All Forum Posts by: Jim Pfeifer

I am not a tax advisor, but I believe you should get 80% on your bonus depreciation this year.  Also, mt CPA calls the strategy you are talking about the "Lazy 1031".  

I think it's important to really figure out how much time and effort you want to, and can afford to, put into being an active investor.  That is what you will be if you are buying properties - hiring a property manager does not make it passive.  At all.  I used to own multiple single family and multifamily properties and had property managers for all of them.  It was not passive - I was the asset manager and I had to deal with lenders, insurance, title companies and most of all the property managers.  I went through a number of PM's in every market I bought properties in and it was a constant time suck.  If you have a full time job AND travel a lot - will you have the time to devote to an active portfolio?  

You stated you want to be passive and have the RE income replace your W2 income - you don't have to invest actively to achieve this goal.  You can be a passive investor in real estate syndications.  You would effectively hire asset managers to manage the properties for you.  All of the work for you is up front - you need to vet the operator, analyze the market, evaluate the deal and then send the wire.  After that - you have nothing else to do but hopefully collect distributions and read reports.  There is quite a bit of upfront education you will need, but that's no different from active investing - you will definitely have much less to do after your investment.

In my experience as an active investor, unless you have a solid advantage - market knowledge, skills with a hammer - you won't beat the returns of passive real estate syndications where you have a professional asset manager handling your investment.  This is their full time job and if you choose quality operators you will have quality results.  You can absolutely use this strategy to replace your W2 income and it can happen faster than you think and without all of the hassles of actively owning real estate!

If you are interested in active investing check out COIN - Central Ohio Investor Network.  They meet monthly in Columbus and have an active Facebook group.

@Josh Haney Fundrise and similar online crowdfunding sites are technically syndications, but there is a whole ecosystem out their of syndicators and funds that are a bit more transparent and personal as you can talk to the actual operators. There is a lot of due diligence that should be done on the operators. This is why I recommend people find a network or Community to help with education and to meet like-minded people with similar goals. BP is fantastic but it focuses more on active investing. There are several communities that focus on passive syndications and you can learn from the mistakes of others and really get a head start on this type of investing. 

The difference to me is investing versus speculating.  

When you are putting money in the stock market you are buying a piece of (electronic) paper, you get no current benefit in the form of cash flow (other than perhaps a small dividend on some stocks) and you hold the paper hoping you can find someone later to pay more for it than you did. You are speculating.

When you invest in real estate you are buying a real asset, you receive monthly cash flow and the appreciation on the back end is the bonus.  You are making money the whole time you own the asset and get a big bump on the back end.  You are investing.

There is nothing wrong with speculating as long as you understand that's what it is.  You can buy Apple stock and operationally they can have a fantastic year, but if the market tanks 30% - Apple stock will too.  There is a place for speculation in a person's portfolio - for me, it's less than 10%.  The stock market is also good for liquidity, but I don't think it should be the bulk of a quality portfolio.  Have you ever heard of a wealthy person who built their wealth investing in the market?  Likely they invested in real estate or owned a business.

There was mention of the advantage of the stock market being passive - that is true.  If you want to invest passively, I would recommend real estate syndications.  It is not as passive as picking a stock, but all of the work is upfront in vetting an operator and analyzing a deal - after that, you just sit back and (hopefully) collect cash flow.

Finally - the largest eroder of wealth is taxes.  If you speculate in the stock market - thank you for paying taxes!  If you invest in real estate - congratulations on having goose egg on your tax return on the Pay to the Order of the US Treasury line!

@Josh Haney You mentioned you want to be passive because you are working a W2.  In my experience, turnkey rentals are not passive.  As Scott mentioned - they "should" be "mostly" passive.  In reality, unless you find a really high quality property manager - which is quite difficult - it won't be passive.  I owned almost ten single family turnkey rentals in four different markets with 7 different properties managers and it was not passive at all.  I spent most of my time managing the property manager - it was difficult and frustrating and very few of my properties ever cash-flowed as projected. Even if you find a great property manager - you still have to manage the asset which includes corresponding with the PM, addressing issues like vacancy and repairs, reading and reacting to reports, replacing tenants and all of the other issues that come up.  I was fortunate that I owned these properties when asset values continued to rise, so although I didn't make money on cash flow, I did very well on appreciation.  That will be much more difficult in the current market.

