

A mortgage broker is not limited to loan programs offered by a single lending institution. They have a network of many lending institutions, which means they can find the lending institution that offers the best terms for that particular loan program. When a borrower works directly with a lending institution, their options are more limited.

Since the mortgage broker is an intermediary, however, they charge a fee for their services.

So, who should be use? I think it makes sense to work with a mortgage broker. Sure, the expense to secure the loan is higher. But since they have relationships with multiple lending institutions, they will likely underwrite a loan with better terms that offsets the broker’s fee.

When is the best time to engage with a mortgage broker/lender?

A borrower should already have engaged a lender or mortgage broker prior to looking for deals. Based on their and their teams background, the lender or mortgage broker will let them know which loan programs and how much debt they qualify for.

With this information, the borrower will know which type and sized deals to pursue.

Then, when the borrower is interested in submitting an offer an a specific deal, the mortgage broker or lender can quickly provide a quote (since all they need to do is fully underwrite the deal as opposed to fully underwriting the deal and the borrower). The borrower will have an idea of the down payment and debt service so that they can submit a more accurate offer.

When a borrower doesn’t engage a mortgage broker or lender before looking for deals, they may over-estimate the type and size of deal for which they qualify. They may submit an offer, get a deal under contract, and get forced to cancel the contract because they cannot qualify for financing (or the financing results in a higher than expect debt service). As a result, the borrower’s reputation is tainted in the eyes of the seller, listing commercial real estate broker, their property management company, and their passive investors (depending on how far into due diligence the deals was when the contract was cancelled).

To avoid these issues, the borrower should engage the mortgage broker or lender for even looking at deals.

What are the qualifications of the borrower, deals, and market?

Both the borrower and the deal must meet specified criteria in order to qualify for Fannie Mae and Freddie Mac debt.

The borrower includes the guarantor, key principals, and principals.

  • The guarantor is who guarantees the loan.
  • The key principals are any person who controls and/or manages the partnership or the property, is critical to the successful operation and management of the partnership or the property, and who may be required to provide a guaranty.
  • The principals are any person who owns or controls specified interests in the partnership. When the partnership is an LLC, a principal is anyone who owns 25% or more membership interest (this includes passive investors too).

Agency lenders will analyze the borrower based on the organization (i.e., entity) structure, multifamily and business experience and qualifications, general credit history, and current and prospective financial strength. What is considered passing criteria is based on the size, complexity, structure, and risk of the deal.

  • Organizational Structure: For most agency loans, only single purpose entities are eligible borrowers. This means you will need to create a new entity for each transaction. The exemptions are the small balance agency loans in which individuals and non-single asset entities are eligible borrowers.
  • Multifamily and business experience and qualification: Fannie Mae and Freddie Mac have different ways to qualify the borrower based on experience. Fannie Mae uses a service called application experience check (ACheck). ACheck checks the borrowers experience with Fannie Mae loans in the past. Generally, a member of the borrower must have been a member of the borrower on a previous Fannie Mae loan to “pass”.

Freddie Mac provides more specifics on how they qualify borrowers. The borrower must have a minimum of three years’ experience in the same capacity that it will have for the proposed transaction, and acquired, developed, or owned a minimum of three properties. Also, the borrower must own and manages other properties in the market where the subject property is located. If the borrower is lacking in one or more of these areas, Freddie Mac may require a higher replacement reserve deposit.

  • General credit check: The lender will conduct a general credit check on the borrower, checking for other loans and liabilities to determine their ability to fulfill the debt obligations based on the current and past debt obligations.
  • Current and prospective financial strength: The agencies do not have specific liquidity and net worth requirements for the borrower on their conventional loan programs, which means it will vary from deal-to-deal. They may require more upfront reserves if the borrower has weak finances.

We can get an idea of what the agencies require regarding liquidity and net worth by looking at the stated requirements for their small loan programs.

For Fannie Mae’s small loan ($750,000 and $6,000,000) and Freddie Mac’s small balance loan ($1 million to $7.5 million) programs, a minimum liquidity of 9 months principal and interest and a new worth equal to the loan amount is required.

Assuming the borrower qualifies for agency debt, the next check is the deal.

To qualify the deal, the lender will analyze the property, the occupancy, the property management company, and the market.

  • Property: The agencies only provide financing on certain types of properties. However, most multifamily properties you look at will meet their requirements. The requirements are standard characteristics like five or more units, accessible by road, the units have bathrooms and kitchens, water and sewer service, up to code, access to emergency services, etc.
  • Occupancy: The major factor that determines if a deal qualifies for agency debt is the occupancy.

Fannie Mae’s conventional loan program requires a minimum physical occupancy of 85% and a minimum economic occupancy of 70% for 90 days. The occupancy requirements are even higher at 90% for their small loan program.

Freddie Mac’s conventional and small balance loans require a minimum physical occupancy of 90% for 90 days.

  • Property management company: The property management company who will manage the deal post-closing will also be analyzed by the lender. The agencies do not have restrictions on the type of management company, which means it can be in-house or third party. However, the property management company must have adequate experience to ensure effective administration, leasing, marketing, and maintenance, and is staffed appropriately for the type and size of the property and the services provided.
  • Market: The agency will also analyze the strengths and weaknesses of the market in which the deal is located. They characterize strong markets as having low vacancy, minimal rental concessions, stable or increasing tenant demand, good balance of housing supply and demand, stable economic base, and employment diversification.

Also, certain loan terms will vary based on the market. For example, Freddie Mac has different minimum DSCR and maximum LTVs for top markets, standard markets, small markets, and very small markets.

What are the upfront service requirements?

The agencies have increased their reserve requirements in responses to the coronavirus pandemic.

Fannie Mae is currently requiring 12 months of principal and interest for loans of $6 million and more, and 18 months for loans of less than $6 million. However, if the debt-service coverage ratio (DSCR) is 1.35 or higher and the loan-to-value (LTV) is 65% or lower, Fannie Mae only requires six months of principal and interest. If the DSCR is at least 1.55 and the LTV is 55% or less, no reserves are required.

Freddie Mac is currently requiring nine months of principal and interest on loan with DSCR less than 1.40, six months on loans with DSCR 1.40 or higher, and 12 months on small balance loans.

Are renovation costs included?

Both Fannie Mae and Freddie Mac offer loan programs which cover the costs of renovations.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan (mod rehab). This is a supplemental loan that can be secured in addition to the conventional DUS loan to cover renovation costs. Unlike standard supplemental loans, the mod rehab loan doesn’t have a one-year waiting period. The main requirements for the mod rehab loan is that Fannie Mae must be the only debt holder on the property and minimum renovation costs of at least $10,000.

Freddie Mac offers two renovation loans – moderate rehab loan and value-add loan. The main different are the renovation costs requirements. For the value-add loan, renovations must be between $10,000 and $25,000 per unit. For the moderate rehab loan, the renovations must be between $25,000 and $60,000 per unit with a minimum of $7,500 per unit designated for interior work.

Therefore, if renovations are less than $10,000 per unit or greater than $60,000 per unit, a borrower will have to cover 100% of the renovation costs with passive investor capital or secure a bridge loan through a mortgage broker.

What should be looked at when comparing multifamily loan options?

Here is a list of factors to be aware of when you are analyzing loan options.

Debt service is the payment owed to the lender each month. The lower the debt service, the greater the cash flow. However, the loan option with the lowest debt services isn’t automatically the best option. The debt service may start low and gradually increase if the interest rate isn’t fixed. The debt service may be low but the closing fees are too high, or the loan may not be assumable, the prepayment penalties may be high, etc. Therefore, the other factors which are outline below must be taken into account in addition to the debt service.

Loan amount is the total amount of money a borrower will receive from the lender. The different between the loan amount and the total project costs is the amount of equity a borrower will need to raise.

Loan term is the number of months until the loan must be repaid in full. On shorter-term loans, a borrower may have the option to purchase one or multiple loan term extensions. Ideally, the total possible loan term is at 2x the projected business plan. For example, for a value-add business plan with a renovation timeline of 24 months, the maximum loan term should be four years. That way, a borrower isn’t forced to sell or refinance. However, the longer the loan term, the higher the interest rate, so the longest term isn’t necessarily the best term.

Amortization is the time period the principal and interest payments are spread over. The greater the amortization, the lower the debt service. Usually, the interest payments aren’t spread out evenly during the amortization period. Instead, the first payments are mostly interest (so the lender makes their money upfront) and the interest gradually reduces over time.

Interest-only period is the number of months of interest-only payments. At the end of the interest-only period, principal and interest payments are due.

The main benefit of interest-only periods is the increase in cash flow, resulting in a higher internal rate of return (IRR) since money is returned sooner. This increase in cash flow is even more beneficial on value-add deals because cash flow is generated from day one before the increase in revenue is realized from the renovations.

However, there are a few potential drawbacks. Firstly, there is no principal paydown, which impacts future supplemental loan or refinance proceeds. Secondly, once the interest-only period expires, the debt service increases, which reduces cash flow. Lastly, a borrower may convince themselves to do a bad deal because of the lowered debt service during the interest-only period.

Debt-service coverage ratio (DSCR) is a ratio of net operating income to debt service.

This is one of the factors the lender will use to calculate the maximum loan amount.

Loan-to-value (LTV) is the ratio of the loan amount to the appraised value of the apartment community. All lenders will provide financing up to a maximum percentage of the appraised value.   

The higher the LTV, the more leveraged the deal. This is beneficial because of the lower down payment but is also riskier since a borrower has less equity in the deal as a protective cushion against market fluctuations. Therefore, don’t secure a loan with an LTV that is greater than 85%.

