JF2508: 3 Successful REI Strategies While Working Full-Time | Actively Passive Investing Show
In this episode, Theo Hicks and Travis Watts talk about the key to being successful in real estate investing while also working a full-time job. They talk in detail about each investment strategy, analyzing how it fits into your lifestyle, and what they recommend investing in first.
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Theo Hicks: Hi, Best Ever listeners, welcome to another episode of The Actively Passive Investing Show. As always, I’m Theo Hicks, joined by Travis Watts.
Travis, how is it going?
Travis Watts: Hey, Theo. Doing well, man.
Theo Hicks: So today we are going to talk about how to succeed as a real estate investor while working a full-time job. So you’ve got some sort of W-2 or self-employed non-real estate job, but you want to invest in real estate at the exact same time. What are some of your options? And then how can you be successful at it while it’s only getting a portion of your time? So that’s going to be the main topic of today.
So as always, Travis is going to go into a little bit more detail on why we’re covering this topic today.
Travis Watts: Sure. Theo, and everybody listening, I think the key is here, “how to be successful investing in real estate while working part-time.” I would argue that I was not successful through portions of my active journey trying to hold down a very busy job. So these are hopefully some helpful keys and tips and hints and strategies that may help you, that I sure wish I had known about back then.
The fact is that not everybody’s cut out to be a full-time landlord or a full-time property manager or a general partner in a real estate syndication. I’m a big advocate, as you know, of people focusing on their highest and best-earning potential. So for the majority, that’s not going to be the real estate profession. That makes up a very, very small portion of the overall job market. We’re talking about the investing side, excluding realtors, brokers, etc.
So I certainly started out part-time as a real estate investor, as I just mentioned, holding down 100 hour week W-2 job. And again, this episode is just to give you some possibilities and strategies to think about. So Theo, if you want to kick us off just talking about either single-family, getting started that way as many people do, or I guess we could categorize it as active investing – if you just want to kick us off there, and then I’ll take over on some of the passive strategies.
Theo Hicks: Exactly. So as Travis said, you’ve really got two options to invest in real estate; you’ve got the active side and then you’ve got the passive side. So I’ll define active as you’re the one doing everything. You’re not necessarily doing the day-to-day duties, but you’re responsible for doing those or you’re responsible for finding someone to do it for you. So you’re buying these deals and then you’re either being a landlord yourself, or you’re hiring someone to be a landlord for you. Now, this is how I got started; I started by house-hacking, like how Travis started.
I bought a duplex, and the intention was to live in one side and then rent out the other side. Now, this is how a lot of people get started in real estate – not everyone, not all, but a lot of people when they first hear about real estate, this is kind of what they do. They’ll start small, they’ll house-hack, maybe they’ll buy a single-family home or they’ll start wholesaling… But you don’t have to start this way; you don’t have to start with a single-family home or wholesaling. You can start with smaller multi-families, for example, like I did with the duplex. And there are definitely benefits to starting this way, one of them probably being that it doesn’t necessarily require as much money to get started as it would for passive investing. Again, with REITs it’s a different story, but we’re talking about syndications – you don’t need as much money or as high of a net worth to buy a single-family home or a duplex, for example. We’re talking about residential properties, one unit to four units, and if you live there, you can get it for very little money down. Or you can be very creative and do some sort of seller financing where you put very little or no money down. So there’s a lot more flexibility in the terms of how you actually buy the property… Whereas the terms that are more set in stone for passive investing; you can’t negotiate with the REIT or negotiate with a syndicator some creative way where you put no money in the deal but still have a stake.
Obviously, also when you are actively investing since you are doing everything, then you have complete control of that deal. And with that complete control obviously comes extra responsibilities on your end, and you need to know what you’re doing. But with that control comes the ability to direct the project, but also, you are able to reap all the benefits. So if you double the price of the property, then you get all that money; you get to pay fees to your property management company or whoever else you’re working with, but in a sense, 100% of the proceeds go to you, whereas the profit splits are different for these passive type of deals.
I think one of the biggest benefits though of starting this way is the education piece that you get. Even if you don’t plan on doing your own active investing business, like maybe your plan is to eventually get to passive investing, which Travis talked about, what you learn by going through a transaction, even if it’s just a single-family home – you can’t get that knowledge just by reading a book or listening to a podcast.