I am sure there are plenty of people who are successful at turnkey rentals, but most of the people I know that were in that space because they had W2's and wanted to be passive have changed strategies and now invest in real estate syndications.

The advantage of syndications is you effectively hire a professional asset manager that handles every aspect of managing the property - including handling the property manager.  Your main job as an investor is to find and vet the operator/asset manager, research the asset class and market and analyze the deal.  Once you make the investment your responsibilities are done - you just sit back and wait for distributions (hopefully!) and read the reports.  In my experience, the returns of syndications outpace the returns of turnkey while costing much less time.  There are many advantages to syndications - you can get exposure to many different asset classes without having to develop deep expertise, you can get into multiple different markets, you don't need to worry about obtaining bank financing, you can diversify easily by investing smaller amounts than a down payment on a rental property and you have a professional asset manager in charge of each of the assets you choose to invest in.

The major downsides of syndication investing is that these are long-term, illiquid investments that are completely out of your control.  You don't (usually) get a say in when the asset is sold - it could be sold too early for you or too late.  The operator can sell it before the initial estimated hold or long after.  If you need cash and you own a rental property - you can sell, even if you lose money and get some capital back.  If you own a syndication and need cash, you are most likely out of luck.

I have done house flipping, single family turnkeys, small multi-family and syndications.  For a passive investor, syndications have proven much more efficient for my time and for the returns earned. If you are buying rental real estate - turnkey, BRR or any other way - your success requires that you have some expertise that beats the others in your market.  If you don't, your returns will suffer.  With syndications, you don't need market specific or asset specific expertise.  Of course, you will need to educate yourself in how to vet operators, research markets, learn about different asset classes and analyze deals - but your results will be driven by professional asset managers that have full time jobs in their markets and asset classes and it is hard for an investor to beat these professionals.

If you are set on investing in turnkeys - go for it!  I encourage you to look into syndications as well because they are designed for people like you - working a day job and wanting to invest passively in real estate!  Good luck!

 @Steve S. gave some great book recommendations, but he is too modest to mention his own book which just came out: "Avoiding Rookie Errors as a Left Field Investor: 20 Lessons Learned from 14 Years of Passive Investing in Private Syndications".

Steve's book is a fantastic read for the new and veteran syndication investor.  Would you rather make your own mistakes or learn from a successful investor?  Add this book to your reading list - it could save you thousands!

I an not a CPA or tax professional, but I agree with @Lane Kawaoka on this issue.  I sold five single family homes and three small multifamily properties - all had large gains.  Instead of the 1031 Exchange that many people feel obligated to do, I did a "Lazy 1031" and did not pay taxes on the gains from the active investments.  I worked closely with my CPA - and it is not an exact science as you won't know if you amassed enough passive loss until after the following tax year, but it definitely worked for me.   Good luck!

 You might be better served by looking into passive real estate syndications.  I started my RE journey owning a few single family properties, then I moved to turnkey single family.  Sadly, my first one was with Clayton Morris and Oceanpointe.  I lucked out because I visited the property after the "rehab" so I didn't lose as big as others.  I moved on to other turnkey companies and while they weren't committing fraud, they were difficult to deal with.  I had to manage the property managers and it was not at all passive.  Fortunately, I did this when property values continued to go up.  I was not a good asset manager, but I still made money.  That isn't possible anymore and I switched to hiring asset managers through investing in syndications.  These means all of my RE assets are managed by professionals who do this for a living - they hire the PM and handle all of the details.  

It's not all passive - there is upfront work in vetting the operator, analyzing the market and the deal and filling out the documents, but after that you just wait for distributions and reports.  That's it.

My results are much better than when I was managing my own properties and the time and effort is much much lower!  You still have to make sure you don't invest with any Clayton's but that is where a network and a Community come in - we work together to find quality operators who we can trust with our capital.

Good luck!

BP is a great place to start looking for quality operators, but you will probably have the most success if you find a Community that specializes in supporting LP investors in syndications.  There are several out there.  People are often hesitant to share their favorite sponsors on a public forum like BP, but in smaller groups - masterminds, LP communities or one-on-one you will find people very willing to share their expertise and connections!