Interest rate is the rate the lender charges a borrower to borrow their money. The interest rate is either fixed, meaning it will remain unchanged during the loan term, or is floating, which means it fluctuates up and down during the loan term. Generally, the initial interest rate is lower when floating. But it doesn’t mean it will remain lower.

If the interest rate is floating, a borrower will want to know what the rate is tied to, which is referred to as the index. Then, they can see how the index is trending to determine if your interest rate will go up or down during the hold period (to the best of their knowledge, of course)

If the interest rate is floating, a borrower may also want to consider purchasing an interest rate cap. For an upfront fee, they can place a ceiling on how high the interest rate can rise. This is always ideal since it is impossible to predict whether interest rates will rise or fall during the hold period.

Whether the interest rate is fixed or floating, a borrower will also want to know when the rate is locked in. If interest rates are raising, they want to rate to lock as quickly as possible. Sometimes, a borrower has the option to expedite the rate lock period for a fee.

Click here to learn more about fixed rate vs. floating rate interest rates.

Recourse determines if the guarantor is personally liable for the loan. If the loan is recourse, the guarantor is personally liable. If the loan is non-recourse, the guarantor is not personally liable.

If the loan is non-recourse, a borrower will want to determine what the exemptions are that converts the loan to recourse, which are typically fraud, misrepresentation, and gross negligence.

Tax and insurance escrows: a borrower may be required to submit monthly deposits into a tax and insurance escrow account, even if taxes and insurance payments are due quarterly or annually. If monthly escrow deposits aren’t required, they may need to raise extra money upfront to cover lumpsum tax/insurance payments, depending on how quickly each is due after closing

Lender reserves is the amount of money the lender requires each month to be deposited in a reserves account. Usually, lenders require between $200 and $300 per unit per year.

Besides the deposit amount required, a borrower also wants to know when they stop making deposits and when they can pull the money out if it isn’t used.

For agency loans, expect to continue to make the payments until payoff the loan. Also, don’t expect to be able to access the funds until payoff of the loan either. For non-agency loans, the lender reserves are usually negotiable.

Prepayment penalties is a fee incurred if a borrower pays back the full or a certain percentage of the loan amount before a specified date.

The prepayment penalties are important if they expect to refinance or sell before the prepayment period expires. If this is the case, they will need to include the prepayment expense into your sales disposition calculations.

Click here to learn more about prepayment penalties.

Assumable: if the loan is assumable, when you are ready to sell the deal, a prospective buyer has the option to either secure new debt at new terms or assume the existing debt at the existing terms. This is attractive to buyers if the existing terms are better than the new terms currently available.

Typically, there is a fee incurred to the buyer who assumes the loan.

Supplemental loans: these are secondary loans taken out on top of the existing mortgage. If a borrower is allowed to secure a supplemental loan, they will want to know how many they can secure and when they can be secured. Generally, they are able to secure a supplemental loan one year after the origination of the first loan.

Click here to learn more about supplemental loans.

Require reports: the lender will order reports to be conducted on the property. These generally include an appraisal, property condition assessment, and phase I environmental, at minimum. A borrower will want to know which reports are required, when they are due, and the costs associated with each.

Click here to learn more about the different due diligence reports.

Financing fees: these are the fees charged by the lender (or mortgage broker) to put together a loan. Common fees are applications fees, processing fees, origination fees, good faith deposits, and interest rate lock fees.

Want to learn more about commercial real estate lending and multifamily financing?

Click here to download a FREE document with more detailed information on the different types of agency loans, bridge loans, and multifamily financing options,

Also, click here for more blog posts on apartment financing and lending.

 

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How does the FIRE Movement relate to Real Estate?

The financial independence, retire early or FIRE movement is a lifestyle for many younger investors. People who adhere to the FIRE movement aim to achieve financial independence early instead of waiting until they reach the traditional retirement age. FIRE enthusiasts tend to invest or save from 50% to 75% of the money that they earn. Meanwhile, they practice frugal living and avoid unnecessary purchases or taking on too much debt.

Real estate is a popular investment choice for people who follow the FIRE movement. This primarily involves purchasing investment properties to collect rent and boost your income. Becoming a successful investor in real estate, combined with the goals of achieving financial independence and retiring early, requires proper planning and research.

Planning to achieve financial independence and retire early

Everyone who implements the tenets of the FIRE movement in their lives do so in their unique contexts. You might have children or might not. You may have a high-job or earn an income that places you in the middle class. Regardless of your context, there are some basic practices that you will need to follow to achieve your goal of retiring early.

Planning early

Following the FIRE movement will require you to begin planning for your retirement as early as possible. Ideally, you should begin as soon as you become an adult. You should try to keep your routine expenses low and avoid debt. You should also plan for ways to boost your income. If you have debt, your plan should include steps for repaying it as quickly as you can to avoid losses from interest.

Prioritize investments and savings

The next strategy that you need to implement is to prioritize your investments and savings. When you are young, you can have an aggressive portfolio. However, you should also make sure that your portfolio is diversified. While this includes saving money in tax-advantaged retirement accounts, it also includes investments in other areas, including real estate.

Advantages of real estate investments to generate passive income

If you want to invest in real estate as a part of your strategy to achieve financial independence and retire early, you will want to leverage your properties to improve your investments every year. Planning to add rental income for wealth building will necessitate knowing how to be a landlord. Real estate investments can offer several advantages for you if you are working to achieve FIRE.

Fast way for a passive investor to achieve FIRE

When you invest in real estate, you might achieve financial independence and be able to retire early much earlier than if you simply invest in the stock market or retirement accounts alone. While you will need to have some money upfront to make the down payment, you can use other people’s money to finance the rest. Building a portfolio of properties is a passive investing strategy that can help you to build wealth. While you can use traditional mortgages to purchase properties, you will want to calculate the income that you will earn versus the payments that you will need to make.

Adjusted returns

Rental prices rise with inflation. When you are a landlord, you can increase the rents for your properties once a tenant completes his or her lease. Normally, this happens annually. By contrast, money placed in an investment fund requires you to make adjustments for inflation when you predict your returns.

Reduced volatility as compared to the stock market

Passive investing in real estate exposes you to less risk than investments in the stock market. Once you retire and start taking distributions from your retirement accounts, you will face the risk of a market crash. Since you were not be contributing to your retirement savings any longer, your portfolio could diminish much faster because of your withdrawals. By contrast, rental income is ongoing. As long as your properties are maintained and occupied, they can continue generating income for you as a passive investor long after you retire.

Avoiding the drawbacks of real estate investments

Purchasing rental properties requires you to pay a substantial amount upfront. You will also need to factor in the costs of repairs, maintenance, insurance, and a property manager. You will need to be careful about where you purchase properties so they won’t sit vacant for months. Diversification can help to avoid some of the problems that can occur with investments in real estate. Make sure that your portfolio includes other types of investments in addition to your properties.

Hiring a property manager can help you to remain as a passive investor instead of working a full-time job as a landlord. A good property manager can collect rents, handle repairs and maintenance, and help with evictions when necessary.

How to invest in real estate

Real estate investments do not require you to become a landlord. There are other ways to generate passive income from real estate beyond working as a landlord. You will first need to decide which type of investment is the right one for you.

Renting out property

Working as a landlord is among the most predictable ways to earn income from your real estate investments. You will need to research the investment properties and ensure that they are in good areas to prevent vacancies and other problems. You can then determine how much you will earn from your rental properties and add the income to your FIRE plan.

Flipping houses

Flipping houses is another option for investors. People who flip houses purchase properties when their prices are low and sell them quickly to make profits. You might focus on purchasing short sales and foreclosures. Flipping houses may require you to be able to do some repairs and improvements, so you will either need to be handy or partner with someone who does that type of work.

Real estate investment trusts

REITs are another option for wealth building. These are equities that are offered by companies that own real properties. Investments in REITs normally offer high dividends but carry some risks. Since REITs are publicly traded, they have similar market risks to stock investments. They are also affected by the real estate market. Diversification is the key to securing the best returns when you invest in REITs.

Choosing the right property

Choosing investment properties can be challenging. To avoid making mistakes, make sure to invest in a property in a growing area. These areas have more housing demand, allowing you to command higher rental prices or higher returns on your investment. Make sure to thoroughly research areas where the properties are located. Make sure that you know the vacancy rate and the demographics before you invest money. Make sure that the property you choose is within your budget, and avoid properties that are in an extensive state of disrepair. You do not want to have to spend thousands of dollars to make a property livable.

Get your finances in order

To benefit the most from your investments in real estate, you will want to get the lowest interest rates possible. This requires you to have a good credit score. Aim to achieve an excellent score of at least 720. You will also need to gather your financial documents together to get a mortgage, including paystubs, tax returns, current mortgage statements, investment, retirement, and bank account statements, and proof of insurance.

You will also need to have sufficient savings to make your initial investment. Include enough money for closing costs and unexpected expenses.

Financing options

There are several ways to secure financing to invest in real estate. Investor capital is a very attractive option, but you will need to network with the right people. You can also apply for a mortgage to purchase a property. However, many banks prefer to approve mortgages for people who want to live in the homes that they purchase instead of investors.

Hard money loans are another option. These types of loans generally have very short terms. The amount of money that you might secure will depend on the determination by the lender of what your property will be worth after you fix it for flipping. Since hard money loans have short terms, they often also have substantial fees and charge high rates of interest, which can diminish your returns.

Cash-out refinance loans are another option. However, tapping into your home equity to purchase an investment property is risky because your home serves as collateral. Cash-out loans have fixed rates of interest, but they can extend the length of your mortgage.

Under the FIRE movement, taking on high-interest debt is viewed as a risk. If you have high costs each month, it will make it more difficult to meet your savings goals. You should make sure to perform the calculations ahead of time to determine whether taking out one of these types of loans is worthwhile.

