Why I Believe Striving to Build Passive Income is Overrated

[Don Konipol]

Why I Believe Striving to Build Passive Income is Overrated

This may seem like a disingenuous statement coming from a passive income guy, BUT, I believe that those looking to build sustainable look term wealth would be better off to downplay passive income.

Passive income has a role, a large role, but one best utilized when a certain level of wealth has been achieved, and the holder of said wealth is looking to preserve capital and live off the income generated by passive investments.

I hear many relatively new real estate investors say that their goal is to acquire enough real property to replace their earned (W-2 or 1099 or Sch C) income with the income be generated by their investments.  The problem with this is that they tend to place INCOME as the main feature of any investment they’re currently considering, and their decision making process centers around how a particular investment will fit into their ULTIMATE portfolio, the one that is large enough to generate all that income which will replace their earnings, and still grow enough to offset inflation.

In my opinion, what the investor in this situation should be doing is concentrating on WEALTH BUILDING, not passive income.  The investments should be chosen based on increased wealth, so that an investment in land, providing no income, but likely to triple in value in 24 months, would be chosen over a office building throwing off 12% income, but unlikely to increase in value.  Both these investments may be good; but for the “wealth accumulation” stage the land that triples in value is clearly the better choice. (This is obviously a simplification; one must consider risk, personal comfort, ability to manage, etc.).

The wealth builder should always consider selling or trading his property for a property that will increase his net worth FASTER.  Investors tend to fall in love with certain properties they own, and stick with them even if something better comes along.  The wealth builder should be agnostic about property; the BEST investment is the one that brings them closer to their wealth building goal the fastest. 

Now, somewhere along the path to wealth accumulation, it may be proper for the wealth builder to place a portion of their assets in passive investments throwing off significant income, if only for portfolio diversification. And we need to distinguish between passive income investments and passive investment that strive for capital gains and or increasing value.  So for the wealth builder, a projected 20% return on a passive equity investment is better than a 10% income return on a passive debt investment.  

Here’s my bias in general terms. First $50k of investment capital should go into a money market fund or similar.  Next $500k should go into real estate equities, active or passive.  Next $1 million split between income and equity.  After that it becomes very personal depending on investors goals, abilities, interests, etc. 

What do you think?

[Marcus Auerbach]

Quote from @John Morgan:

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

10k/month was good enough for me to help supplement my lifestyle. And I think a lot of people feel that 10k/month would help them a little. But I agree, 10k/month in 20 years won’t be much at all due to inflation. But I think rent will go up over time with inflation. Hopefully!  Especially when you have a vacancy and can fill it at market rent. I’m closer to 18k/month net with my rentals now after investing in RE 9 years ago. Definitely not enough to retire on now, but it should go to 23-25k/month in 7-9 years when some of the 15 year mortgages are paid off. And if I pick up a few more rentals with the equity I’ve got, 30k/month net seems doable and might be enough to retire on. But I think 10k/month net for noobs is a good goal. They can achieve that in 5-10 yesrs with buy n holds. Maybe sooner if they hustle. 

5-10 years to 10k is tough when you start in 2024 with zero. I don't know about TX, but 9 years ago Milwaukee real estate cost exactly half of today. 

You need 50 units for 10k in Milwaukee, so you have to pick up 10 doors every year to make it in 5. Anything is possible, but that's a tall order, even if you buy in the hood.

Hopeless? Absolutely not, the equity gain alone is well worth it. But I would plan to reinvest 100% of the cash flow into asset upgrades because our 100-year-old buildings need it.

