Passive Investing for new investors... is there such a thing?

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Passive Investing for new investors... is there such a thing?

Trevor Lohman
Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

Hey Everyone!

I'm being a bit dramatic with my title here, but I do have a serious question if anyone is willing to provide some feedback.

I had recently asked a question in the forums about turnkey investing which led to a really educational and helpful discussion. This question morphed into a more general discussion about passive investing which is something that I am very interested in.

In my limited understanding it sounds like there are a few different ways to be a "passive investor". Turnkey investing, hard money lending, syndication, and note investing among them. Of these, syndication sounds the most appealing to me, but thanks to some very educational advice and guidance from Jeff Greenberg, a BP member and syndication expert... my words, not his. (Thanks for taking time out of your busy schedule Jeff!), I've now realized that I probably am not in the right place financially for investing in syndicated deals... yet.

So in the meantime, I find myself wondering... what are some passive investment opportunities for a new investor who like me has say 10k to 25k dollars to invest, but a relatively small net worth? Can you consider hard money lending with this small amount of money? Or do I basically need to resign myself to being patient and saving more?

I'd love some of your opinions if anyone has the time!

Thanks,

Trevor

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Jerry K.
Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
12y

@Ron Kelley I take a portion of my tax lien investing funds and I look for liens on properties that have mortgages. If the owner doesn't pay the taxes, the mortgage holder will pay to protect their interest. 95%-97% of all property tax liens are paid off before going to foreclosure.

By looking for very good properties with mortgages you will most likely be paid off. There is always a chance you won't, but then you can go the foreclosure route to get your money or the property. However a good property will also attract many bidders and your lien yield may be lower than the maximum rate.

You have to accept in a tax lien investment that you don't know when it will be paid off. I've had liens pay off in as little as 2 weeks, and others are now at the foreclosure point. When I talk to someone who knows fixed income investing, I describe the liens I buy as fixed rate, variable maturity instruments. Yet there are some liens that actually pay more interest as time passes if the owner does not pay.

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  • Paul ZofsakPro Member
    Investor · Cypress, TX · Member since 2013 · 118 posts · 15 votes
    12y

    Based on my experience it would all matter on the deal at hand. If you can include the purchase price, repairs, and the closing cost into an HML then you are getting in with no cash out of pocket; it all depends on the deal and the numbers. My most recent deal had a purchase price that was exactly 70% of the ARV; repairs and closing costs came out of my pocket to a tune of about $17K. I will get back about $2K at refi closing (would be $8K if I had the property for six months before refi) so In the end I will have about $15K cash out of pocket but an instant equity of about $33K plus monthly cash flow.

    It all depends on your area as far as what is achievable; in Houston, the housing market is cheap and exploding.

    If you want to be completely passive then you should look into a property management company; in the end, its all about the numbers.

    0Reply
  • Paul Birkett
    Specialist · Manhattan, NY · Member since 2013 · 116 posts · 192 votes
    12y

    Hi Trevor

    I'd suggest it's tough to get into private lending at the $10k to $25k level.

    There are plenty of borrowers at that level, the problem is the fixed cost of closing a loan. The borrower will struggle to justify the amount of fees (legal and recording fees typically run $1500+) he will have to pay for what is a relatively small sum in the rehab world.

    Maybe a better route would be a straight partnership with a rehabber that you know and trust. A few deals like this and you could build your capital to the point where you can start lending larger sums.

    In my experience, it's hard to make a loan work for both parties at less than $30k...and even then, it's very tight.

    Good luck building that capital!

    Paul

    1Reply
  • Andrew S.
    Investor · Raleigh, NC · Member since 2013 · 1k+ posts · 708 votes
    12y

    @Trevor Lohman - there is a very interesting discussion on crowd funding going on right now (http://www.biggerpockets.com/forums/520/topics/105106-comparing-crowdfunding-sites-for-re?page=3) that is quite relevant to what you are after.

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    12y

    Do a j/v with someone on a cheap rental. 25k can buy a house and provide the rehab budget in my area.

