The best investment strategy for W2 part time investor in 2023?

Question

My strategy for this year (2023) is to:

1. Buy two 500k multifamily units (or one 1m multifamily unit) - ideally they break even.

2. Cost segregate both properties and generate close to ~150k in passive losses, ~35k in taxes in 2023.

2. Use Real Estate Professional Status to be able to use those passive losses to offset my W2 income. (My wife is REP, and I am W2).

Plus, I'll have two residential multi family properties that cashflow a little bit - and then I can refinance in the near future to boost that cashflow number up. It is a plus if I can get a 2-1 buydown so that I can achieve some cashflow before I refinance in a few years.

Anyone have any suggestions on where I can buy some residential multi-family properties at ~$500k, or $1M that will breakeven/cashflow??

Lane Kawaoka · Answer

@Nathan Lacey Syndications and private placements, are basically deals that are more geared towards accredited investors where a GP sponsor takes the wheel of the deal - typically they are a professional. I personally got into it when my net worth hit around half a million dollars back in 2015. At that time, I had 11 rental properties, but I realized it wasn't really scalable, especially as your net worth grows and have more assets, you become a bigger target for litigation. That's when I started exploring the option of being a limited partner (LP) and a passive investor in syndications and private placements. It just made more sense and was a lot more scalable. Plus, I got to meet a ton of other passive investors in that space and moved away from the DIY (do-it-yourself) world.

Sure, there's a potential to make more money by doing those "buy, rehab, refinance" deals, but boy, is it risky! There is a paradigm shift that occurs when you're making a decent income, maybe a hundred or a couple hundred thousand dollars a year at your day job, and you become more aligned with being an accredited, passive investor.

It's different for those who are below that threshold or need to build up a portfolio of rental properties or investments to achieve that same level of cash flow plus their day job income. But eventually, everyone reaches a point where time becomes more valuable than money, and you shift away from the DIY route and embrace a more passive approach.

Lane Kawaoka · Answer

@Michael Hyun

I took a look at your journey so far, and I must say, you're doing a great job. Moving quickly and all. You're probably making good money at your job, so here's my suggestion: why not skip the whole hassle of buying individual rentals and go straight to syndications and private placements? I know it sounds crazy, but trust me, I've been there. I bought a bunch of rentals between 2009 in Seattle and up to 2015, had 11 of them out of state, and let me tell you, it's just not scalable. So many legal liabilities and headaches. I'm just trying to save you from all that trouble - plus its going to hard to be to unload them on RS.

Now, the real challenge is finding other truly passive investors like yourself. It's not easy. You won't come across them on internet forums or local real estate clubs. But once you do find them, it's a game-changer.

Regarding Real estate professional for the tax benefits. I get where you're coming from... But when you have your own direct ownership portfolio, you'll still have to recapture the depreciation eventually. All that hard work you put into it will need to be unwound. Let me know if you would like to chat more.

Michael Hyun · Answer

Hey Lane!We actually spoke a while back during an intro call. You're definitely the resource I turn to when I wanted to learn about syndications. I've been watching the deals that you put together, and I appreciate your honesty when it comes to the current market conditions. At the end of the day, I want to grow my net worth as fast as possible. If I invest in syndications, REP status becomes almost useless for me - as I can't use passive losses from syndications to offset W2 income. So then, do you suggest that I put all my savings into syndications and start to generate passive income - and just forget about saving any money from federal income tax using REP status?Ideally, I want to utilize a combination of both the REP status strategy and the syndication strategy. I'm sitting on 250k, and I want to know what's the best way to split this. Perhaps 15% down on a 1M property ($150k), and then (100k) into syndication?I'd receive maybe 200k in passive losses I can use against my W2 income from the 1M property, and then I'd be able to generate some passive income from the syndication. But @Lane Kawaoka, ground-up developments don't take Bonus Depreciation in year 1 - how would passive losses work for ground-up construction syndications?I'm paying 100k+ in federal income tax, so that seems like the lowest hanging fruit in terms of growing my net worth - by using REP status (my wife) and Bonus Depreciate rental properties that I materially participate in managing.If I can save ~80k in federal income tax for the next five years, I'll have grown my net worth considerably. The only problem with this approach is that in order to get sizeable passive losses, I'm looking at properties that are $500k-$1M. Nothing over $500k+ seems to cashflow unless its MFH, or MTR/STR.

Currently at a cross roads - would love some feedback on my thought process.

Michael Margarella · Answer

https://www.biggerpockets.com/...

Tim Ryan · Answer

I come across properties like this all the time. I have bought 18 properties over the past 4 years. All multifamily and commercial and in the midwest (a very specific area).  PM me if you want to know more and see how I can help you.

Todd Dexheimer · Answer

If you have a W2, why not invest in real estate passively through a syndication? You should be able to do much better than breaking even and still be able to take full advantage of the tax benefits you're looking for.

What should you look for in a company that offers syndications?

1. Experience: Have they gone full cycle on deals and how long have they been in the game?

2. Team: Who makes up the company and what are their roles and experience?

3. Overall business plan: Market, sub-market, strategy, building class, etc

4. Underwriting: Fully transparent and is it actually conservative?

5. Alignment: Is the sponsor investing a large sum of money into the deal. If the deal goes south how are they effected?

6. Sponsor profit: Look for sponsors that have lower fees and higher performance splits. Also, look for splits that make sponsors a nice profit. You want them to be motivated. If they have a 10% split and just take fees, then what is the incentive to perform when times are tough?

Ivan Terrero · Answer

@Michael Hyun

Have you considered note investing?

Joe Archbold · Answer

@Nathan Lacey,

Lane is absolutely right.

The syndication is the opportunity for a pool of investors to leverage the expertise and experience of the operator/ real estate team to invest in their project.

A syndication is formed as a professional real estate team looks to acquire an asset (Apartment, mobile homes, self-storage), and builds a business plan around the asset and the strategy by which they will create value. That plan includes the specific strategy of how they will add value from renovation and reduce expenses to increase operating income, include extensive market detail, and timelines or how long they anticipate holding the asset, as well as target returns to investors. The guiding document is the PPM or Private Placement Memorandum which is supplied to the SEC for review.

The team will use funds from friends and family to acquire the asset, possibly institutional capital and retail or individual investor money.

Today Accredited and Non-accredited investors can see the opportunity to invest as a limited partner, get the same tax advantages of ownership, and receive an excellent risk-adjusted return with no active involvement.

Glad to share details about past projects and a path to see future offerings from our partners.

Regards,

Joe

Peter Mckernan · Answer

Value add is the way to go in California, this is what I would do with the investing in CA. I would find something that you either can buy it from a wholesaler and then flip to a rental. I would look at MTR, that would be the best on cashflow, and be the best to refi when you are ready.

The STR game will get you the best on Cost seg numbers, but you can still do it on MTR and LTR. You will do 80% this year, and next 60% and so on since they are phasing it out. You do not have to be REP status, but it makes it better of course to get more tax breaks.

You can throw in an ADU, value can be there if there are some that have sold in your area that you are buying that have good value (do the ARV on comps with ADUs).

The syndication route is about passive and these days with numbers there are a lot of syndicators that are waiting for better deals or rates and better deals to happen. That is where I would wait, so overall just take your pick on passive/active. If you have to stomach, which it sounds like you do I would go Active all day! Passive is when you want to add some other items into the mix on your overall investing, or you are older and want to sit on the beach.

Tim Ryan · Answer

Yes, on finding those deals. But you'll have to look outside California. I know, I live in LA. PM me and I can help to direct you.

The best investment strategy for W2 part time investor in 2023?

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