What beats apartment syndication returns for passive income?

[Kurt Granroth]

Say I am an accredited investor and I want to allocate $500k for a type of investment that should be capital preserving; completely passive; and generates $100k annually in income.  In general that's a tough row to hoe, as the classic truly passive income flows almost never get near 20%.  But it does seem like even (relatively) conservative apartment syndication deals do hit that mark, over time.

Here's my thinking.  I take my $500k and I invest it into apartments in an investment ladder, with $100k invested each year.  That could be one property at $100k or two at $50k each.  Each year I invest $100k more until after year five, all of my cash is in between 5 and 10 apartments.

A typical deal, from what I've seen, may return 8% annually in dividends and 175% (including initial investment) during a sale in year 5.  That's a 2.1x multiplier.  This is what it looks like to me:

The 8% isn't a lot and it will increase to only $40k a year when all $500k is in play.  But on year 5, I get the original $100k back plus an extra $75k, leaving my annual return at $115k -- just above my target.  I then take my returned capital from year 1 and invest it again.

After this, there's always my one or two properties from 5 years earlier going up for sale, and so my annual return will stay at $115k (22%) indefinitely, until I finally stop the ladder.

When that happens, I will temporarily have an extra $100k each year for 5 years.

On the surface, this seems like it beats pretty much all other truly passive investments for annual income generation.   Therefore:

1. What am I missing?

and

2. What is better than this?

[Ivan Barratt]

@Kurt Granroth

It's a great plan and I'd like to add a little more insight.

I'm doing the same thing but have come to the conclusion that I need to average my return on equity (NOT CoC) to ~12%. So... if I want 1.2m in passive income (I'm a 10x kind of guy) I need to work hard to earn $10,000,000 (1.2m divided by 12%) in equity. How do I do this?

1: Grow an operating business or income stream that generates excess cash flow (for me it's a property management and syndication business). For you it might be a day job, new biz venture, etc. 2: Invest the cash into income producing assets that generate the best risk adjusted return while greatly protecting hard earned principal (for me it's workforce apartments in great locations, with long term, fixed rate debt). 3. Reinvest distributions and refinance liquidity events from these projects into new income producing assets. Simple formula that takes a lot of discipline and a ton of perspiration to execute.

Looking forward to connecting.