Investing for (Mostly) Passive Income

[Laura R.]

I'm looking for some guidance or suggestions on how to invest some different chunks of money into some sort of passive-ish real estate investment. The main goal is to get more diversification, both in terms of asset class and geography and get a decent return that isn't crazy risky.

I would like to ultimately invest $100k from a self-directed IRA and $100k from a savings account.

I already have multiple businesses so I don't have much time right now to do much hands-on property management or flips. I do have experience doing 2 full renovations and 1 new build (personal properties) in the past. Also some residential real estate agent experience.  I am not big into driving all over town so if I do take on something local it needs to be close by. I like to travel and have thought about purchasing real estate overseas, but I would rather go somewhere new each year and not get locked down to specific locations. The passive cash flow could help fund that travel. 

Here are the things I have considered: 

- Cash purchase a turnkey-ish SFR rental using the self-directed IRA and plan to buy and hold. Would need to use a PM company due to arms length rules. Looking at Cleveland market.

- Purchase REIT funds, Hard Money Lending fund, or invest in some sort of crowdfunding real estate thing. Could use retirement or savings funds for this.

- Find a local commercial project or apartment building where I can become an investor partner and get some % of the rents each month. Would need to use savings funds for this. Not sure how to go about finding something like this. 

- Purchase a feature home near where I live now in Austin and manage it as an Airbnb rental. This would require $100k down payment from savings account. Need to learn more about the time commitment to manage. 

- Purchase a SFR home in my neighborhood to rent out and manage it myself. Would only require $50k or so down payment from savings, but not really a big fan of this due to lack of geographical diversification. Plus LTRs have crap cashflow rates in our area.

I'm also concerned about where we are in the economic cycle and that we may be in for a downturn soon. Would love to hear if anyone has any other suggestions or thoughts, please? Thank you!

[James Wise]

Originally posted by @Laura R.:

I'm looking for some guidance or suggestions on how to invest some different chunks of money into some sort of passive-ish real estate investment. The main goal is to get more diversification, both in terms of asset class and geography and get a decent return that isn't crazy risky.

I would like to ultimately invest $100k from a self-directed IRA and $100k from a savings account.

I already have multiple businesses so I don't have much time right now to do much hands-on property management or flips. I do have experience doing 2 full renovations and 1 new build (personal properties) in the past. Also some residential real estate agent experience.  I am not big into driving all over town so if I do take on something local it needs to be close by. I like to travel and have thought about purchasing real estate overseas, but I would rather go somewhere new each year and not get locked down to specific locations. The passive cash flow could help fund that travel. 

Here are the things I have considered: 

- Cash purchase a turnkey-ish SFR rental using the self-directed IRA and plan to buy and hold. Would need to use a PM company due to arms length rules. Looking at Cleveland market.

- Purchase REIT funds, Hard Money Lending fund, or invest in some sort of crowdfunding real estate thing. Could use retirement or savings funds for this.

- Find a local commercial project or apartment building where I can become an investor partner and get some % of the rents each month. Would need to use savings funds for this. Not sure how to go about finding something like this. 

- Purchase a feature home near where I live now in Austin and manage it as an Airbnb rental. This would require $100k down payment from savings account. Need to learn more about the time commitment to manage. 

- Purchase a SFR home in my neighborhood to rent out and manage it myself. Would only require $50k or so down payment from savings, but not really a big fan of this due to lack of geographical diversification. Plus LTRs have crap cashflow rates in our area.

I'm also concerned about where we are in the economic cycle and that we may be in for a downturn soon. Would love to hear if anyone has any other suggestions or thoughts, please? Thank you!

 Welcome aboard Laura. I see that you are looking into Cleveland. You'll wanna check out The Ultimate Guide to Grading Cleveland Neighborhoods for info on Cleveland. When going into a new market you can make or loose a ton of money if you buy in the wrong hood. lol pun intended.

[Ian Ippolito]

@Lauren Hogan,

I invest both passively via syndications/crowdfunding and directly in real estate properties that I own myself (including SFRs).

If you are able to execute successfully, you will make more money by being an active investor then passive. That's because of the sweat equity you put into it.

But as you mentioned, this would require a time commitment and it sounds like something that might be difficult for you. The other thing is that since you are a newbie, there is no guarantee that you execute successfully. You could make some mistakes that cause loss of principal for instance in any of numerous areas such as market selection, property selection, purchasing, rehab, etc.. So if you want to go that route you will want to make sure you are okay with assuming those risks as well as taking the time to educate yourself and then devote to this strategy. Finally, since your local market sounds unsuitable, you will have additional risk doing it out of your area than you would if you could keep it local. So these are factors for you to think about.

On the other hand, you mentioned investing passively. I also invest in hard money loans, although not individual notes because I'm conservative and I would much rather be in a diversified portfolio. Plus, if and when a note goes into default, I personally don't want the time and headache of having to take it through foreclosure, rehab and sale. First position debt projected returns can range currently anywhere from 6% to low double digits, depending on how much risk you're willing to take.

Crowdfunding is basically the same as syndications, but online. So you can find hard money loans there but also other types of debt and also other types of equity. Again there is a wide range of projected returns from as low as 4-5% to double digits. Also add that while there is zero effort involved in this type of investing once you pull the trigger, there is actually quite a bit of education that you should do beforehand to make sure you are choosing wisely. If you're interested in how I do this, let me know and I talk about it further.