    1Reply
  • Trevor Lohman
    OP
    Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes
    12y

    @Paul Birkett Wow that is some great advice... and unfortunately what I was expecting. It is good to know that I am not too far off though, so I will definitely try to educate myself on the field, thanks for the advice. Now I just need to work on building relationships in the meantime I suppose, thanks again!

    @Andrew S.

    I will definitely keep my eye on the crowdfunding real estate sites, unfortunately I am not yet an accredited investor... hopefully those rules will change in the near future.

    @James Wise You are the third person to give me that advice, so it must be good. I just need to find someone that I feel comfortable partnering with it sounds like. Thank you for the feedback!

    Sorry, my mention links don't seem to be popping up, forgive me!

    Trevor

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    It's not turnkeys specifically that are passive investments, it's technically rental properties in general. Turnkeys pose themselves as being (unofficially) 'more' passive because in theory you don't have to do as much work because it's all done for you. But 'passive' isn't always a gauge of how much work or effort you have to put into something. Even a rental property you buy and do a ton of work on is technically passive income.

    So the answer kind of depends on what version of passive you mean. I assume you are talking about hands-off/no-work passive?

    I saw those turnkey threads. I stayed out of them for the most part because the arguments get a little ridiculous. Don't be turned away from turnkeys because of people not knowing what they are talking about. Every single component of buying a turnkey can be checked on with some easy due diligence. Unfortunately most people miss those and then want to blame someone else, or blame a property type like a 'turnkey'. I buy turnkeys and not all of my turnkeys have been perfect, but it's not about them being turnkey at all. Turnkey is irrelevant when it comes to their performance.

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    That kind of limited capital would be tough to do lending in either a hard money or transactional funding role, especially here in CA. Turnkey rentals are not really as "passive" as they are made out to be. Getting into a buy and hold with only $25k could be a problem too in CA, so you would have to venture into the desert cities combined with leverage or go out of state.

    Investing in a syndication may be tough because you would not be an accredited or sophisticated investor, potentially making you ineligible.

    I would learn what I could on rehab flipping and/or wholesaling, use that $25k as your skin in the game (after you get fully educated on how to) and build more capital from there. This of course is an active role, but with the intent to build capital to use passively.

    Podcast Guest on Show #130
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  • Trevor Lohman
    OP
    Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes
    12y

    @Ali Boone

    Thanks Ali, good advice as usual! Yes, I was implying "hands off" by passive. Now I know there is no such thing as a completely hands off investment, and that isn't necessarily what I want either. Obviously I love learning about and thinking about investing, so am not afraid of something that requires some input/management. At the same time though, I have to realize that I work way too much, and really don't feel comfortable making any type of transition into more "active" real estate investing... at least for the nest 5 years or so.

    I haven't been talked out of turnkey... I've just realized there are many options and innovative ideas out there, but definitely haven't ruled it out, thanks in part to the reasons you listed.

    For some reason, in my head at least, buying an income property even with the use of a property manager, seems more intensive than HML, Syndication, and other "passive" real estate investing ideas. I have absolutely zero real life Real Estate experience though so I could be way off base in that assumption. What do you guys think?

    0Reply
  • Trevor Lohman
    OP
    Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes
    12y

    @Will Barnard Haha yes you are correct, 25k buys you a fruit stand out here in Orange County if you're lucky. I was really hoping to do out of state deals, which may be a whole other can of worms.

    Yes, I am not an accredited investor... which is really what led me to posing this question. I think your advice may be the very best way to increase the capital I have at my disposal, but I will likely just stick to saving half of my income and trying to be patient if my only options are between flipping and saving... but who knows! I will definitely try to continue soaking up all of this great guidance and advice.

    Thanks,

    Trevor

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  • Marco Santarelli
    Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    12y

    @Trevor Lohman -- Hello neighbor. Welcome to BiggerPockets!

    There are a few options open to you as has been outlined by everyone above. However, if you're strategy is to buy-and-hold income property then you could get started with a property up to $100k in purchase price. That;s assuing a 20% down-payment ($20k) plus some closing costs and a little reserve (the remaining $5k).

    If you're looking for something "larger" then I suggest saving up a little more. Notes and hard money lending could generate some monthly cash-flow, but it may be sporadic, and there will be no equity growth as time goes on.