Building wealth by investing in real estate can work well with a FIRE plan. If you do your research and plan carefully, investing in real estate can help you to achieve financial independence and retire early. Make sure to avoid common mistakes and choose your investments carefully so that you can enjoy the highest possible returns and a source of steady income.

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How to Invest Like A Pro – Speculating vs Investing

Real estate investment strategies are not created equal. Today, we confront a common myth about investing. There are hundreds of books, programs, seminars, TV shows, and advertisements about the topic of real estate investing; however, most of these resources promote “buy low and sell high” speculation strategies rather than professional cash flow investing strategies. Let’s explore the difference between the two…

Lesson #1 – The Velocity of Capital

The velocity of capital refers to how quickly you get your initial capital returned after making an investment. 

Think of investing your capital like electricity. Electricity is a powerful force, but it has a weakness; it has to move. If the electrical current stops; it dies.

Your money works the same way. Money that is saved in cash or in the bank, dies over time due to the erosion of inflation. Your money must move into new investments in order to survive and continue growing.

A Professional Real Estate Investor Understands Two Things:

#1 The need to continually move money into new investments 

#2 How cash flow is used to create exponential wealth

By applying these two fundamentals, you can effectively move house money into new assets, thereby lowering your risk and creating exponential growth in wealth. I use the term “house money” as a gambling example. In a casino, if you bet $1,000 and end up winning $1,500, you can place the initial $1,000 back in your pocket and continue gambling with the house money ($500). At this point, what is your risk? Let’s take a look at how this works in terms of real estate investing…

The Professional Investing Formula:

#1 Seek to get your initial capital investment back as soon as possible (through cash flow, a refinance, or sale of the property)

#2 Use this cash flow and returned capital to re-invest in more investments 

Example:

Let’s say you invest $500,000 into (5) different cash flow real estate projects and each investment yields a 10% annualized return:

 

Investment #1 (100K) Cash flow = $10,000

Investment #2 (100K) Cash flow = $10,000

Investment #3 (100K) Cash flow = $10,000

Investment #4 (100K) Cash flow = $10,000

Investment #5 (100K) Cash flow = $10,000

Total Annual Cash Flow = $50,000

At the end of the year, let’s say you take $50,000 from the cash flow you received and you invest in a new real estate project. At this point, you are playing with “house money” because you still have the $500,000 in initial investments + you have a new $50,000 investment that was created by saving 12 months of cash flow distributions. In this situation, let’s assume a worst-case scenario. Let’s say the new $50,000 investment went bad and you lost 100% of that investment. If this happened, you could simply learn from the mistake and move on knowing you still have your initial $500,000 in investments plus the current cash flow they produce. 

Lesson #2 – When you re-invest cash flow to further build your wealth, you reduce your risk. 

Conclusion – Speculating vs Investing 

If you’re investing in cash flowing real estate, then you are not gambling on future pricing; you are investing in current income. The only speculation is that residents will continue renting your property for the foreseeable future. 

If you invest in real estate, but the real estate is not distributing cash flow, then you are not really investing, you are speculating and hoping the real estate grows in value over time. An example of this could be flipping a house and speculating that you can sell the property later for a higher price. Or if you purchase a property and rent it out long-term in an appreciating market, but the property does not cash flow in the meantime, then you are speculating the market will continue moving up in value. 

 

Confusing speculation with investment is always a mistake – Benjamin Graham

 

To Your Success

Travis Watts 

 

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Passively Investing in Apartments – Fund or Individual Deals?

There are many ways to passively invest in apartment syndications. Knowledge of these different strategies is important to understand which is the best wealth generating vehicle for you.

In this blog post, I want to educate you on the differences between investing in individual apartment syndications and investing in an apartment syndication fund.

But first, we need to distinguish between the type types of passive apartment investments.

Passive apartment investments are either debt investments or equity investments.

For debt investments, the passive investor is acting as a lender to the apartment or the apartment syndicator. The loan is secured by the property and the passive investor receives a fixed interest rate as a return.

For equity investments, the passive investor is a shareholder in the entity that owns the apartment. Depending on the equity structure, the passive investment receives a preferred return and/or a share of the total profits.

Click here to learn more about the differences between debt and equity investing.

Passive investors who prefer equity investments over debt investments will chose to invest in individual deals or into a fund.

The first option is to invest in a single deal at a time. One deal. One business plan. One market.

A fund (i.e., a private real estate fund) is a private partnership that owns more than one piece of real estate. For apartment investing, numerous passive investors commit an amount to invest and the apartment syndicator use the passive investors’ capital to purchase multiple apartment communities.

The apartment syndicator of the fund will either execute one or multiple of the apartment syndication business plans: value-add, turnkey, or distressed. And they may focus on investments in a single or in multiple markets.

What are the different types of funds?

Close-ended fund: For a closed-ended fund, you would commit to invest a certain amount of capital when the apartment syndicator is accepting investor capital. Usually when the apartment syndicator commences a fund, they will continue to accept commitments until they’ve achieved their desired funding goal. Then, the apartment syndicator will begin purchasing apartments over a specific period of time – usually 3 to 4 years after the start of the fund. The apartments are held for a specific period of time – generally 3 to 7 years, depending on the business plan. Therefore, most close-ended funds are 10 years. But apartment syndicators may have the option to extend a close-ended fund by one or more years. 

Typically, your initial equity investment is not returned until the end of the fund. However, some close-ended funds will distribute lumpsum profits once an apartment is sold or refinanced. The apartment syndicator may also have the option to recycle proceeds from sales or refinances back into the fund if, for example, the apartment is sold or refinanced a certain number of years after acquisition or less.

Open-ended evergreen fund: The other fund option is an open-ended, or evergreen, fund. The main difference between evergreen and close-ended funds is that evergreen funds do not have a specific end date. Therefore, the apartment syndicator is continuously accepting investor commitments. To exit an evergreen fund, you would need to sell your shares in the partnership rather than having to wait until the end of a close-ended fund.

How does close-ended and open-ended funds compare to individual deal investing?

When passive investor money is due: When investing in individual deals, once you have committed to investing, funds are typically due in full shortly thereafter. Once you commit, you sign the deal documents and submit your funds.

When investing in a fund, once you have committed to investing, your funds may or may not be due shortly thereafter. The committed amount is submitted at a capital call. A capital call occurs when the apartment syndicator of the fund has identified an acquisition and requires a portion or all your committed capital to cover the purchase costs. 

When the apartment syndicator sends a formal capital call notification, you are legally obligated to fulfill their call based on your committed capital investment amount. Typically, a capital call will only require a portion of your capital investment, but it is possible that they request the full committed amount. If you fail to meet the capital call, the apartment may force you into default and to forfeit your entire ownership share.

Compensation structure: The compensation structure for funds and individual deals are the similar. You are offered a preferred return and/or profit split. Oftentimes, the profit split will change and become more favorable to the apartment syndicator once a certain return threshold, like IRR, is passed. 

The timing of the ongoing distributions after you’ve submitted funds are similar since you are actually submitting your capital once a deal/deals are identified. 

However, the time from commitment to receiving your first distribution is longer when investing in a fund because of the gap between commitment and the first capital call. Additionally, you may not submit your full investment amount until one, two, three, or more years after committing, depending on the length of time over which apartment syndicators plan on acquiring apartments. Since you receive a return based on submitted funds and not committed funds, the ongoing distributions will be lower at first.

Return of Capital: When investing in individual deals, you will not receive your initial equity back until the asset is sold. When investing in a fund, you will not receive your initial equity back until the fund is closed. The exception would be an evergreen fund, where you can sell your shares at any time (or after a lock-out period).

The apartment syndicator of both approaches will provide you with a projected hold period (for individual deal) or fund length (for funds). Assuming you were to invest with apartment syndicators who follow the same business plan, you will typically receive your initial capital back sooner when investing in individual deals. 

Profit upside: The overall return upside is lower for funds compared to individual deals. If you are investing in an individual deal that performs exceptionally well, your return increases in the same proportion. However, your return on investment in a fund is based on the average return of the entire portfolio. Therefore, if one or a few apartments perform exceptionally well, the performance of the other average or below average deals will flatten the overall return.

Risk: On the flip side, since by investing in a fund you are investing in multiple deals, the probability of losing a portion or all your initial capital investment is lower. If one or a few apartments perform poorly, the performance of the other apartments in the fund will cover (or at least reduce) your losses.

However, when investing in a fund, you place more trust in the apartment syndicator, especially early on in the fund when there are zero or a few apartments. When investing in an individual deal, you can qualify the GP and the deal. If you don’t like the syndicator, you can pass. If you don’t like the deal, you can pass. If you really like the deal, you can invest as much as you want.

When investing in a fund, you can only qualify the apartment syndicator. If you don’t like thm, you can pass. But at a capital call, if you don’t like the deal (if you even get to see the deal), you have no choice but to invest. Conversely, if you really like the deal, you cannot go all in. Therefore, qualifying the apartment syndicator is even more important prior to investing in a fund to minimize risk.

Taxes: From a tax perspective, distributions from an individual investment and a fund are the same. Ongoing cash flow payments are considered income and are subject to the income tax. Taxable income may be reduced if depreciation is passed on to the passive investors. Profit at the conclusion of the partnership are considered gains and are subject to capital gains tax.

Feasibility: Only accredited investors are qualified to invest in funds whereas sophisticated investors can invest in certain individual deals.

Another minor advantage of funds to individual deals is the paperwork. When investing in a fund, you complete once set of documents at the beginning of the fund and then are invested into multiple apartments. Each individual deal you invest in outside of a fund come with its own set of paperwork.