Once you actually go through it, and you experience it and you see what happens and what it actually feels like to close on a deal, to manage the deal, to collect the rent, to deal with maintenance issues, things like that – it gives you a much better understanding of what that company is doing that you’re investing with. Obviously, that’s probably one of the main reasons why you would want to actively invest first, even if it was just one little property.
And then ultimately, if you’re going to continue to actively invest and not transition to passive investing, then your goal to be successful, especially when you’re working a full-time job – because you’re not going to be able to scale to 20 different units if you’re the landlord and you’re doing everything, so the goal would be to transition it to a turnkey system, where you hire people to essentially do every single thing. And then maybe on that first deal, you’re going to be working hard, working long nights, working weekends, having that phone by just in case someone calls… Maybe you’ll find a maintenance guy right away, that could be the person who deals with those things that happen while you’re at work, but eventually, once you understand how the process works, you’re going to find out where you’re spending most of your time and then hire someone to do that for you.
Since you have a full-time job, you’re probably not going to have enough money generated from your properties to cover that person’s salary until you scale to a certain size, and so it’s kind of finding that fine line of when to hire that person. But finding a property management company, finding a maintenance person where hopefully they do that for you, will reduce your time investment so much so that it is almost like it’s passive investing, the time commitment that you have.
So upfront, it’s going to be a lot of work a lot of time, which again, might not be something you do with your current job. If you’re not flexible with your job, you have to work 8-6 and you have no access to your personal cell phone, you’re going to have a hard time doing that, getting to the point where you can even get that team in place… So that might not be an option for you. But if you have one of these flexible full-time jobs where you’re in sales and you’re out on the road or you work from home and the ability to have your phone, then this could work really well for you.
Of course again, it really all depends on how much time you have, what your job is, and then what your end goal is actually going to be. Active investing is not good for everyone, neither is passive investing; it just kind of depends on your situation.
Theo Hicks: That’s all I have to say for active investing. Travis, any thoughts on doing this? Or going straight to the flip side, which is that passive approach?
Travis Watts: Yes, a couple things real quick; you brought up some excellent points, one of which I couldn’t agree more, which is, if I look back on all the six years of doing active investing, that was the biggest benefit, the biggest takeaway, the thing I’m most grateful for, is that foundation, understanding the business of real estate, at least from a small level. And then just finding myself through that process, realizing this really isn’t for me, this really isn’t something that I enjoy. And sometimes it’s hard to know that until you’re there, you’re in the trenches, and things are going bad, and then it really calls on your strengths. And if your strengths aren’t there, like mine weren’t, it caused me to pivot and go a passive direction, which is what I want to talk about here.
And the other thing is, you mentioned you and I started with house-hacking, which is an active strategy, right? So many people start with active real estate, and there’s nothing wrong with that, of course, but what I think it is – there’s a big lack of information out there on how to successfully passively invest in real estate, or just how to passively invest in real estate in general. All these courses and seminars and books – most of them are about active strategies; we see it all the time on TV, the house flippers and the whole thing. These are all active strategies. So I think it just gets painted in our mind, and I would argue you really don’t need necessarily a formal training system to get out there and house hack or to go rent out an extra house in your own city that you decided to buy at a discount and then put a tenant in there. It’s pretty simple stuff.
But to take it a notch above or two notches above, which is what we’re going to talk about now, realize that, hey, if you’re busy, and to the point and topic of this section here, this episode, if you’re just looking to place capital in real estate, get some depreciation, some leverage, some tax benefits, some cash flow, you can do that without having to be active or be a house flipper or be a wholesaler or have roommates. If you’re older or have a family, I understand why you may not want to do that.
So anyway, with that intro, let me define passive investing this way. I like this definition – “Not having an active participation in the day to day decisions or management of the business plan.” That’s how I like to define passive investing.
So I’ll give you an example. Theo, you brought up turnkey investing, which is where you’re going to buy an asset that already has a tenant in it, they already have a lease made up, hopefully the property has no real deferred maintenance you need to worry about. It’s a turnkey. It’s a transaction, you go to closing, now you’re the owner of this home and everything is set up for you, at least for now. But you still have to make decisions – which property manager to use if you decide to change that at any time, what repairs you want to do… Do you fix something? Do you replace something? What upgrades to make to the property? Should you paint the outside of the house? Should you paint the inside? Should you replace the carpet? There’s so many things that are still active on your plate. And things like, do you sell the property or refinance it? And when do you do that? And which lender do you use? This is what makes all of this active, even though it seems, on the surface, like that would be passive income, right? Because it’s turnkey. But there’s still a lot that you’re involved with.
