Why Passive Investing Is The Right Fit

Why would a guy that has been buying real estate for 15 years, has a podcast that talks about real estate, travels to conferences across the nation talking about investing in real estate, tell you not to buy rental real estate?

Simple! Most people that buy real estate, go out and buy a duplex or single-family home. If they really go all in, they buy several of those and even a small apartment building. This seems like the right thing to do, but those people are creating a 2nd job and that’s often not their goal. Their goal is to create more time freedom, but the hours they put into the building and the head space that it takes often doesn’t add up, considering the small returns they make.

On paper, the investment looks great, but that’s because the landlord looked at the numbers on paper and forgot to add in realistic maintenance and very likely, didn’t account for those big-ticket items, we call capital improvements. They underestimated the vacancy loss and eviction costs that pop up on occasion. Also, often forgot, are the hours spent showing the units, talking with tenants, doing maintenance, completing the books, and doing taxes.

Reality comes to fruition when a sewer line is clogged, only to find out that you need to dig up the yard and replace the entire sewer line for $12,000. That kills 2-3 years of cash flow, but that’s not the end. 3 years later, the roof needs to be replaced for $8,000 and 2 years after that the refrigerator, stove and water heater go out. How about the time that you get a call from your tenant about water in the basement, to find out that the sewer backed up and the water you are standing in is full of poop and pee! Trust me this happens – ask me how I know!

The dream for most, is to buy the property in order to have passive income. What ends up happening, is that they buy the property and soon find out they created a new job! So much for gaining passive income, to be able to retire earlier, spend time with family and vacation more. Instead, the owner gained active income (oftentimes no income after those big expenses hit). They also get to spend less time with family and retire years later with a new job!

Over and over, I talk with prospective investors that have bought into the dream of owning their own duplex or even short-term vacation rental, only to find out that it’s sucking the life out of them. They’re now selling everything they bought and passively investing with my company, Endurus Capital. These investors often have great jobs. If you have a great job, then focus on that, make great money, and use the extra income to invest passively. In 10 years, you should have a great portfolio, with excellent returns. Many people I talk with have that great job or are recently retired, only to understand that they still have a job and want to actually retire.

If you’re like me, you have no clue how to get into passive investing with good returns. 10 years ago, the only passive real estate investing I knew about was investing in a REIT. I knew REIT investing was ok, but not great. REITs perform slightly better than the average stock and provide low dividends, plus you get no tax benefits of actual ownership.

So, what’s available to you? Real Estate syndication is where private real estate companies raise money from friends, family, and acquaintances. A company like ours finds apartment communities and other commercial real estate, usually between 100-500 units or 75,000 sq ft commercial properties and raises capital to purchase and renovate those assets, as well as fully implement the business plan. The money comes from our network and that network comes from investors that are looking for a great place to put some extra money PASSIVELY.

These investments still have many of the same issues as a duplex, but the great thing is that we have scale. With a 200-unit building, we have 2 office staff and 2-3 maintenance staff on-site full time. Overseeing these employees is a regional manager. We also have professional bookkeeping and marketing. This doesn’t mean the problems don’t happen, but instead the professional staff handles them, and the general partner helps manage it, while the passive investor does nothing, but collect their profits. Another perk about scale, is that when 1 unit is vacant, we are still 99%+ full vs 50% with a duplex. Lastly, expenses are spread out amongst all the units. Remember the sewer line that needs to be fixed. That $10,000 expense is only $50/unit on a 200-unit building!

The best part about investing passively is that you can sit back and collect the profits without taking weekend or evening calls from tenants, property managers and maintenance!

Here’s a fun story – among many others I could tell. In 2012, I was self-managing all my properties, which was around 60 units. It was a Friday evening, and I was at home preparing dinner for my wife’s birthday, getting ready to spend the evening with her and the kids having fun, when I get a frantic call from a tenant of mine, “Todd, water is pouring into my unit and I can’t shut it off!” I try to explain how to shut the water off, but she tells me the shut off valve is broken off! So, I call my maintenance guy, but he just left town, my plumbing was the next call, and he was up at his cabin 4 hours away. Then, my back up plumber got the next call, but he was also not available, and the list goes on. Well, I grab my tools and tell my wife, “I’ll be back, but you’re going to have to finish dinner.” I get to the apartment and several hours later and a few trips to the hardware store, I have the problem fixed. Well, one problem. The other problem is that I am now home at 8:30pm on my wife’s birthday. She had to cook dinner, clean up after dinner and put the kids to bed – Happy Birthday beautiful!

You’ve heard the saying “owning rental properties would be great if you didn’t have tenants, toilets and trash.” I’ll also add in they’d be great without plumbing, electrical, heating, cooling, and roof issues. Oh, and the dreaded city as well!

Here’s the deal, there are no guarantees on your returns whether your active or passive, however, the headaches are certainly limited with passive investing. No need for a late-night run to the apartment or a call from an angry tenant or property manager, while you’re hanging out on the beach with your family.

Real estate historically is one of the safest investments, with the highest returns, so don’t avoid it, just make sure it fits your lifestyle!