Which is the ideal passive investment?

First, you need to determine if you are an accredited investor.

Assuming you are an accredited investor, all other things being equal (the GPs, market, and business plan) the only major differences between the two options are return and risk. 

Investing in individual deals come with a higher level of risk, meaning both the profit upside and profit downside is greater.

Investing in funds diversifies your investment into multiple apartments and markets, reducing the risks and resulting in a more stable return.

If you want to maximize the chances of preserving your capital in return of a lower return, investing in a fund is the ideal option for you.

If you are more focused on growing your capital and potentially receiving a higher return, investing in individual deals is the ideal option for you. 

 

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The Best Shortcut to Getting Started in Multifamily Investing

You know what one of my favorite things is about interviewing multiple people each week for the Best Real Estate Investing Advice Ever Show? Occasionally, I will come across an investor with a mind-blowing amount of creativity and hustle.

They were in a bad financial spot, having no money to invest and no real estate experience. Yet, through massive effort and ingenuity, they were able to get started in real estate investing. 

Usually, they identified a unique, unconventional path – dare I say, a short cut – to success. 

One recent guest I interviewed that fit the above description was Chris Thomas. In fact, before interviewing him, I read his biography and was perplexed. It said he was a short-term rental investor with only two and a half years of experience, yet he had somehow amassed a portfolio of over 250 rentals (at the time of the interview).

“How is this possible?” I asked myself. Once the interview began, I was even more confused. Chris was in the backyard at one of his rentals, wearing a t-shirt covered in sweat (which I was actually kind of jealous of because it was around 30 degrees in Chicago) and holding his iPhone as the camera and microphone. He tells me that before he got started in real estate, he was a high school dropout on welfare (and was maybe even without a home for a period of time).  

After telling me more about his background, he begins to explain his investment strategy. To be honest, even 10 minutes into the interview, I was still uncertain as to how he built his portfolio. All I knew was he somehow began quickly amassing short-term rentals.

It wasn’t until I asked Chris, “how did you buy over 20 rentals in 8 months with no money and no experience? I don’t understand” that I finally realized what he was doing. And the reason for my confusion is that I had never heard of someone implementing that kind of strategy before. I didn’t realize it was possible (or even legal).

Now that I understand what he did, I’m here to convey his strategy to you. 

Here is how Chris went from welfare to controlling over 250 units, without prior real estate experience.

Overall, Chris uses over people’s money to lease and furnish individual units in large multifamily buildings. Then, he manages the unit as a short-term rental on AirBnB.

The first thing Chris needed to do was secure private equity from investors. The problem was that he didn’t know anyone with money. So, he told me that for two days in a row, with little sleep, we sent 500 messages on LinkedIn. The reason it took so long is because he had to manually type each message since LinkedIn marks copy-and-pasted direct messages as junk.

Chris found LinkedIn profiles with the word “investor” in their tagline. Then, he reviewed their profile and sent a custom message based on their interests or an article they recently liked. He said the was completely transparent in the message. He explained what he was doing (rent, furnishing, and AirBnBing apartments), that he was new to this but was working with someone who currently managed one AirBnB, and asked if they would be interested.

Of the 500 messages, 40 responded. After further conversations over the phone, 11 agreed to invest.

Next, Chris needed to find units to rent, which also required massive effort. He reached out to many property managers and apartment owners, asking if he could rent, furnish and AirBnB their unit. Countless managers and owners declined. However, enough agreed to allow Chris’s new investors to pick up 3 to 5 units each.

After the investors submited their funds, Chris was responsible for furnishing the unit and managing the AirBnB process in its entirety. The investor is only responsible for signing on the lease and setting up a direct deposit for the monthly rent.

Each investor invests $7,500 to cover the first month’s rent, security deposit, furniture, and Chris’s $1500 to $2000 fulfillment fee. Each month, the investors receive the cash flow left over at paying expenses and Chris’s $500 to $750 management fee, which is approximately $2,000.

When Chris and I spoke, he was managing 70 units for other investors. That means he made between $105,000 to $140,000 in fulfilment fees and was generating between $35,000 and $52,500 each month in income. 

Once he had proof of concept with his investors’ investments, he began investing in the units in the same buildings. At the time of our conversation, Chris was personally invested in 187 units. 

He said the units generate ~$2,700 per month in income. Based on a $5,000 ($7,500 minus the fulfillment fee) investment per unit, the annual ROI is nearly 650%. 

Now, I didn’t write this blog post with the intention of convincing someone to execute Chris’s strategy, because I am uncertain whether it can work in every market (or if it is unique to California Chris’s market) or if it adheres to securities law regarding raising capital. 

However, I think we can use Chris’s story as an example of how hard work and imagination can allow you to overcome whatever obstacle is keeping you from getting started or scaling. If a high school drop out on welfare can create a seven-figure real estate business in less than three years without any money or experience, what is your excuse?

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Your Blueprint for Passive Investing in Real Estate

You’ve worked hard to get to where you are today. It’s time to begin thinking about investing and expanding your wealth. Passive investing sounds great, but where do you begin? To find success, you need a plan.

Step One: Know What You Can Gain from Passive Investments in Property

It’s smart to know why you’re doing this. You want to make money, but passive investments are about more than wealth building. There are many ways of passively generating income, and they all have positives and negatives. You should choose a route that matches with the lifestyle you hope to develop for yourself.

There’s a reason that so many passive investors choose to put their money into property. Investments in property are one of the most powerful ways to put your hard-earned money to good use. Before you can decide whether you want to go into property, make sure you understand what it means to be a passive investor.

Passive vs. Active Investing

Not every property investment is passive. Many options, such as buying an apartment complex and renting it out, require hands-on work. You can hire a management company, but you’ll still need to check in on a regular basis to see how things are going. You’ll still need to make decisions about how to run the property. Appliances and structures will break, and you’ll need to figure out how you want to make repairs and replacements. You’ll also need to decide how often you want to renovate the property. Renovations will cost you, but without them, the property will lose value.

Does this sound like more work than you were hoping for? Maybe you’re looking for a truly passive option. If so, you’ll be glad to learn that there are forms of property investment that are much more passive.

To passively invest in property, you need to look for an opportunity that won’t require you to play a direct role in managing the investment. How is this possible? There are several ways.

  • Choosing property investment trusts
  • Lending money to others for the purchase of property
  • Putting your money toward property crowdfunding projects
  • Investing in property through the stock market
  • Finding an investment partner who prefers to do most of the hands-on work
  • Making an investment in a real-estate adjacent industry

Wonderful Reasons to be a Passive Investor

Now that you understand what it means to passively invest, how can you be sure it’s right for you? After all, this is a big chunk of your money we’re talking about.

You Can Get a Quick Return

It’s possible to see a fast return on investment when dealing with property. As soon as you do your due diligence and handle all the paperwork, you’ll become a stakeholder. If the property is generating income, you’ll begin making money right away.

You Can Keep More of Your Money

The point of making an investment is to get a return, but some investments pay out better than others. For example, stock dividends are taxed at a high rate. With property, the cash returns are tax deferred.

You Can Skip the Financing

Most people who buy property directly end up financing a portion of the investment. Financing can be great for some investors. It allows them to choose from high-value properties rather than what they could afford using cash. However, anyone who has ever purchased a home knows that dealing with banks during the buying process can be a hassle. It can also be tedious, often taking more than a month to close on a deal.

When you make passive property investments, a third party manages the investment. This third-party company will handle the banks for you, freeing up more of your precious time.

Step Two: Decide How to Invest

1. Real Estate Investment Trusts (REITs)

REITs let you invest without worrying about the physical aspects of the property. This is exactly what you’re after as a “lazy” investor. These companies own high-value properties, such as commercial office buildings and hotels. Investors purchase a stake in these properties. It’s a truly passive venture. As a bonus, since REITs don’t have to pay corporate taxes, they’re usually able to pay out larger dividends to their shareholders.

For classification as a REIT, a company needs to:

  • Derive 75 percent of its income from property assets.
  • Pay at least 90 percent of its taxable income to shareholders.
  • Invest 75 percent of its assets into real estate.

There are different types of REITs, and some are riskier than others. If you’re new to property investment, you’ll want to stick to publicly traded REITs, which are easier to value and generally safer.

2. Property Crowdfunding

Although “crowdfunding” is a relatively new term, people have always joined forces to buy property. Thanks to technology, you can use crowdfunding platforms to look for investments. Compare this to spending days, weeks, or months looking at individual properties, and you’ll see that crowdfunding can save you a lot of time.

You’ve heard of crowdfunding creative projects, such as films or albums. Crowdfunding property works in a similar manner. Investors pool their money to fund a project, and if all goes well, they all get a return on their investment.

Crowdfunding is great for new investors. Since the listings are curated, it requires much less research than some other options. The crowdfunding platform reviews everything, from market statistics to the quality of the property itself. You can use the platform to invest in different ways. For example, you could become a stakeholder in a property, or you could invest in a loan that’s secured by a property.

There’s also a much lower barrier to entry than you might expect. The beauty of crowdfunding is that many people can make a difference with only a small amount of money. You can invest through a crowdfunding platform with only a few thousand dollars. Some platforms are even working to lower the requirements, allowing users to invest with as little as $500.

3. Partnership

Maybe you already know someone who is involved in property ownership. If this person is looking for a financial partner, it could provide you with a great opportunity for wealth building.

Before you take the leap and form a partnership, it’s important to discuss exactly what your partner will expect of you. You’re looking for passive income, not a burden. Make sure that your partner is looking for a financial contribution and nothing more.

