Is Real Estate Ever A Truly PASSIVE Investment?

[Brian Hosier]

Many new investors think real estate provides passive income. They follow the BRRRR strategy and think after I get to 10, 20, or maybe 50 houses, then I can sit back and just cash the rent checks every month… I'll be set!

However, speaking now to the seasoned RE investors out there, you know it’s not that easy. When you start out you do all your own property management and typically don’t pay yourself for the time you are spending to manage the properties. If you don’t pay yourself, you actually have a “job” where you are working for FREE.

Sure, you may have a “pay-day” months or years later when you sell but that’s not guaranteed depending on the market you are in. If you are highly leveraged and the market takes a downturn, you can easily be “under water” where your property has a market value less than the outstanding loans on it.

A common prediction going around in 2020 is that we are almost guaranteed a recession in the next year or two due to the large amount of government stimulus, record high unemployment, large number of bankruptcies, shrinking GDP, etc., etc. Usually during a recession, house prices drop at least 10% and in severe markets it can be much more. Does anyone remember the Great Recession in 2008/09 and seeing prices drop 40-50%?

Assuming you are NOT over-leveraged on your real estate and can ride out a market downturn, I believe it is possible for real estate to be a truly passive investment. However, you need to do it by "being the bank" instead of just the "flipper" or the "renovator". Even buy-and-hold investors that follow the BRRRR strategy religiously for years, will eventually be RICH but it will only happen after a HUGE investment of your time. What is your time worth to you?

I first started RE investing in my 20’s and got up to 10 doors with some success but had to bail when the market corrected in the late 1980’s. I learned then that “leverage is a double-edged sword!” Now in my early 60’s, I’m a little wiser and want a truly passive RE investment. I no longer want many 12-hour days running around, answering tenant calls, finding new used appliances, rehabbing, screening tenants, evicting tenants, and so on.

What I wanted was a passive, turn-key investment, where I own the asset (i.e. the house) but I am never involved in the day-to-day management. Maybe it’s because I know see my time differently. As Kiyosaki says “The Rich don’t work for money” where you trade your time for dollars. I’m not rich but I want a comfortable lifestyle where I let my modest money work for me.

W own just a few rentals that comfortably bring in over $2k/month ($24k/year), with zero-effort on my part. We leverage our credit, work with a credible company that has been doing this for years, and continue to re-invest our profits. We also play the role of the “bank” and help the same company fund their flips, and that brings in another $40k per year passively. Overall, we earn anywhere from 12-17% on our investments while my wife and I do what we love which is cruising, travelling, etc. 

For us, RE investing is truly passive but it took me over 30 years, and after losing probably $400k in real estate over the years, to finally find the niche that worked for us. As Matt Theriault from the Epic Real Estate podcast has said many times, “In Real Estate, you’re either making money or you’re getting an Education!”. I’ve got my education so that we can make money passively. Good luck in your real estate journey.