[Don Konipol]

Quote from @Marcus Auerbach:

Quote from @John Morgan:

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

10k/month was good enough for me to help supplement my lifestyle. And I think a lot of people feel that 10k/month would help them a little. But I agree, 10k/month in 20 years won’t be much at all due to inflation. But I think rent will go up over time with inflation. Hopefully!  Especially when you have a vacancy and can fill it at market rent. I’m closer to 18k/month net with my rentals now after investing in RE 9 years ago. Definitely not enough to retire on now, but it should go to 23-25k/month in 7-9 years when some of the 15 year mortgages are paid off. And if I pick up a few more rentals with the equity I’ve got, 30k/month net seems doable and might be enough to retire on. But I think 10k/month net for noobs is a good goal. They can achieve that in 5-10 yesrs with buy n holds. Maybe sooner if they hustle. 

5-10 years to 10k is tough when you start in 2024 with zero. I don't know about TX, but 9 years ago Milwaukee real estate cost exactly half of today. 

You need 50 units for 10k in Milwaukee, so you have to pick up 10 doors every year to make it in 5. Anything is possible, but that's a tall order, even if you buy in the hood.

Hopeless? Absolutely not, the equity gain alone is well worth it. But I would plan to reinvest 100% of the cash flow into asset upgrades because our 100-year-old buildings need it.

I think there’s too much emphasis on residential and even multi family.  Studying commercial property investment could greatly accelerate the time line.  I know residential is more forgiving, and for most more comfortable.  Yet my commercial investments were, on average 5-10 times more profitable.  Somewhat riskier; sure.  But risk can be mitigated.  

So here’s my gut feeling about commercial opportunities vs residential

On the debt investing side, 8-10% return in residential, for the same risk 11-12% on commercial

on the equity side 10-12% residential, same risk 15% plus commercial. 

this assumes investor is well educated and at least somewhat experienced in commercial real property. 

This assumes a passive or semi passive approach. An active approach in commercial can send the ROI sky high. But, the risk may be too high for most.

My opinion is that those that want real estate to be a full time occupation should give serious consideration to studying commercial real estate.

So, what do you think?  What has been your experience?  You can disagree with me. I promise not to through a childish fit like some posters do when someone disagrees with them.LOL. 

[John Morgan]

@Don Konipol

What kind of commercial RE are you involved with? I'm strictly residential with 27 buy n hold SFR. I've considered commercial RE but don't know anything about it. From what you're saying, the returns are pretty good, but the risk is a little higher. I like residential because it's passive and easy. Most of my tenants stays for years so there's barely any work or turnovers. The homes appreciate 5%/year and my tenants are paying them off for me. The monthly cash flow is good too so the returns are great. I like to be very passive and worried commercial RE might take up more of my time. Or is it very passive too? I just want to sit back and just collect mailbox money without much work. Is that doable with commercial RE?

[Jay Hinrichs]

Quote from @John Morgan:

@Don Konipol

What kind of commercial RE are you involved with? I'm strictly residential with 27 buy n hold SFR. I've considered commercial RE but don't know anything about it. From what you're saying, the returns are pretty good, but the risk is a little higher. I like residential because it's passive and easy. Most of my tenants stays for years so there's barely any work or turnovers. The homes appreciate 5%/year and my tenants are paying them off for me. The monthly cash flow is good too so the returns are great. I like to be very passive and worried commercial RE might take up more of my time. Or is it very passive too? I just want to sit back and just collect mailbox money without much work. Is that doable with commercial RE?

I am not answering for Don.. but give you an example of one of my commercial investments.

Now its a single purpose and I know those can have some risk however its a Doctors office.

My tenant is dermatologist who took over for her mentor that was retiring.. So she stepped into a fully functional office/ patient base and my purchase included all the equipment fixtures everything which of course gave me substantial accelerated tax bene's.. its a NN lease so I only am responsible for the roof and exterior ( roof  was 5 years old and with no hail in this area it will last long time). The original Doctor custom built it. So its really cool big parking lot recently seal coated..  3% annual lease raises  they pay taxs insurance and landscape etc etc.. Now that is passive.. not to mention on a up zone property 2 blocks from downtown and County seat.. so I like that.. it pays for itself throws off some cash.  And my tenant wants to buy it in 5 to 7 years so I have a nice exit that will save me selling costs. The tax write offs far exceed anything I could have gotten on any kind of MF or SFR .. So timing was perfect for us to hit this one in our high income year.