4. Lending Money

This option is best for investors who have a large amount of money to work with. It’s risky, but it can offer a good return on investment if you’re smart about it. Becoming a private lender will let you provide another buyer with a loan with a high interest rate. This type of deal is usually carried out between an investor with liquidity and a buyer who needs quick access to a property and is willing to accept a higher interest rate.

If you’re interested in becoming a private lender, there are some steps you’ll need to take:

  • Establish your lending business and acquire insurance.
  • Choose what type of loan you’d like to focus on.
  • Meet with your legal team to discuss the details of your plan.
  • Join a lending platform to connect with borrowers.
  • Evaluate the risk associated with each individual borrower.

Most of the borrowers you’ll be working with will be investors themselves. People who are buying a home to live in typically finance through a bank or lending service. This means you’ll be lending to commercial investors, building developers, and those who work in property rehabilitation and flipping.

5. Real-estate Adjacent Industries

This option doesn’t relate to property ownership. It could still be a good option for many investors, especially those who are looking to diversify their portfolios. Examples of real-estate adjacent companies include:

  • Construction supply businesses.
  • Property listing websites.
  • Companies that sell properties on behalf of owners.
  • Apps or websites that provide online paperwork signing.

An investor might choose to purchase stock in some of these companies at a time the market is flourishing. When more people are buying property, adjacent industries will thrive. In turn, you will earn more passive income.

We hope this blog has given you a taste of what passive investing in property might be like. There’s always a degree of risk involved in making an investment, but what would our lives look like if we never took any chances? You deserve to expand your wealth and create the life you’ve always dreamed of, so get started today. Imagine where you could be in a few years!

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New changes to “Accredited Investor” status

In late August, the Securities and Exchange Commission announced some amendments to the accredited investor status, which you need to be aware of if you’re currently engaging in wealth building and want to eventually become an accredited investor. It’s also important to note that these changes won’t cause someone who previously qualified as an accredited investor to no longer qualify. The amendments are mainly designed to expand access to this status for investors who would not previously qualify. The following offers a closer look at the recent alterations to the accredited investor status and what they mean to you.

What Is an Accredited Investor?

When a business entity or individual is classified as an accredited investor, this means that the entity is effectively able to trade certain securities that aren’t registered directly with financial authorities. However, the entity in question must meet specific requirements to received this kind of accreditation. These requirements can extend to everything from professional experience to overall net worth and wealth.

Any person who is deemed to be an accredited investor is considered by the SEC to be financially knowledgeable, which also means that this individual won’t have as much of a need for the kind of protection that’s afforded by regulatory disclosure filings. The individuals who are classified as accredited investors are individuals with a high net worth. In most situations, individuals with a high net worth will have at least $1 million in liquid assets. Before making investments in securities, you should have a clearer understanding of the changes that have been made to the accredited investor status.

Amendments Made to Accredited Investor Status

Five separate amendments were made to the accredited investor status, all of which you should be aware of before investing. These amendments range from small to large and may not affect you.

Knowledgeable Employees for Private Funds

Without the addition of this amendment, the various categories of accredited investors include:

  • Individuals with a high net worth
  • Brokers
  • Trusts
  • Insurance companies
  • Banks

With this amendment, an additional category of accredited investor was created that can apply to individuals who may not have the kind of passive income or wealth that’s needed to be a high net worth individual. This category involves knowledgeable employees who are a part of a private fund. These individuals can be classified as accredited investors for the investments of the private fund in question.

A knowledgeable employee of the private fund can be a general partner, a trustee, a director, an advisory board member, or an executive officer. Anyone else who oversees investments from the fund could obtain this status. Keep in mind that you will need to be a part of the various investment activities pertaining to the fund for a period of 12 months or more.

Family Clients and Family Offices

This particular amendment adds another type of category to the accredited investor status, which provides a passive investor with additional opportunities to become an accredited investor. The new category refers to family clients and family offices. A family office must meet requirements like:

  • There are at least $5 million in total assets that are being managed under the family office
  • The family office wasn’t formed for the sole purpose of obtaining securities
  • Any investments under the family office are directed by someone who has experience and knowledge in business and financial matters, which means that this individual must be able to properly evaluate the risks and merits of the investment

As for a family client, this refers to someone who has an investment that’s directed by the family office. These individuals will also become accredited investors.

Expansion of Various Entities

Additional entities are being considered as accredited investors, which include:

  • Rural business investment companies
  • Limited liability companies that are able to satisfy all requirements of definition for accredited investor, which means that the employees of the limited liability company could classify as accredited investors
  • Any investment advisers who are registered with the Investment Advisers Act

It’s also important to note that any entity that wasn’t formed solely for the purpose of obtaining securities and owns more than $5 million in investments could become an accredited investor. This also applies to Native American tribes.

Professional Designations and Certifications

If you have been taking part in passive investing and are thinking about becoming an accredited investor, this particular amendment has added an extra category that makes it possible for individuals to obtain this status. If an individual possesses certain professional credentials, designations, or certifications, they may be qualified to be an accredited investor. These designations and certifications must demonstrate an extensive background and knowledge of investing and securities. If you currently hold a Series 7, Series 65, or Series 82 license from the Federal Industry Regulatory Authority, you will likely qualify to be an accredited investor.

One notable aspect of this particular amendment is that the SEC has some flexibility in regards to the credentials, certifications, and designations that they take into account when providing someone with accredited investor status. The credentials that are considered by the SEC can be altered at any time. In order for new credentials and designations to be used for accredited investor status, a self-regulatory organization, educational institution, or member of the public will need to submit an application for consideration to the SEC. The SEC will then deliberate to determine if the certification or credential should qualify.

Public notice must also be made by the SEC before the list of qualifying criteria is modified. If you opt to go this route when seeking accredited investor status, keep in mind that any qualified designation or credential of yours would need to be independently or publicly verified before the SEC would grant you accredited investor status.

Asset-Based and Income-Based Accredited Investors

Before these amendments were finalized, the SEC sought public opinion on whether the asset or income requirements for accredited investors should be altered in any way. The purpose of seeking opinions from the public was the determine if geography, inflation, or other factors should play a part in asset and income requirements. At the moment, the financial thresholds have been kept in place, which means that the requirements remain the same as they were before these amendments were passed.

These thresholds were initially set back in 1982 when only a small selection of individuals and entities were able to obtain accredited investor status. Since that time, an increasing percentage of the public have been able to receive this status. However, the SEC noted that the individuals who currently qualify are still able to protect themselves when trading securities. While passive investing is considered to be safer, timely information for securities is easier to access than it once was, which helps to keep accredited investors protected.

There were some small changes that have been made to these facets of classification. When joint income is being calculated for accredited investor status, the “spousal equivalent” term has been added to the definition of accredited investor. Spousal equivalents can also be considered when calculating net worth. With this amendment in place, spousal equivalents can pool their finances together with the main investor to qualify as an accredited investor.

Additional Info Pertaining to Accredited Investor Status

If you are looking for ways to increase your passive income as an accredited passive investor, there are still some additional pieces of information that you should be aware of. While the requirements that you must meet to become an accredited investor can be strict, they are relatively straightforward. Once you have received this status, you will be able to make non-registered investments and securities investments, which can include a focus on real estate and apartment deals.

To be classified as an accredited investor, you must bring in an annual income that’s higher than $200,000 or $300,000 with joint income. You will need to have earned this income for the past two years with the belief that you will earn the same income in the year that you apply for this status. You can also qualify for this status if your net worth is higher than $1 million. If you work as a director, general partner, or executive officer of the company that’s issuing unregistered securities, you can be considered an accredited investor. If you belong to a private business development company, the assets that are being managed by the organization must be higher than $5 million.

Whether you’re thinking about investing in real estate securities or mutual funds, becoming an accredited investor will give you the opportunity to obtain higher returns and to diversify your portfolio with assets that aren’t correlated with the market and the risk that comes with it. When engaging in wealth building, gaining accredited investor status can place you in the upper echelon of investors.

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How to Choose the Right Syndication Opportunity

As a passive investor, you’re likely always on the lookout for new investment opportunities. As you’ll come to find out, the real estate sector is full of many great potential opportunities if you know how to spot them. If you’re not yet taking advantage of real estate syndication, we’re going to change that today.

What Is Real Estate Syndication?

This process typically involves getting together with other investors to do deals. Everyone pools together capital to purchase a rental property. Nowadays, more recent technology has made syndication a breeze. Syndication is commonly referred to as crowdfunding for real estate. Many online syndication sites can connect you with potential investors and deals you can take advantage of.

Syndicators

Syndicators, also known commonly as sponsors, are individuals or companies who are in charge of handling the deal. This means finding the deal, acquiring the property, and managing the real estate. Syndicators tend to have a long history of real estate experience and an understanding of how to perform due diligence for a potential deal.

Investors

As you’ve likely guessed, investors are the other party to this transaction. These are people like you who invest some of their capital into the deal. In exchange, you’ll get a percentage of ownership in the real estate. With syndication, you can enjoy all the benefits of owning a property without the hassle of obtaining or managing it.

JV Partners

Depending on the syndicator, they may work solely with JV (joint venture) partners. Think of these partners as similar to brokers. Instead of investors dealing directly with the syndicator, the JV partner is the middle link. The JV partner pools together a list of investors for the project. These JV partners can be a great asset for investors who are looking for consistently flowing deals.

Is Syndication Right For You?

Many well-known real estate investors opt for adding syndication as one of their main wealth building strategies. As a passive investor, syndication can be a great tool to assist you in growing your wealth portfolio. Here are some of the top reasons that you should really consider syndication in your wealth building strategy:

Access To Deal Flow

One of the most time-consuming jobs of investing in real estate is the research. You want to ensure that a potential property will bring you a good ROI over the long-run. If you’re like most investors who don’t use syndication, then you probably scan close to 100 deals before you find the right one to invest in. That takes a lot of time.