So true passive investing takes all of that off your plate, okay? So someone else is calling the shots is the main takeaway here. Hopefully someone very knowledgeable and with experience, but that’s how a syndication works, is that you would have a general partnership and they’re actually managing the business plan, they’re deciding on refinances and sales, they decide who the property manager is, they send out distributions, they work with a CPA and get your tax forms done for you… All of that is off your plate. And that’s what I fell in love with years ago. So after doing active for six years, as I mentioned, I discovered this hands-off approach, so to speak. So that’s kind of real estate syndications in a nutshell. I know we talk about that a lot on the show.
Also, one thing to point out – they’re less volatile than stocks, these private placements, because it’s not a publicly-traded market where tweets are going around and people are getting on the news channels saying, “The sky is falling” and then the stock market’s up and down, and depending on what the Fed says your real estate’s up 5% or down 10%, things like this. So – much more steady and consistent compared to rentals that I had even, single-family homes, on a side note. And I want to explain that a little bit. I’ll give you an example.
If I have one single-family rental, and I put – whatever; 50 grand into that as a down payment, just to make up some numbers, and that tenant moves out, I not only lose my cash flow, which maybe I’m living on or maybe I’m relying on for some purpose, I actually go negative immediately upon that tenant either not paying rent or moving out, because I still have to worry about expenses – HOAs and maintenance and insurance and property tax. I’m still making payments, regardless if there’s a tenant in there or regardless if they’re paying or not. And that’s something I really didn’t like about my buy-and-hold single-family properties that I used to have.
So now if we compare that to putting, say $50,000, in a real estate syndication, let’s say I’m a partial owner, I own a percentage of a limited partnership that owns a 400-unit apartment building. Well, a lot of the break-even occupancies are, let’s just say, around 70%; could be lower, could be slightly higher, but I’m just going to use that as a round number. So 120 residents or tenants in that property could either not pay rent or be moved out and they could be vacant units, and I’m at a true break-even. So yes, it’s true, I wouldn’t have any cash flow, but I also wouldn’t have out of pocket expenses. And that’s a huge, huge thing. That, to me, was one of those light bulb moments in my real estate investing journey, is just to think about that and realize how much more of a safety net you really have because of the scale of investing in larger projects, that I never knew that I could invest in. So I just think a lot of people don’t know they can invest this way.
And I’ll have you covered REITs here in a minute, which is another great option for a lot of people, but I used to think, if you’d asked me when I first got started, who owns apartment communities? I would say, “Billionaires and Wall Street hedge funds”, or something. I had no clue that what I would call “Main Street retail accredited investors” could be investing in this. And what I mean by that is medical professionals, or lawyers, or proathletes, CEOs, business owner, VPs of companies; high income, high net worth individuals, basically. But not billionaires, just your average millionaire basically, could be investing in this kind of stuff. And sometimes even without being a millionaire, right? As we all know, you could be a sophisticated investor, non-accredited, depending on the kind of offering you may be able to participate anyway, without those kinds of thresholds. So that’s for another topic. But these are people that are active in leveraging their highest and best earning potential, but they’re passive in their investing approach. That’s the simplest way to put that. So that’s been my journey and some of those light bulb moments. Any thoughts on that, Theo?
