investment strategy, suggestions on next step ?

Question

Witth the long term goal to have multiple doors, for passive income with less involvement what would you do or suggest as a next step ?

have primary and rental home in bay area,  looking for next step.

few options in my mind :

1.  Buy next sfr nearby, move in,  rent current home.

[Don't really want to move at this point as its pain, and expensive homes.]

2. Buy next sfr nearby as an investment property

[ higher interest rate on investment property,  most probably negative cash flow for initial few years]

3. Buy two sfr on same lot in Hawaii, keep one for own use (vacation home) , ltr other one.

[ Rental rules/laws sucks, and getting tightened up, negative cash flow due to expensive market, eviction process is long ]

4. Buy in AZ / TX / FL or other growing cities

[will need property management,  cut in profit, less income,  also less appricition in property value Vs bay area ]

5. Look for commercial real estate and rent those?

[takes time to rent initially,  low occupancy =loss , higher rates ]

6. Mobile parks ?

[need to hire someone for regular maintenance, unknown expenses?]

7. Apartment complex in mid west / low cost area.

[management cost, maintenance cost , any profit left ? unless self manage

8. any other suggestions?

please comment

Christine Bellish · Answer

Hey Ron - based on this part of your post: "for passive income with less involvement what would you do or suggest as a next step ?" Have you considered investing passively in real estate syndications? Once you wire your money to invest it's completely passive - the work you need to do is all done upfront evaluating the syndicator and the deal (finding someone with a track record of success that you trust, and an opportunity that meets your investing objectives). Some deals are more cash flow heavy, some more appreciation focused - some longer term holds - some take longer to start receiving distributions and some are more turnkey so you start getting returns from cashflow pretty immediately.

The syndicator raises money from passive investors to cover the costs associated with purchasing and managing real estate properties (down payment, closing costs, renovation, reserves), and the syndicator/General Partnership team is the one who evaluates and identifies the market and the deal, comes up with and implements the business plan, they hire property management, manage construction projects, stay on top of occupancy, and everything else related to the day-to-day operations. They ultimately decide when to sell or refinance, and as a passive investor in this type of opportunity you are often an equity partner who is paid your relative portion of the profits from cash flow during the hold period and appreciation when the property is refinanced or sold.

Passive investors get tax benefits the same way you would if you owned investment properties personally (sometimes they're even better because of accelerated depreciation thanks to cost segregation analysis - cost seg is expensive so it's not worth it on smaller properties but is worth it on properties worth multi millions).

You can use the write-offs you get from syndication against the returns you get from the syndication and also against the income you collect on your other rental home in the bay area (unless you are a real estate professional or married to one in which case you can use the write offs against regular income too).

My husband and I started out buying small multifamily properties locally in NJ where we live it's - also super expensive, high taxes, not landlord friendly here. We did a BRRRR that was a nightmare project - turned out to be a good investment on paper but we have PTSD, so we were looking for more TRULY passive investing opportunities and found syndication. We completely changed our investing strategy and leaned way more into syndication because we love that it is actually passive.

Paul Moore · Answer

Hey @Ron Singh - great questions.  I agree with @Christine Bellish wholeheartedly.

I’ve been in real estate investing for 22 years, and I’ve done dozens of projects. I could do most any of the options you list, but knowing what I know, I would only invest passively - in syndications or funds.

I want an expert team managing these deals. And I want diversification across asset types, geographies, and strategies. I can’t do all that myself. And if I could do 20% of it, I’d be extremely stressed and would have no life. It would certainly not be passive.

Good luck!

Joe Villeneuve · Answer

9 - Instead of assuming the results in #'s 4, 6 and 7, why not do an analysis of actual properties?  You're grouping and assuming that all properties in those solutions are the same...and they are not.

Dead give away....?  #4.  "Buy in AZ / TX / FL or other growing cities..."

The last time I checked, AZ / TX / FL were States, not cities.

Christine Bellish · Answer

Hey @Ron Singh -

How did we start on syndication? My husband and I are based in NJ and we started by purchasing small rental properties locally here, but there were so many headaches associated with it (not landlord friendly, very expensive, high taxes, nightmare contractors, etc)...so we looked into investing out of state - we wanted to be more passive and hire a PM, thought that would be possible in more affordable areas. We actually ended up going to a meetup for buying multifamily out of state, but it ended up being about syndication- that's where we heard about it for the first time. The speaker was Kenny Wolfe, he is a very experienced syndicator, has more than a decade of experience, 7000 units under his belt, $450M in assets under management - we were impressed with his experience, and the returns he was talking about providing to passive investors, so we spent time getting to know him more, and did more research on syndication in general. Met other syndicators, got on their email lists, started evaluating opportunities, and after 9 months of education and rapport building, we decided to passively invest with Kenny. We have invested with him passively multiple times, and we've also partnered with him as co-GPs on a few deals. Love the guy.

What risk do I feel is there? The biggest risk is WHO you invest with. Making sure you are investing with someone who has a track record of success and can do what they say they are going to (and has demonstrated that before) is the most important. For me personally, I don't feel that there is very much risk relative to other types of real estate investing because I feel more confident in trusting a professional to do what they are good at versus going it alone. They should already know how to find the best deals, secure the best financing terms, and manage large projects. The hardest part as a passive investor is vetting the syndicator. Yes, once you do that, you should also vet the deal you are investing in as well - is it in a market where they have experience already? Is the underwriting conservative? I'd rather someone under promise and over deliver, than over inflate projections and hope for the best. If the average rent in the area for that asset class is $800, they better not be using $900 for their projections.