So just one example I am on the hunt for another.

[Peter W.]

Quote from @Don Konipol:

Quote from @Marcus Auerbach:

Quote from @John Morgan:

Quote from @V.G Jason:

Quote from @John Morgan:

My goal was 10k/month net "passive" income from buy n hold SFR. It took me 5 or 6 years to do this without using much of my own $. Infinite cash flow with minimal work was the goal. Once you figure out how easy it is to acquire more and more properties with OPM or to recycle the equity in them to buy more and more houses without any out of pocket cash, the mail box money snow balls. My advice is to find your niche and buy box, and do it well. Then stick with it and create generational wealth if you care to bring in more $.

 This fixated goal on "10k" of passive income is just losing it's power annually. You need to know what you want monthly in 20-30 years or down the road so rule of thumb is every 12-15 years things go up 40-50% then you'll want probably $20k in monthly passive income. This is just for some people.

Most of these W2ers on BP need to find 3-5 high quality properties over 7-10 years, with min 1:1 DSCR by higher downpayment. Enough reserves to manage 1 cycle of capex + 2 years of vacancies on day 0 of acquiring property. They need to do it while working their W2 and moving up the ladder there. After 8-12 years, they need to sell 1, re-fi one and pay down leverage + keep more cash reservs for cycle 2 of capex. Then later sell the re-fi one in another 5-7 years and have 3 very good properties with cash reserves and 0 debt. That may only be $6-12k/monthly income in 15-20 years. That's okay, REI won't be 100% of you income as it shouldn't.

10k/month was good enough for me to help supplement my lifestyle. And I think a lot of people feel that 10k/month would help them a little. But I agree, 10k/month in 20 years won’t be much at all due to inflation. But I think rent will go up over time with inflation. Hopefully!  Especially when you have a vacancy and can fill it at market rent. I’m closer to 18k/month net with my rentals now after investing in RE 9 years ago. Definitely not enough to retire on now, but it should go to 23-25k/month in 7-9 years when some of the 15 year mortgages are paid off. And if I pick up a few more rentals with the equity I’ve got, 30k/month net seems doable and might be enough to retire on. But I think 10k/month net for noobs is a good goal. They can achieve that in 5-10 yesrs with buy n holds. Maybe sooner if they hustle. 

5-10 years to 10k is tough when you start in 2024 with zero. I don't know about TX, but 9 years ago Milwaukee real estate cost exactly half of today. 

You need 50 units for 10k in Milwaukee, so you have to pick up 10 doors every year to make it in 5. Anything is possible, but that's a tall order, even if you buy in the hood.

Hopeless? Absolutely not, the equity gain alone is well worth it. But I would plan to reinvest 100% of the cash flow into asset upgrades because our 100-year-old buildings need it.

I think there’s too much emphasis on residential and even multi family.  Studying commercial property investment could greatly accelerate the time line.  I know residential is more forgiving, and for most more comfortable.  Yet my commercial investments were, on average 5-10 times more profitable.  Somewhat riskier; sure.  But risk can be mitigated.  

So here’s my gut feeling about commercial opportunities vs residential

On the debt investing side, 8-10% return in residential, for the same risk 11-12% on commercial

on the equity side 10-12% residential, same risk 15% plus commercial. 

this assumes investor is well educated and at least somewhat experienced in commercial real property. 

This assumes a passive or semi passive approach. An active approach in commercial can send the ROI sky high. But, the risk may be too high for most.

My opinion is that those that want real estate to be a full time occupation should give serious consideration to studying commercial real estate.

So, what do you think?  What has been your experience?  You can disagree with me. I promise not to through a childish fit like some posters do when someone disagrees with them.LOL. 