Theo Hicks: Yes, just at the end of the day, the topic is how to succeed as a real estate investor while working full-time. And Travis just kind of went into the philosophy behind passively investing in syndications, for example, and he kind of gave us examples of the types of people who do this. And if you’re a doctor and you’re working 60, 70, maybe 100 hours per week if you’re just starting out, you just aren’t going to have the time or just the mental bandwidth to do an active business on the side to kind of deal with that, even though you could potentially get it to where it’s operating on its own. So if you truly want to succeed while you’re working full-time, in my opinion, the ideal way would be to passively invest; it doesn’t mean you could never do active investing, you can go from passive to active, and I’ve talked about this on Syndication School before where I said, “Passively investing is a really good way to prepare yourself for actively investing”, because again, you’re not in control, you’re not actually doing it. But just the education you get from being involved in investing, from getting those updates, from all the research you’re doing on your end, even though it’s not as much as you but when you’re active, will set you up for success as an active investor. But if your goal is to become an active investor and you’re working a full-time job, I would highly recommend passively investing first until you have enough capital coming in from that to either come close to covering your expenses, or at least you have the confidence from the education you have to leave that and then go ahead and start an active business. Because as Travis mentioned, if you have a family, you’re not going to house hack; if you’re working 60 hours a week, you might not have the ability to invest all this time into doing these creative financing methods. So you can do that eventually when you have that time, but for now, a really good approach would be to passively invest in these deals, especially if you’re one of these main street accredited investor, you already have the money to do so, to do those deals until you can cover some of your expenses.
Okay, this is just my opinion, and this is [unintelligible [00:19:41].09] just been a doctor and left their jobs immediately and actively invested and have been perfectly fine. I’m just saying that in general, that’s what makes the most sense, to me at least.
Travis Watts: One thing I just want to answer right there before you jump into REITs is if you’re more analytical-minded, think about it this way – what are you willing to work for per hour? Because I calculated a lot of the rentals that I used to self manage or some of the flips that I did, and a lot of the time I was actually working for 20-25 bucks an hour. For so many people, that’s not worth it. And at the time – I was in my early 20s – I was okay with it back then. But then in hindsight, looking back, I thought, “No, no doctor wants to do that.” You go to work and you go make 200 bucks an hour, and then you get off work and go work for 20 bucks an hour? It just doesn’t make sense, ROI. So you might think of it that way. Just calculate how much you earn in a year actively, divide it up by how many hours you work, etc. So just a quick thought, side note.
Theo Hicks: I totally agree. That dollar per hour when you start out, it’s going to be pretty low. And the goal is eventually to transition yourself into doing those really high dollar per hour activities, whether you’re passive investing or active investing.
To the third thing that you can invest in to be a real estate investor while working full-time would be the REITs, so Real Estate Investment Trusts. We talked about this on the show before and we’ve got some information on the website comparing REITs to syndications, for example… But these can be publicly-traded or privately traded. And there’s a couple of pros and cons of this compared to other vehicles.
First, as I mentioned earlier, really low barrier of entry. So for actively investing, there could potentially be a low barrier of entry, whereas for these accredited investors syndication deals you’re going to need $25,000, $50,000, maybe $100,000, maybe even more depending on what their minimum is. Whereas for these REITs, you can get in there really low; you can invest in a REIT for like $10 just to get started. You’re not going to achieve financial freedom by investing only $10, but it’s still something you can do while you’re working a full-time job; you don’t need to have tens of thousands of dollars to invest.
Something else that’s interesting about REITs is that they’re required to distribute 90% of their income to investors, which means that they’re not keeping a bunch of money to reinvest into these deals or reinvest into something else; they have to distribute it to their investors.
You’re going to get higher cash flow from these types of investments if we’re comparing them to stocks, for example. You’re most likely to get higher returns on the syndication, and then depending on what you’re doing for the active, you could or couldn’t, but you’re going to get higher returns compared to some of the stocks you’d invest in, because REITs are similar to stocks. They are a passive investment, so you’re not responsible for managing anything. It’s like investing in a trust that owns a bunch of real estate. And so you’re not going to find the properties or manage them, you just invest in the REIT.
And then one of the biggest strengths that the REITs would have over investing in an individual syndication deal and then maybe a fund depending on how many deals are in the fund, is the diversification. So not only is there a diversification within the individual REIT – it might own tens of thousands of units, the company might own tens of thousands of units or maybe more from probably a multifamily perspective, but you can also invest in a multifamily REIT, a Self Storage REIT, and a mobile home park REIT and a hotels REIT, and they’re going to hold a bunch of properties within that. So you can invest in 10,000 multifamily units in a sense, and then a bunch of self-storage facilities, and then 20,000 mobile home park units, and then 20 hotels, as opposed to buying those deals individually, when you’re looking at syndications. So you’re going to get all the different diversification. Obviously, with the diversification comes a lot less risk, but at the same time, because of less risk, the returns are going to be a little bit lower.