    Food for thought.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    The easiest method for you will always be what resonates best with you. No telling what that may be. Even if HML or syndications were on paper the easiest methods, they would still be harder for me because rentals resonate with me over those. Whatever resonates suddenly becomes easy. Sounds in the clouds, but it's true. So you just have to toy with all the options and see what seems to click. Whichever method you start finding the most on and opportunities start presenting themselves to you, that's probably your method.

    Side note, remember that there are numerous behind-the-scenes financial benefits to rental properties that you won't see with the other methods. The tax write-offs essentially allow you tax-free income from the properties, whereas lending will actively tax you. Then with rentals you have equity use and free money in appreciation too. Your income on those isn't fixed like it will be with the others.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Marco reminded me of another option for you that could be very viable for that dollar amount of capital. Finding some small notes (either performing or non performing), get them at a great discount and flip the paper. You could also hold the paper, or sell off most of it keeping a few payments for yourself and collecting some upfront capital to reinvest and a few payments for passive returns, rinse and repeat. Mobile home notes would be a good start at that price point.

    Podcast Guest on Show #130
    1Reply
  • Gerald K.
    Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y

    @Trevor Lohman

    I won't go into the specifics as to what to do with 10K to 25K. I think others have addressed those concerns. I will say that many consider buy and hold investing a passive activity. Many people on BP have busy careers and are able to do it, especially with property managers or turn key companies. Some even are able to manage contractors while still employed with a full time job. One that comes to mind is Michael Zuber here on BP. He lives in SFO area and invests in Fresno area by having realtors, property managers, and contractors on his team. He makes periodic vists to keep the team on track. This is in contrast to flx and flip, which is more like "active" investing or more of a job. So is there such as thing for new investors ~ yes. That's how I got started. It all depends on your comfort level, what's available for buy and hold in your area, and how much hands on you want it to be. How passive or active it is could be compared to buying mutual fund (passive) or to day trading (active), or event to having a financial advisor (turnkey). My two cents, for what it's worth. Good luck and much success. See you around the forums.

    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y
    Originally posted by @Will Barnard:
    Marco reminded me of another option for you that could be very viable for that dollar amount of capital. Finding some small notes....

    This is exactly what I did & continue to do for my kids (once they were 18).

    Small $20-$50k 1st mtg investor notes. In fact my son is now pulling >$14,000 p.a. on several we set up.

    1Reply
  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    @Trevor Lohman I started with approximately $15k to invest. My target market is much less expensive than CA - bought my first SFH for $18,500 cash, rented at $725/month. I would suggest either joint ventures or setting up a company with another partner and purchasing through that company.

    @Pat L. When you say ">$14,000 p.a.", what do you mean by that exactly? Is that that your son is making $14k annually with the notes that were purchased for a $25,000? Thanks.

    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y
    Originally posted by @Liam Goble:

    @Pat L. When you say ">$14,000 p.a.", what do you mean by that exactly? Is that that your son is making $14k annually with the notes that were purchased for a $25,000? Thanks.

    Not at all.... he has (with our help) been accumulating small 1st Mtg's since he was 18. Around here he can buy a home for $10-$20k & with minimum rehab flip it for $40-$50k holding the first while the investor collects market rents & plays Landlord. To many investors paying off a small high int mtg as long as they net something is just part of doing business. In fact a couple have been paying over 9 years & most of that has been reinvested into the same.

    So as I said he has several in place paying high interest rates & a couple of CFD commercial properties that pay extremely well. But his initial outlay is much lower than the note he holds so the returns can be significant.

    My daughters have been doing the same but they like to spend it.

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    Thanks for the clarification @Pat L. As to your son's business model, from what I gather, he purchases distressed properties (probably physically distressed, rather than financially), improves the properties, rents them, then sells them to investors and holds the note?

    From a financial perspective, I assume he is purchasing the homes for ~$10k, investing $5k, selling for ~$60k w/ 25% down, so his cash is back out, but now he's earning the %% on the mortgage. Does this seem more or less like how he is doing it?

    Thanks for sharing.