[Laura R.]

@James Wise , thank you, I have looked at your neighborhood guide and been watching some of your videos. Very helpful! Hoping to come to Cleveland this summer to check it out.

@Ian Ippolito I would love to learn more about the passive investment options you mentioned. I totally agree that the work is upfront in picking the right investment and I need to educate myself on the choices first. I'm just not sure where to start or what resources are out there. 

[Tom Ott]

Originally posted by @Laura R.:

I'm looking for some guidance or suggestions on how to invest some different chunks of money into some sort of passive-ish real estate investment. The main goal is to get more diversification, both in terms of asset class and geography and get a decent return that isn't crazy risky.

I would like to ultimately invest $100k from a self-directed IRA and $100k from a savings account.

I already have multiple businesses so I don't have much time right now to do much hands-on property management or flips. I do have experience doing 2 full renovations and 1 new build (personal properties) in the past. Also some residential real estate agent experience.  I am not big into driving all over town so if I do take on something local it needs to be close by. I like to travel and have thought about purchasing real estate overseas, but I would rather go somewhere new each year and not get locked down to specific locations. The passive cash flow could help fund that travel. 

Here are the things I have considered: 

- Cash purchase a turnkey-ish SFR rental using the self-directed IRA and plan to buy and hold. Would need to use a PM company due to arms length rules. Looking at Cleveland market.

- Purchase REIT funds, Hard Money Lending fund, or invest in some sort of crowdfunding real estate thing. Could use retirement or savings funds for this.

- Find a local commercial project or apartment building where I can become an investor partner and get some % of the rents each month. Would need to use savings funds for this. Not sure how to go about finding something like this. 

- Purchase a feature home near where I live now in Austin and manage it as an Airbnb rental. This would require $100k down payment from savings account. Need to learn more about the time commitment to manage. 

- Purchase a SFR home in my neighborhood to rent out and manage it myself. Would only require $50k or so down payment from savings, but not really a big fan of this due to lack of geographical diversification. Plus LTRs have crap cashflow rates in our area.

I'm also concerned about where we are in the economic cycle and that we may be in for a downturn soon. Would love to hear if anyone has any other suggestions or thoughts, please? Thank you!

 Hello and welcome! Best of luck to you! 

[James Wise]

Originally posted by @Laura R.:

@James Wise , thank you, I have looked at your neighborhood guide and been watching some of your videos. Very helpful! Hoping to come to Cleveland this summer to check it out.

@Ian Ippolito I would love to learn more about the passive investment options you mentioned. I totally agree that the work is upfront in picking the right investment and I need to educate myself on the choices first. I'm just not sure where to start or what resources are out there. 

 Glad you are digging the content. Wishing you luck on your investing!

[Ian Ippolito]

Originally posted by @Laura R.:

@Ian Ippolito I would love to learn more about the passive investment options you mentioned. I totally agree that the work is upfront in picking the right investment and I need to educate myself on the choices first. I'm just not sure where to start or what resources are out there. 


For vetting a syndication, different investors do it differently because every investor comes from a different financial situation and has different goals and risk tolerance. For me, I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are a red flag for me may be fine for someone more aggressive. Here's how I do my due diligence:

1) Portfolio matching: (takes 30 seconds per deal)

a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)

b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this

2) Sponsor quality check: (takes about 45 minutes per deal)

I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.

a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.

b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.

c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.

d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.

3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.

a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.

b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.

c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.

d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.

e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.

That is the very short summary of what I do. 

[Ben Stoodley]

Hey @Laura R.,

Congrats on your success and drive to continue growing! You've definitely got a great breakdown on what you're looking for with your investment, and that's key. There are so many ways to invest passively in real estate and I think BP is always the best place to help. 

As you and others already mentioned, owning any real estate almost always comes with a serious time commitment. Whether we have property management or not, there are always maintenance and servicing items that need to be handled. 

Also, its clear to see the balance of higher reward vs higher risk (and requiring high time commitments). For example, flipping requires a lot of hands on time and stress with large amount of risk, and, larger payoffs upfront. However, all the greatest investors have bought and held their assets, the long game always holds true. Therefore, I think for someone like you, with multiple businesses already requiring much of your time and focus (and expertise), then better decision would be a passive long term investment.

I would strongly suggest flexible REITs and Private Funds. Anytime you can invest one sum of money across a portfolio of performing assets (or units) , you're winning. Many funds allow investments to be made directly from one's IRA as well, which could add to the benefits. Most importantly, these types of investments are being managed by experts in their field. Talk with them and build a relationship, get to know who's managing your money, ask the tough questions and know what their backup plans are. Find an investment agreement that has flexible lockup provisions as well, if possible.

Anyways, alternative passive investments yielding 10%++ is something I spend a lot of time researching and discussing so I would be happy to help in anyway I can. 

Good luck!

[Enrique Huerta]

Hi @Laura R.,

Given your interest in passively investing, I would look into being a passive investor in a multifamily syndication. Main things to look for are an experienced team, strong track record, geographical presence in a location you'd like to invest in, and preferred returns with a conservative analysis done by the deal team.

This route would check off the below options:

"- Find a local commercial project or apartment building where I can become an investor partner and get some % of the rents each month. Would need to use savings funds for this. Not sure how to go about finding something like this."

Regarding the economic cycle, its a valid concern. Now more than ever, conservative underwriting, experience, and location are critical. There's opportunities at any point in an economic cycle!