Some of the cons is that it’s subject to the volatility of the stock market. So Travis has talking about this when COVID happened, the REITs prices dropped a bunch. So I guess if you were investing in that time, it was good. But if you had invested a REIT before that and then it hit, the value of your REIT would have gone down a bunch.
And in turn, you might have your dividends cut or reduced or stopped, halted during a downturn or recession. Of course, it’s going to happen for syndications; they might change the frequency of the distributions, they might reduce the distributions, they might pause the distributions… [unintelligible [00:26:04].16] since you’re control, you might not get any money at all… Because active investing is just very dependent on what you’re doing and how good you are at it.
And then you might overpay for the REITs, because the portfolio is trading above the book value. So you might overpay, which again, is possible for the other ones as well. You can overpay for an active investing deal, for example. Multifamily syndication probably not as much, especially if you’re investing with the right sponsor.
So for REITs, kind of the way I look at it is, it can potentially be less risky than syndications. But you’re also most likely going to get a lower return. So again, just my opinion. But if you are working full-time and you want to maximize those returns, you need to spend the time researching the right sponsor. Whether you’re investing in multifamily, or self storage or whatever, find that sponsor that you trust with your money, because you’re going to be able to get a higher return than investing with one of these massive REIT companies, from a cash flow perspective. And then if you’re also into the value-add deals, then the equity upside as well. So those are my thoughts on REITs.
Travis Watts: Yes, great points. And same concept too, when you mentioned looking for a competent team with a track record who can actually manage this business plan. You’ll listen to stock people like Warren Buffett, Charlie Munger – they’re always talking about we look for great management. The company obviously is important, what they’re selling, what they’re doing, but great people make great companies and they make them successful. So same principles there.
But at the end of the day, there’s a lot of ways you can make money in real estate, as we’ve talked about many times over. You’ve mentioned some great pros and cons to all of this. And it comes down to your interest, it comes down to your expertise, it comes down to your goals and what works best for you.
For me, I’ve found that a passive investing approach is best for freeing up your time, to pursue things that you’d rather be doing actively with your available time. So that’s the beauty of passive investing. But what if you enjoy working in the business of real estate? Well, then maybe active investing is right for you. Or maybe it’s a hybrid of the two; maybe you’re doing some active stuff and you say, “This is great, I love it, except I don’t want to be too busy. I really don’t want to be working 100 hours a week, I just want to work 40 or 50 on this.” Well, that’s fine. But to scale up your cash flow, you might consider some passive investments to supplement what you’re doing actively. So everybody’s different as I always say, “You do you.” That’s my final thought.
Theo Hicks: I couldn’t agree more. So as Travis mentioned, it could potentially come down to your dollar per hour. But if you really want to do it, then that might not matter to you.
Travis Watts: Yeah.
Theo Hicks: You might actually enjoy being in the nitty-gritty and doing the business; you enjoy creating and growing businesses. You might be a doctor who is making 100 bucks an hour at work, but you’re totally content with making $15 an hour doing real estate on the side, because you really like it; or leaving being a doctor and doing real estate full-time and making much less money. So it just kind of depends. There’s the money aspect of it, but it’s also the “What do you want to do” aspect of it too, right? That’s why I like when Travis calls it time freedom as opposed to financial freedom. How do you want to spend your time, and it might not be for financial reasons. So it kind of just depends on what you want to do. So we just wanted to present the case for these two different options, the active side and the passive side. You can succeed at both in general, or by working a full-time job, but when you’re kind of adding in the full-time job, this is a different element. Different things which you need to take into account in order to determine how to actually succeed while working full-time, and most likely that might involve more passive investing at first, and then ultimately, if you really enjoy working in the business, you can work towards that active investing side; or if you’re younger and you have a lot of free time after work, then of course you could start actively investing on the side. So it kind of depends on your life situation and what you want to do.
So if you don’t have anything else to add, Travis, Best Ever Listeners, thank you for tuning in. If you have a question that you’d like us to answer on this show, or we also do a 60-second question segment on YouTube, you can email me email@example.com, and we will add that to the queue.
So again, thank you for tuning in, have a best ever day and we’ll talk to you tomorrow.
Travis Watts: Thanks, Theo. Thanks, everybody.
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