    0Reply
  • Duncan Taylor
    Real Estate Investor · Member since 2013 · 866 posts · 487 votes
    12y
    Originally posted by @Trevor Lohman:
    Hey Everyone!
    So in the meantime, I find myself wondering... what are some passive investment opportunities for a new investor who like me has say 10k to 25k dollars to invest, but a relatively small net worth? Can you consider hard money lending with this small amount of money? Or do I basically need to resign myself to being patient and saving more?

    I'd love some of your opinions if anyone has the time!

    Thanks,

    Trevor

    I would encourage you to look into some of the really attractive REITs available on the market right now. TDAmeritrade is a great place to find them. (I have no affiliation with them other than as a customer.)

    1Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y
    Originally posted by @Liam Goble:
    Thanks for the clarification @Pat L. As to your son's business model, from what I gather, he purchases distressed properties (probably physically distressed, rather than financially), improves the properties, rents them, then sells them to investors and holds the note?

    From a financial perspective, I assume he is purchasing the homes for ~$10k, investing $5k, selling for ~$60k w/ 25% down, so his cash is back out, but now he's earning the %% on the mortgage. Does this seem more or less like how he is doing it?

    Thanks for sharing.

    Yes but once rehabbed they are sold never rented.

    Then once the initial investment is recovered they become what I call "REI annuities", & we have been doing this for many years.

    0Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y
    Originally posted by @James Wise:
    Do a j/v with someone on a cheap rental. 25k can buy a house and provide the rehab budget in my area.

    That is true in my area too, but it may be better to use the $25k as down payments + rehab on 2 properties versus buying just one with cash.

    Podcast Guest on Show #29
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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    @Dawn Anastasi "That is true in my area too, but it may be better to use the $25k as down payments + rehab on 2 properties versus buying just one with cash." -- Too true. My first purchase was $18k in cash for one house. I next purchased two duplexes for about $20k w/ leverage. Cash flow from the duplexes significantly eclipses the SFH.

    0Reply
  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    Thanks @Pat L.

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    12y

    @Trevor Lohman If you really have no time for other types of REI, then look at the listed real estate Investment Trust (REIT) that @Duncan Taylor suggested. I own a couple and I read through the annual reports cover to cover to see how these "big boys" do their business. There are all kinds of strategies in REITs. Some just provide financing for deals, others invest in homes, apartments, development, commercial, etc.

    Another option for you that is fairly passive is tax lien investing. I have been getting 10% - 16% in tax liens for several years. The active part is in the research. I invest in liens that I expect people to pay off the taxes. There is more to learn, but it is farily passive. No rehab, no tenants, no termites, no toilets. It's not exciting party conversation, but it pays decent for the amount of work.

    0Reply
  • Ron Kelley
    Barstow, CA · Member since 2013 · 51 posts · 7 votes
    12y
    Originally posted by @Jerry K.:
    Another option for you that is fairly passive is tax lien investing. I have been getting 10% - 16% in tax liens for several years. The active part is in the research. I invest in liens that I expect people to pay off the taxes. There is more to learn, but it is farily passive. No rehab, no tenants, no termites, no toilets. It's not exciting party conversation, but it pays decent for the amount of work.

    Jerry can you elaborate on "I invest in liens that I expect people to pay off the taxes", sounds interesting?

    0Reply
  • Jerry K.
    Specialist · Phoenix, AZ · Member since 2011 · 698 posts · 629 votes
    12y

    @Ron Kelley I take a portion of my tax lien investing funds and I look for liens on properties that have mortgages. If the owner doesn't pay the taxes, the mortgage holder will pay to protect their interest. 95%-97% of all property tax liens are paid off before going to foreclosure.

    By looking for very good properties with mortgages you will most likely be paid off. There is always a chance you won't, but then you can go the foreclosure route to get your money or the property. However a good property will also attract many bidders and your lien yield may be lower than the maximum rate.

    You have to accept in a tax lien investment that you don't know when it will be paid off. I've had liens pay off in as little as 2 weeks, and others are now at the foreclosure point. When I talk to someone who knows fixed income investing, I describe the liens I buy as fixed rate, variable maturity instruments. Yet there are some liens that actually pay more interest as time passes if the owner does not pay.

    2Reply
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