When people ask me about the worst case scenario in the syndication deals I am personally involved with, I tell them that it's possible that we may not get as big of a return as was projected, but we underwrite very conservatively to try to avoid that happening. The timeline may also end up being longer (or shorter) than projected since we can't predict what the market is going to look like in 5-7 years.

People ask what are the chances that we would lose our initial investment, and listen, that is a possibility in any investment, but the idea that the properties would become valueless is so unlikely. Even if the properties burned down we have so much insurance that we would probably make out on the deals (that's obviously not something we want though!!). Luckily in real estate there are a number of exit options - refi or sell, or hold and keep cash flowing until the time is right.

Christine Bellish · Answer

@Ron Singh yup, as a passive investor in a syndication where you are an equity owner you get a K1 when tax season comes around. Everyone who invests in the deal gets their own tax form. The syndicator hires a cpa that takes care of doing that paperwork and just furnishes you with the document, which outlines your portion of the tax benefits from depreciation etc based on your percentage of ownership in the deal.

Someone who invests $10K owns less of the deal than someone who invests $100K, so the person who invests $100K is going to get a bigger write-off...it's all relative based on your ownership percentage.

The amount of depreciation will depend whether they are doing a cost segregation analysis for the deal you are investing in (which most do) because a cost segregation analysis speeds up the depreciation - rather than depreciating everything over 27.5 years, some things can be depreciated over 5 years, 7 years, 10 years etc, which means bigger write-offs sooner.

Additionally with bonus depreciation still in play at 100% this year, the write-offs in year 1 are the biggest by far. Thanks to cost segs and bonus depreciation I've gotten 50% write-offs in year 1 - meaning when I invested $50K, I got ~$25K write-off.

This was a paper loss even though I received distributions from the cash flow, which means I didn't have to pay taxes on those distributions.

People who aren't real estate professionals can only use these write-offs against passive income (like the returns you are getting from the syndication deal itself, or if you are collecting rental income from other properties you personally own you can use it against that too), whereas real estate professionals or those who are married to real estate professionals and file jointly can take the write-offs against their regular income.

Example: my husband has a W2, but I am a real estate professional and we file jointly so we can use all our write-offs against our real estate income and the income from his W2 also :)

If you are not a real estate professional and the write-off you receive is higher than the passive income you get in a year you can carry the rest of the write-offs forward to future years and use it then. Example: if you make $5K in passive income but get a $25K write off, you can write off the $5K and carry the other $20K forward to use in future years.

Disclaimer that I'm not a tax professional, but just sharing my experience and understanding of how this works for educational purposes only. Definitely always talk to a professional about your specific circumstance.

Colton Hahn · Answer

Definitely agree that when investing with a syndicator trusting them, their track record and vetting them is #1,2, and 3 in most important aspect of investing in a syndication. Ensuring both parties goals are aligned is massive :) Great post!

Ron Singh · Answer

@Christine Bellish

thanks, any insights for syndication investment,  how does the depreciation,property tax and intrest being calculated when you file your taxes

I believe you get some sort of forms based on how much you envest or same for all investors.  I.e someone investing 10k vs 100k would get different deduction benefits at end of the year?

Christine Bellish · Answer

@Paul Moore "I want an expert team managing these deals. And I want diversification  across asset types, geographies, and strategies.  I can’t do all that myself. And if I could do 20% of it, I’d be extremely stressed and would have no life.  It would certainly not be passive." Yes 100% to this!!!!!!

Andrew Moore · Answer

A few thoughts:

1. If you're looking at this as an investment, I would say it doesn't make sense in any case to move forward if there is negative cash flow.

2. As long as you are building in the cost of property management into your analysis, it may make owning the asset less of a burden on you.

3. There are many areas where appreciation is in line with that of the bay area. However, the home prices may not be as high, so your total gain may not be as much from a $ standpoint. However, there is also generally a lower cost to entry into some of those other markets.

4. If you are looking for a strip mall, or store front then leasing that (if it isn't already) can take some time. The silver lining there is that commercial leases are generally much longer than residential leases. But I also think it is extremely important to build those factors into your analysis.

5.If you are looking at larger multifamily, the beauty of having so many doors is that your vacancy will be reduced when units turn over. You may have to pay a manager to handle this, but overall its going to be a fairly stable investment.

Regardless of the factors, as long as you are accounting for them in your analysis and coming out with positive cashflow you'll be in a good spot!

Nick Robinson · Answer

@Ron SinghIf your long-term goal is to have multiple doors and have passive income with less involvement, I agree the easiest way to do that is through syndications.  If you want to physically own the doors than going to a larger multifamily, Triple net lease, mobile homes, storage units would be the way to go.  The more units/tenants you have the easier it will be to have a property manager in place to handle the day-to-day operations.

There are always pros and cons to any type of investing.  For instance, I live in CA but unless something changes dramatically, I would not buy rentals in CA because of the laws in place favoring the tenant.  Not just the fact that during normal times it can takes months to handle an eviction but things like rent control, raising taxes will seriously affect your returns.  You have to decide what you want out of investing and the risks you are willing to take.

Tax wise if you make under $100k you can write up to $25,000 of passive losses, from $100k-$150k you have diminishing write-offs the more you make.  Once you make over $150k you cannot write off any passive losses over the income on the property, but they will become unallowable passive losses that you can use in the future.  If you are a real estate professional, then you can write off an infinite amount of passive losses.

investment strategy, suggestions on next step ?

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