Syndication, on the other hand, allows you to easily have access to good deals without having to perform the research. In fact, you’re getting access to property that have be researched by real estate companies who research investment properties for a living. Instead of spending your time on research, you can simply sift through good potential deals until you find one you like.

It’s Passive Investing

Passive investing is a way of life for many of us. As soon as you start rolling in that income without having to actively participate to receive it, you’re hooked. Syndication is a fantastic strategy to receive passive income in the rental property market. You won’t have to worry about day-to-day management and fostering a deal. All you need to do is decide which syndication deal you want to invest in and commit your money to it.

You Get Access To Professional Management

Real estate companies who take on the role of syndicators have lots of experience in their industry. Most companies will have a long track record of previous successes that they’ll be able to show you to prove their status. With a professional syndicator, they will work closely with the property management company to ensure the property stays in good condition, and all operations go smoothly. They’ll even send you monthly or quarter updates, so you know how your investment is doing.

Provides Portfolio Diversification

Any good investor knows that diversification is a must. You shouldn’t put all your eggs in one basket because they all could be gone with one turn in a specific real estate market. Instead, syndication offers a way to help diversify your investment portfolio. The best part is that you can get into these deals for much less than you would have to spend if you were undertaking the investment solely on your own.

Tips On Investing In The Right Syndication Opportunity

If you’ve decided that real estate syndication is a must-have for your passive income wealth strategy, the next logical step is learning how to find the right deals. Just as with any sort of investment, you want to get your bearings in this new type of deal. It’s best to take your time and follow the tips we outline below to ensure that your first syndication investment is a profitable one.

Know Your Investment Time Strategy

Everybody invests with different goals. Part of these goals is having money by a specific time. Whether it’s having a certain amount of money when you retire or having money available for your child’s college fund, you likely have deadlines you need to meet. It’s important to have these figured out ahead of time, so you know which types of investment periods are right for you.

You’ll be able to find real estate syndication investments that range from as little as 1 or 2 years up through 10 to 15 years. Let’s say your goal is tuition money for your child who graduates high school in three years. You’re going to be looking for a syndication opportunity that is in the one to two-year range.

Know Your Acceptable ROI

As an investor, you know that ROI can make or break a deal. Each investor should have a clear idea of what ROI minimum they’re willing to accept. Each syndication deal is going to be a bit different from the next in terms of ROI. By having your minimum ROI percentage ready to go, you can easily sift through syndication deals and expel those which don’t meet your minimum ROI requirement.

Decide On A Syndication Strategy Up Front

Syndication deals come in different strategies. It’s important that you decide what syndication strategy you’re going to be investing in before you start looking for a sponsor. The most common types of syndication strategies include:

Aggressive Value-Add Strategy

With this strategy, an entire property will be purchased and vacated. It will undergo extensive renovations. Once the renovations are finished, the building will be leased at higher rental rates than in the past.

Mild Value-Add Strategy

With this strategy, the property isn’t vacated once bought. Rather, as normal tenant turnover occurs, the existing units are renovated. Then, they are rented for higher rates than in the past.

Buy And Hold

This is the most traditional investment strategy most investors are familiar with. An investment property is simply bought and held for long-term cash flow benefits.

As you can see, each strategy comes with its own pros and cons. The value-added strategies can be riskier than the buy and hold strategy. If you’re willing to take on a lot of risk, then the aggressive value-add strategy may be a profitable one for you. If you want to limit your risk, then buy and hold syndication deals are your best bet.

A Note On The Legal Structure

If you’re really getting excited about the potential of using syndication deals in your wealth building strategy, then you’ve likely questioned the legal structure. Any good investor knows that their deal is only as good as the legal paperwork. With syndication, you’ll find most deals will be structured in the form of a limited partnership or limited liability company.

With either of these legal entities, you’ll need to pay close attention to the LP Partnership Agreement or LLC Operating Agreement. These vital documents outline the rights of the investors and the sponsor in regards to the property you purchase. Some examples of rights include voting rights, distribution rights, and sponsor’s rights to fees for managing the property.

How To Find Syndication Opportunities

If you’re on board with this strategy, it’s time to discover how to find these deals. Syndication opportunities can be found via local sponsors or online platforms. Most communities have local meetup groups for real estate investors, which you should be attending. These groups can allow you access to more seasoned investors who are likely to reveal their sponsors.

Otherwise, you can opt for viewing online syndication platforms at your leisure. The two most popular online platforms are Fundrise and CrowdStreet. Even if you’re considering talking with other investors to find local sponsors, taking a look at these online platforms can be helpful. They can give you a good understanding of how deals are formulated and so forth.

As a passive investor, you should always be on the lookout for new opportunities. Hopefully, we’ve opened up your eyes to the profitable strategy of syndication. This investment strategy is one that should definitely be included in your investment portfolio.             

 

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5 Reasons to Invest in Real Estate Syndications

You may have considered entering the real estate market for some time. However, a few of its characteristics may have kept you hesitant and unwilling to contribute your funds to it. For a passive investor, one of those factors is likely concern over needing to be more hands-on than you are willing to be. Your time is important to you. Thankfully, though, you do have other investing options available to you. One of those is taking part in a real estate syndication. In doing this, you will be able to experience several benefits, including not being hands-on in the running of them. Here are five.

Diversification

One piece of advice that you have likely heard on several occasions, including well before you became interested in property ownership, is to not put all of your eggs in one basket. Avoiding that reduces your risk in all aspects of your life. As it relates to this type of passive investing, you will essentially be crowdfunding for properties. Instead of owning 100% of a property, you will, for example, own 10% of 10 different properties. As a result, if one of those 10 is losing money due to it not being occupied or for other reasons, you will have nine others ready to push your overall earnings well into the black.

Another thing to consider is the type of properties that you will be devoting your wealth towards. An additional way to diversify your passive investing efforts is to purchase fractions of different types of properties. You could get involved with apartment buildings, shopping malls, self-storage facilities, mobile home parks and office buildings. By doing so, you are protecting yourself against any economic downturns that may occur with one or a few of those types of structures and increase the odds that you will still turn an overall profit.

Also take into account that you may want to engage in geographic diversification as well. Sometimes, a geographic area will go through a downturn, which could affect various types of properties located there. To hedge your bets as far as this goes, take advantage of investing opportunities in several areas. Also note that investing elsewhere, particularly if it is out of state or in a different country, could be difficult to do on your own if you have no connections with that area but be much simpler of a process if you are part of a syndicate.

Ability to Engage in Passive Investing

One of the most significant benefits of taking advantage of syndicates for many is the ability to be a passive investor for these types of properties. If you were to purchase one of these by yourself, you would then be responsible for all aspects of it. This includes ensuring that those who are renting it from you continue to pay their rents, that you make sure to keep it as full of those rent payers as possible, that you take care of otherwise managing the property or paying someone else to and that any public relations or related needs for it are handled.

Instead, you can simply engage in wealth building from the sidelines while you focus your time on other areas as you see fit. Instead of scurrying around finding renters to fill empty spots in your facility, you can improve your public speaking skills. Instead of making sure that the leak through the roof that has created a hazardous area is handled, you are able to spend more time with your family.

Another benefit to consider is that the syndicator or sponsor who is the person handling all of these aspects for the property has also done the due diligence necessary to decide on one or more properties for those such as yourself to invest in, time that you can instead spend elsewhere. You simply devote your passive income to the efforts and allow that money and the syndicator to take care of everything else.

The sponsor, who typically receives around 30% of the cash flow and appreciation, will also handle all investor relations, including sending out quarterly reports on how the properties are doing. So, in exchange for your payment of the sponsor’s fee, you get to experience the increasingly significant benefit of time.

Reduced Credit Risk and Personal Liability

Those who get involved with real estate syndications tend to fall on one of two sides of those organizations. On the one hand are those who handle all of the day-to-day aspects of the property, including the minute specifications of what happens with the group’s funds. On the other side of the table are those who are simply providing some of their wealth to the equation. They do not play any role whatsoever in those decisions that are being made about the money.

The passive investor will experience numerous benefits from being in the second group. One is not being involved in any lawsuits that could be sent towards those in that first group as no judge would find individuals such as yourself liable for fund-related decisions that were made as they did not make any.

Other benefits are related to credit. These are experienced before the property is purchased and after. Prior to its ownership changing hands, the syndicator will be the one making the actual purchase. They may need to ask a bank for a loan. As a result, their credit will be on the line, and it will be their credit that will be assessed. So, whether you would be approved for that loan or not is irrelevant. Then, after the purchase has been made, if something happens to cause the purchaser’s credit rating to decrease significantly, that also will not result in anything negative happening to your credit.

Access to Commercial Properties

For those looking to solely engage in wealth building – i.e. without a syndicate – by taking advantage of investment opportunities related to large commercial properties such as shopping malls, that may simply not be possible. We all have dollar amounts that are out of reach for us. However, syndicates allow us to have a piece of that pie. For example, if you would like to be involved with the owning of a commercial property that costs millions or even hundreds of millions of dollars, a syndicate allows you to do so with fewer zeros in your investment figure than would have otherwise been the case.

Of course, the exact figure necessary will depend on a number of factors, but, in many cases, this type of investment opportunity can be had for as low as around $10,000. As a result, you will now be able to take advantage of the generally steady income of entities such as shopping centers and related properties. However, do note that most investment figures in these types of situations are closer to $100,000.

Regardless, do also take into account that most commercial properties have been purchased by a syndicate, so this setup is the norm, not the exception.