 I am curious. I went into residential because buying and fixing single family homes is familar and more accessible. I’ve been a renter, I’ve been a homeowner so the potential problems seem more familiar to me. There is also lots of free information online about the laws. Most of them are for renter protection (and not landlords, but definitely useful). For single family homes and duplex’s I am looking at entry prices of 150-250k. for commercial I am looking at entry prices of 1million. I might look to moving into commercial in the future, but I can’t risk 250k on something I have limited familiarity with.

[John Morgan]

@Jay Hinrichs

Thanks for sharing. Your commercial property sounds like a great deal. How would one get started in buying something like this? All I know is residential and the profits have been amazing for me so far. But if the profits on commercial RE is much better than maybe I'll sell off some of my SFR. I've been investing in RE for 9 years and haven't paid a taxes off my 27 SFR so the tax breaks are great on single family as well. But sounds like commercial is more passive with bigger profits. What would you recommend for a noob commercial investor like me. 1031 some of my properties into my first commercial strip center or office building?

[Jay Hinrichs]

Quote from @John Morgan:

@Jay Hinrichs

Thanks for sharing. Your commercial property sounds like a great deal. How would one get started in buying something like this? All I know is residential and the profits have been amazing for me so far. But if the profits on commercial RE is much better than maybe I'll sell off some of my SFR. I've been investing in RE for 9 years and haven't paid a taxes off my 27 SFR so the tax breaks are great on single family as well. But sounds like commercial is more passive with bigger profits. What would you recommend for a noob commercial investor like me. 1031 some of my properties into my first commercial strip center or office building?

john I don't know about profits.. I don't buy this for anything but solid safe investment with a Grade A tenant  IE doctor and her personal Guarantee on the lease.. I don't need profit from rentals I need just a place holder and some tax bene's I make far more income building houses and lending money than i ever could buying rental props.. But I get it for most investors that have not been in the business and have transactional income to support their lifestyle.. Congrats on what you have put together sounds very good !

[Don Konipol]

Without commenting as to the ease or difficulty, passive or active aspect, here are a few commercial deals I’ve made outsized profits on in fairly short periods of time.  I just haven’t seen opportunities like these in the residential field.

I purchased an automotive repair facility, fully equipped, where the owner was in bankruptcy.  Because there was a potential environmental issue, I had only one other bidder to worry about.  An environmental report commissioned by the court put the amount to remediate at $48,000.  My environmental engineer put the cost at $3500.  I bought the property for $115,000.  I sold the equipment, inventory, sign, business “name” etc. to an operator for $75,000, and provided them a lease at $3000 per month TRIPLE NET.  After 6 months the tenant/operator was able to obtain an SBA loan, and purchase the property from me for $325,000.  All in less than $120k; 6 months later $325k + $75K = $400K.

I purchased a tract of land on a major suburban thoroughfare (with a partner) for $155,000.  We almost immediately sold 1/2 the tract to a developer for $110,000, with the developer agreeing to put in water and septic for BOTH sides.  The developer did a build to suit for us, putting up a building for which we signed a 5 year lease with 2 5 year option at $3500 per month with $500 per month increase on option 1 and $1000 on option 2.  We immediately subleased to a national service company at $4500 per month under the same terms.  Over 15 years we collected $1,000 per month “overage” on the sublease, for a total of $180,000.  Additionally, 3 years after originally purchasing the property we sold the second half parcel for $155,000.

Partner and I purchased a closed new car showroom and service facility at foreclosure auction for $275,000.  I was sure that this was the “home run” of all time. Over the next 3 years we were unable to sell or lease the facility. We spent $24,000 on property taxes, $16,500 on insurance, and $12,000 on repairs.  We sold it after three years for $275,000, of which we paid a 3% buyer’s broker commission.  We lost $60k and had our money tied up for 3 years.  Well, sometimes you just have to cut your loses! 

[Paul Azad]

I read somewhere , Wealth is made by concentrating risk and preserved by diversifying it.