Eat, Sleep, Invest, Repeat: Let’s Talk About the Benefits of Passive Investing…
“No matter how hard you work, your money can work harder.” -Aya Laraya
At least once in your adult life, I am sure you all have heard someone say, “Don’t work for money, make money work for you,” (or some variation of that). For those who have and even more for those who haven’t, we would like to discuss this topic in our post today. Passive real estate investing.
What does that have to do with “making money work for me?” Let’s start with the basics.
What is Passive Investing?
Passive investing refers to having an income stream that seemingly comes to you automatically. First, you make an upfront investment with your cash. Then you receive a stake (in the form of ownership) in that investment, from which you are paid dividends or other types of regular income distributions.
This is passive investing because you are not directly managing the investment. It’s exactly the type of opportunity we offer with our investments at CF Capital.
Passive Real Estate Investing
Taking into account the broader passive investing explanation, passive real estate investing happens when you invest your cash into a real estate venture; one that you won’t be managing directly. Again, it’s precisely what we do at CF Capital. If you want all the benefits of investing directly in real estate without all the hassle or the tremendous effort in coalescing the team to do so, we invite you to consider investing alongside our team.
There are several ways you can passively invest in real estate: syndications (see our posts on syndications and accredited investors), equity funds or ETF’s focusing on publicly-traded companies whose primary business is real estate, direct investments in individual publicly-traded real estate business’ stock, REITs or real estate investment trusts (both private and public), fixed income securities, crowdfunding, private equity real estate funds, and derivatives with exposure to the real estate market (e.g. swaps on residential mortgage-backed securities or RMBS). Each of these requires a specific level of “knowledge and sophistication,” so not all of these are available to everyone.
You can passively invest in real estate with different intentions; all of which have to do with your individual goals. For instance, you can invest for passive income. Typically, this income is paid out to you as regular dividends (in an equity investment) or as fixed income translated from interest payments in a debt-related investment.
Also, you can passively invest in real estate for growth purposes. This just means you may or may not care about passive income, and the main focus is the appreciation on the property (or properties) within the investment, followed by the profit when they are resold (i.e. the investment is liquidated). Everyone’s goals are unique, and each unique goal matches a corresponding strategy. For us to be a good fit to partner together, we must understand your investing goals and intentions before making an “offer” to invest together.
Now that we have reviewed some of the basics, let’s review just how great passive real estate investing really is.
The Benefits of Passive Real Estate Investing
If you are looking for a passive income stream, real estate can be one of the best passive types of investment you can access. To keep things simple, let’s just say that it is important to understand that passive real estate investing can be an excellent option for adding to your residual income.
Residual income refers to the income that remains for an individual or a business after all debts and expenses have been paid. In layman’s terms, cash flow.
To determine if the benefits appeal to you, here are five specific examples:
Keep More Through Tax-Deferred Structures - In an equity-structured investment, passive real estate allows tax-deferred cash returns that can let you keep more of your earnings. This is one reason we stated earlier that real estate can be a more powerful passive investment than other forms of passive investing. Unlike interest payments or stock dividends, which can be taxed at your highest income bracket, the pass-through potential benefit of real estate ownership allows your share of the depreciation expense to offset your income.
Keep More Time with Less Pain - When you are a passive real estate investor, you do not deal directly with the hassles of day-to-day-management. Leaky faucet? You’re not getting a call at 2am. Broken gate? It’s not your responsibility to call the handyman.
Keep Your Sanity: Less Lender Interaction - Working with lenders to obtain financing is difficult. Since the economy went south, banks have started to require even more documentation to get loans, and the process is both time-consuming and mind numbing. When you are a passive real estate investor, your investment is tied to a professional private real estate investment company that already has relationships with select institutions. They navigate the lender financing waters on your behalf so you don’t have to.
Keep Your Time and Let Experienced Experts Take Care of it - You always have the option in any investment to go it alone, whether that means investing in stocks through an online brokerage or buying your own investment property. But there is something to be said for leveraging the intelligence of the people around you. Some real estate investors devote their lives to learning the in’s and out’s of the market, and passive real estate investing gives you the chance to benefit from their deep education.
Keep Your Bed Time: “Make Money While You Sleep” - Passive real estate investing can be quick. You do your due diligence, sign legal paperwork online and transfer funds almost immediately. And as soon as your investment is processed, you become an equity stakeholder in that real estate venture and can start possibly realizing passive income and/or a portion of that venture’s growth. In other words, you have the potential to make money while you sleep. Primarily when investing in properties with existing tenants where there is existing cash-flow, your money is working for you 24/7.
But, What About the Risks?
Now that we talked to you about the benefits, how could we leave out the risks? All investments come with inherent risks, and passively investing in real estate is no different. To simplify this topic, here is the main point:
There is a Chance that You Lose Some or All of Your Money - We apologize if that sounds harsh, but the reality is that nothing in life is guaranteed, not even real estate investments. In the case of real estate stock, REIT, syndication, derivative, or fund investment, you can lose money when the value of the investment goes down. Sometimes it may be due to internal issues with the real estate management team. Sometimes it might have to do with the underlying asset (e.g. the company whose shares you’ve purchased, or the real estate portfolio of the REIT or fund), or due to a real estate market downturn. In any case, the value of your investment could decrease. From our experience and based on the data that is publicly-available, losing all of your money is not extremely common, but it has happened.
With that said, we would like to stress how important it is for you to do your own research or consult other experts/advisors ahead of time. No real estate investment can promise you a return or protection of your investment (i.e. the principal).
Your own due diligence can never hurt, it will only help. In doing so, you may even find “safer” or even more lucrative investment opportunities out there in the marketplace.
Final Thoughts
Regardless of whether or not you choose to passively invest, even if it is not in real estate (with our team or with another operator who may be a better fit for you), we want to be here for you all as a guide and as a potential solution. Our doors are always open and we welcome any and all discussions related to this topic. Seriously, we love it… almost too much!Ultimately, our team provides asset management solutions and a team of experts that give people like you access to high quality passive investing real estate opportunities. We’re positioned to help investors maximize returns, and mitigate risk all while generating residual, and predictable cash flow. If that sounds like something you want more of, feel comfortable reaching out.
Please feel free to contact us through our inquiry page or reach out to us directly via email. We look forward to hearing from you!
“Rich dad said that financial intelligence determines not so much how much money you make, but how much money you keep, how hard that money works for you, and how many generations you can keep it.” ― Robert T. Kiyosaki
Recommended & Related Elevate Podcasts
(PRO TIP: Scroll down on our Elevate Podcast page, hosted on the CF Capital website to find the section titled, “Search Episode Transcripts.” Type in the keyword “passive” to see all podcasts that touch on passive investing)
Recommended Books
Bringing Value, Solving Problems, and Leaving a Legacy by Tom Ziglar
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