Consistent Performances

One benefit of taking advantage of property investments that is enhanced when acting as part of a syndicate is experiencing consistent returns and less volatility as compared to other types of investment opportunities, most notably the stock market. Although the latter option is a better one in many ways, its major con is significant for passive investors: dramatic ups and downs. Property investments provide a steadier rate of increase and income that can be counted on with greater assurity than is the case for stock market investments.

You should also take into account that the stock market as a whole experiences a down year for every two up years. Conversely, property investments as a whole have resulted in around three to four times fewer down years than the stock market has endured.

Another thing to consider is how property investment opportunities provide a nice hedge against inflation. While other types of investment opportunities can result in losses as inflation increases, properties tend to not follow along with that. That is because, in general, the rents that are charged those staying in those places naturally increases with the inflation rate, resulting in a steadier rate of income.

Plus, in some areas, properties are expected to continue to increase in value as the local population grows and demand for them increases.

The Last Word

You have numerous options available to you as you decide how to use your wealth to experience passive income. Fortunately, some of these can be turned into passive opportunities when they would not normally be ones, and property investments that are done by syndicates is one example.

Consider taking advantage of this generally steady rate of income while allowing somebody else to handle all of the heavy lifting of finding properties that are worthy of investments by you and others and ensuring that they are being managed once they are purchased so that you can enjoy more of the benefit of free time.            

 

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Bruce Petersen Mentors You on Syndication

Many real estate investors are eyeing syndication as a lucrative next step. If you’re thinking about sponsoring a passive investing partnership, syndicate expert Bruce Petersen has hard-earned wisdom for you. Bruce is the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, focusing on multifamily property investing and management. He’s also the author of “Syndicating Is a B*tch”. A recent guest on the Joe Fairless Best Ever Show podcast, Bruce discusses the power of mentorship and other tips to make your launch into syndication a success.

 

About Bruce Petersen

 

Bruce is a late-blooming entrepreneur who found syndication after 20 years in retail. At 43, burned out from 100-hour weeks, he took a break to evaluate what to do next. After researching real estate, he found an excellent mentor, a relationship that changed the course of his life. His mentor was a buyer’s broker for multifamily properties. Soon Bruce had purchased his first syndication property, which yielded an impressive return. He was hooked.

 

Since then, Bruce and his wife Stephanie, who serves as CFO, have acquired multifamily properties in Texas. Their goal is to provide an exceptional living experience for tenants from all walks of life. Bruce also serves as a mentor and educator. He recently released “Syndicating is a B*tch”, a book that tells the raw truth about syndication’s difficulty and challenges.

 

Find the Right Mentor

 

If you’ve considered a formal mentor but think it’s too costly or sensationalized, Bruce has some advice. His mentorship with the multifamily broker catalyzed his success more quickly and professionally than he could have achieved alone. Why reinvent the wheel when experts have already created it? Your effort will net a higher return if you leverage their knowledge and experience.

 

Bruce notes that mentorship has gotten a bad rap in the business due to hucksters who hype themselves as gurus of a lavish investor lifestyle. These people are not mentors. Good mentors walk the walk, are successes in their field, and have verifiable track records. They are honest about what they offer you and don’t overpromise.

 

Mentorship Is Cost-Effective

 

Most mentors charge for their services. If you balk at this, says Bruce, consider the cost of a college education. People often spend $50,000 or more as undergraduates and $200,000 or more with graduate or professional school. Then there’s the opportunity cost of four to 12 years of lost endeavors and income. Ultimately, many people end up in jobs they dislike or didn’t prepare for.

 

In contrast, the right mentorship can teach you how to run a lucrative business you’ll enjoy. Syndication is hard and full of unforeseen challenges. If you’ve never done it before, you’ll encounter obstacles you’re not prepared to manage. A mentor will coach you on all aspects of the business and slash your learning curve to self-sufficiency. Bruce’s bottom line: “You do need a mentor. Don’t do this alone.”

 

Find Your Investors First

 

Bruce notes that many new investors ask if they should find property or raise financing first. Though you may be eager to hunt for the ideal multifamily, he advises starting with the money. It’s too easy to get to the table without your financing locked. Think about it: This happens all the time with primary residential purchases. Syndication has significantly more risks and variables.

 

Meanwhile, you’ve tied up the property for one or two months, and people will remember that. If you withdraw from a deal at the last minute due to a lack of funds, word will spread that you can’t deliver. You’ll be just another enthusiastic greenhorn who didn’t prepare.

 

Raise Twice the Money You Think You Need

 

According to Bruce, you should raise at least twice as much financing as you think your property will cost and preferably three times as much. For example, if you’re targeting a $500,000 cash property, plan on raising $1 million to $1.5 million.

 

Over raising can be a tough sell to prospective investors but will likely save the deal. You should assume at least half of your pledged investors will bail. Some may have personal situations arise, while others may get cold feet. Build this likelihood into your financials, and it won’t derail your plans.

 

If you’re contemplating your first deal, consider these typical costs in your estimate:

 

  • Down payment
  • Closing costs
  • Rehabilitation costs not covered in the loan
  • Operating expenses

 

Then double or triple that total to arrive at your investment target.

 

Get Out There

 

Real estate investors are like successful salespeople: They need good personalities. You are selling potential investors on your opportunity, but you are selling them on you most of all. If they don’t like you or smell an ethical rat, they’re gone.

 

Bruce describes how he told one excited man at a syndication event to find another venture. Why? Though the man could finesse spreadsheets and was motivated, he was a self-described jerk and misanthrope. According to Bruce, that’s a deal-breaker.

 

You don’t need to be an extravert, but you do need to meet people and have them like you. Bruce found the investors for his first deal from a meetup group he started. He had no experience or even a job, but the members got to know him over many months.

 

If running groups doesn’t suit you, there are many existing ones to join. Bruce suggests attending events from experts such as Joe Fairless, Jake and Gino, and Michael Blank to network with like-minded people.

 

You’ll also learn a tremendous amount by immersing yourself in the world of passive investing. Many groups and events feature free or low-cost training in webinars, videos, books, and more. Simply by interacting with people, you will learn from their experiences and stories. They, in turn, will learn from you.

 

Lead With Your Best Self

 

Here are Bruce’s straightforward tips for networking success. If you’ve dealt with pushy colleagues who were all flash, you know these bear repeating:

 

  • Be genuine
  • Dress the part
  • Present dignity and confidence
  • Keep your ego in check

Know Who You Are

 

When you watch Bruce captivate a large audience, you might assume he can command any networking situation he encounters. The truth, he says, is that he’s an introvert who dreads working a room. Having to start small talk with strangers leaves him frozen and awkward. Instead, he lets his wife engage people, and then he joins the conversation. On the flip side, Bruce is a natural on stage, whereas his wife avoids it.

 

The takeaway is to know who you are, play to your strengths, and manage your weaknesses rather than pretend they don’t exist. Networking is the backbone of real estate investing, so if certain social situations make you uncomfortable, don’t avoid them. You could be leaving valuable contacts and information on the table. Instead, find a way to adapt gracefully.

 

Present Yourself Professionally

 

Dress the part, as strangers will remember your first impression. Bruce is not a fan of the image of the “millionaire next store” in cheap clothes. Instead, he suggests dressing at or above your means to project confidence and professionalism.

 

This attention to presentation doesn’t mean overspending to achieve an image. Such overreach financially sabotages your goals and ultimately undermines your self-confidence. However, you do want to appear you belong in the room. Some creative shopping can net you a well-priced and polished wardrobe. Don’t forget other basics such as professionally printed business cards, quality accessories, and a clean car.

 

Be Honest About Your Experience

 

Many people wonder how to present themselves to potential investors if they have no experience. If you lack experience, say so. You want to be transparent, Bruce notes, but confident. Every investor out there started somewhere.

 

You should offer people a solid idea of the type of property you plan to purchase and why. Have your elevator speech ready just as you would for a traditional job. For example, “I’m targeting a 30 to 50-unit multifamily property in Raleigh, built between 2000 and 2010.” As the conversation continues, you can explain why.

 

Be mentally prepared for rejection. Some potential investors won’t like your inexperience, your approach, your personality, or your shirt. That’s their prerogative, so stay calm and move on. When starting out, Bruce once had a man laugh in his face. Bruce expressed his understanding and politely excused himself to meet others in the room.

 

Is Syndication Right for You?

 

The syndication investor lifestyle isn’t for everyone. You need confidence, good people skills, and an entrepreneurial spirit. You should also have grit and the humility to learn from others. In this business, you will encounter shockers you couldn’t make up. As Bruce notes, we are living in an era of black swans, so expect more of those, too.

 

Bruce points out that there are many ways to make excellent money. You don’t have to choose syndication or even real estate. However, if you decide syndication is for you, then leverage the quality resources available to create your roadmap.

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It’s Not About Net Worth, It’s About Cash Flow

The greatest benefit of passive investing is the freedom it gives you. A steady flow of income generated by your real estate investments is the basis of your prosperity. It allows you to build wealth from a secure footing.

When you’re investing, should you focus on assets that generate income, or should you focus on building a high net worth? While both are important, it’s cash flow that gives you the freedom to leave your job, pursue new opportunities and build a solid foundation for your future.

Why You Should Focus on Cash Flow

As a passive investor, you may wonder if you should focus on increasing your net worth or improving your cash flow. In our view, cash flow is the true marker of financial success.

Cash Pays Your Regular Expenses

Cash flow is the measure of how much money you have to spend on necessities, luxuries and investments or savings. If you have high cash flow, you have more to spend on all these things. Simply put, cash flow pays the bills.

Businesses that have high cash flow are stronger than those that have high net worth because they can avoid debt and attract investors. Similarly, your personal financial situation improves when you can use cash to avoid debt, pay your creditors, pursue more opportunities and build your future.

Net Worth Is Not Liquid

High net worth is a good snapshot of your financial situation, but it is not liquid like cash. If you need cash quickly for any reason, a high net worth won’t save you. If your net worth is tied up in a home, for instance, it’s an all-or-nothing situation. You can’t sell part of a property. Are you going to sell off your assets every time you need cash? Eventually, you’ll run out of illiquid assets and have to start over. A positive cash flow means being able to take that trip, buy that business or meet an unexpected expense with ease.

Net Worth Can Change

Your net worth can change as markets and economic situations change. If a property increases in value, that’s great news, but it doesn’t increase your immediate ability to spend or save more. Many gains in net worth are so-called paper gains that don’t affect your income. Also, these assets can drop just as quickly as they rise.

Cash flow is tangible. It’s money you can use. It’s also more reliable than net worth. Once you have a flow of cash, it tends to remain steady. This is especially true if you have several income streams. You can take in enough income to offset occasional dips in cash flow.

It Offers More Stability

A high net worth doesn’t mean you’re financially stable. You can have a high net worth but be running through your cash every month to stay afloat. Eventually, you will hit bottom and have no cash. If you sell your assets, how long will it take for that money to run out?

What if the opposite is true? Someone with low net worth and high income is in a more secure situation. You can pay your living expenses and avoid going into debt. You can always work on further passive investing and wealth building once your cash situation is stable.

Cash Flow Is Freedom

Net worth gives you a solid foundation for the future, but cash flow gives you the freedom to live your daily life. Dividends, passive income or the proceeds of asset sales all combine to create a steady flow of cash that takes away your need for a job.

Wealth building starts once you have an established income. Cash flow gives you the freedom to make more investments, buy more property and continue to build wealth for the future.

High Net Worth Can Be an Illusion

Although more than half of American families are homeowners, a large number of them have low net worth. Their entire net worth is in their homes. To make matters worse, they frequently have low or negative cash flow. For these families, their high net worth is an illusion because they aren’t investing in income-generating properties.

It’s More Attractive To Investors

There’s a reason investors don’t judge a company by its net worth. When they’re looking for their next investment, they look for cash flow. Like a person, a business can have a high net worth and an insufficient cash flow. That signals trouble because a business that has low cash flow usually ends up in debt and unable to expand. A business with a high cash flow has the money to compete with other businesses, acquire other companies, avoid debt and continue expanding.

If you look at your financial situation as a business, you should judge it by the same terms. Would you be a good risk for an investor? Having high cash flow means you can meet your personal operating expenses with plenty left over.

Cash Flow Is Predictive

Your net worth is mostly about your past financial life. It can tell you what you did with your first investments. Cash flow is predictive of your future. If you’re on the right track, your cash flow will steadily increase every year. A solid cash flow is a good indicator that you’ll continue generating income for years to come.

You Can Pursue New Opportunities

With a cash flow cushion, you can pursue other investments or ideas that interest you. You can feel confident about purchasing more real estate or other assets. Cash flow is the key to maximizing opportunities.

Asset-Producing Investments Have More Value Than Personal Property

Your asset mix may include dividends, capital gains, interest-bearing accounts and property rents. These are all asset-producing investments. Any property that helps you generate income can also fall into that category. The more investments you have, the more your assets will grow and the wealthier you will become.

Personal assets don’t generate a cash flow. Personal property includes your personal home, vehicles, jewelry and other assets. These assets may have value, but most of them don’t appreciate in value. They may even lose value. Investing too much money in personal property can be an unwise use of your money.

Net Worth Is Subjective

Everyone has a different opinion of what a good net worth is. There is no hard and fast way to determine if your net worth is too small or just right. Most people would say, for instance, that a million dollars is a good solid net worth. It is, but what if you’re tied up in a million-dollar mortgage? Does it still count? Some people would say yes, and others would say no. People can argue about this all day.

Cash flow is objective. There’s no argument. You either have enough money to meet your expenses, or you don’t.

It’s More Enjoyable

High cash flow is also more enjoyable than a high net worth that’s locked away and untouchable. High cash flow allows you to meet your expenses without worry, travel, enjoy life and support your children or favorite charities. It’s the reason you chose to be a passive investor. A high cash flow lets you enjoy the results of your investments.

When To Pursue High Net Worth

Naturally, there are times you should pursue assets that will add to your net worth.

You’re Just Starting Out

When you start out on your passive income journey, you may have limited funds to work with. Most people in this situation prefer to buy assets that can give them a solid foundation of wealth. For most of us, that means property. Real estate is usually the first income-generating asset people buy when they’re creating passive income. Starting this way can help you start with a strong foundation.

You Need To Diversify

If you’ve focused most of your effort on income-producing acquisitions, you may have neglected to add to your long-term growth. You might need to spend more time on your retirement plans. If you have amazing cash flow, that’s great. Use that money to invest in wealth building for your future.

You’re Getting Older

As you get older and closer to retirement, you may want to cash out of your investments and properties. If you have assets that have steadily appreciated in value, selling them will give you a nice chunk of cash to fund your remaining years. In this case, high net worth allows you to enjoy life without the headaches of managing your properties.

The Bottom Line: A Diverse Portfolio Is Best

Your portfolio should include a good mix of income-generating assets and those that lead to long-term growth. Start by choosing assets that produce an income. Then, focus on building your net worth.

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Real Estate vs Stocks

The primary goals of a passive investor are to build wealth while also drawing regular income from investments. Ideally, the investor will not have to deal with the routine stressors associated with hands-on investing activities and can simply enjoy a steady stream of returns. Two of the more popular options available for passive investing are income-producing properties and divided-paying stocks.

 

The path that you choose to take to achieve your passive income and wealth building goals should be selected after careful review of the facts. While some investors may lean heavily toward one of these opportunities, others may find a happy medium between both of them. What should you know as you make upcoming investment decisions strategically?

 

The Historical Return on Investment

 

When you analyze the historical return of these two investment types, you will immediately notice that the annualized return on stocks is between 9 to 10 percent. On the other hand, the appreciation on a traditional single-family home across the decades is close to 5 percent. However, this does not tell the whole story.

 

Keep in mind that asset value appreciation is only one aspect of the return. Everything from cash flow from investments to tax advantages and risk must be taken into consideration as well. The return that you will realize from your investing activities will depend on the specific investments that you select as well as how you manage those investments, your taxation situation and other factors.

 

The Ability to Produce Steady Income

 

Because passive investing is your focus, the ability for an investment to produce steady income is crucial. For stock investments, income is derived from dividends. The average stock dividend is approximately 3 percent today, but there is tremendous variation in this. Generally, stocks that pay a higher dividend are riskier.

 

Furthermore, those high-yield stocks may not have a history of maintaining that high dividend amount. The stocks that have maintained their dividend rate for many years often have a yield at or below the average. Given a yield of 3 percent, you would need to invest $100,000 in stocks just to draw $3,000 per year in dividends. Keep in mind that most dividends are paid out either quarterly or annually.

 

Rental properties, on the other hand, produce regular income through the rents paid by tenants. Tenants are contractually obligated by a lease to make regular payments, and this provides a level of certainty in the monthly income that you would receive from your investment. While some tenants will breach that contract, there are legal options to collect the money if that happens.

 

In addition, if you or your property manager maintain high standards during the screening process, the risk of a tenant not paying rent is minimized. Because businesses always have the right to adjust their dividend, income security is generally higher with rental properties.

 

Which investment type has the higher yield? You have significant control over your return with rental properties. Your net income from this type of investment will be based on the rental rate that you charge, the property’s operating expenses and the mortgage payment. Careful research prior to your property selection as well as adjustments to loan terms can establish a relatively steady return that you have strategically set up.

 

The Opportunity to Invest with Debt

 

The ability to leverage the purchase of a rental property is truly advantageous. You can certainly take out a loan against another asset to purchase more stocks, but you are placing that asset at risk and increasing your expenses with a new loan payment in the process. This is not the case when you buy a rental property with a loan.

 

Your new mortgage is secured by the rental property rather than by one of your other assets, and the mortgage payments are covered by the rental income. The tenants are essentially paying off the mortgage debt through their monthly rent. In the process, they are building up the value of your investment portfolio.

 

In line with the $100,000 investment example described previously, you could use that as a down payment on a $600,000 to $750,000 property depending on the loan terms that you qualify for. Property value appreciation will be based on the full value of the asset rather than on the amount invested out of your pocket. In addition, your rental income on a property this size could be substantially higher than the $3,000 annual return from a comparable stock investment.

 

The Tax Advantages

 

A notable benefit of stocks is that they can be purchased in a tax-advantaged retirement account. While this is important for wealth building, however, retirement accounts are not suitable for building a passive stream of regular income. This is because penalty-free distributions are dependent on age and other factors.

 

On the other hand, the tax advantages for real estate investments are considerable. Consider that the mortgage interest and all property-related expenses can be written off. These expenses offset the taxable income that the property produces. In some cases, investors can turn a sizable profit with regular monthly income, and the deductions result in only a modest amount of this income being taxed. Property depreciation is another major deduction that further offsets taxable income from your investment.

 

Tax benefits related to your properties continue when you sell the investments. Through a 1031 exchange, you can avoid capital gains tax altogether if you reinvest in a similar type of property. Overall, you can save a substantial amount of money through all of the allowed deductions on your investment property’s income.

 

The Need for Regular Management or Oversight

 

One of the more notable reasons why the typical passive investor may forego the incredible benefits associated with rental properties is related to management. The amount of time and stress that may be allocated to dealing with tenant issues, property upkeep, vacancies and more can be considerable. None of these time drains are present with stock investments.

 

However, stocks do require regular oversight. The market moves thr