HOW TO ACHIEVE FIRE FASTER WITH PASSIVE REAL ESTATE
Have you heard of the FIRE movement? Financial Independence, Retire Early.
Does it sound like a crazy idea? Or maybe something to aim for?
The basic premise is to live and spend on less, and invest more. This enables financial independence at an earlier age than traditionally believed. Some people reach it in their 30’s or 40’s instead of their 60’s or later.
Achieving FIRE gives you more choices. You can continue to work. You have more freedom to pursue other interests.
What would you choose to do if you did not have to work?
Even if you are not a FIRE proponent you may have similar challenges and ask similar questions.
ANSWER THESE QUESTIONS FOR YOURSELF
How can I get better returns on my investments?
How much time should I spend on my investments?
What is my time worth?
Should I spend my time earning more? Or finding other investments?
Do I want to spend more time with family and friends and less time actively managing my investments?
What should I invest in now to achieve FIRE?
The stock market is unpredictable. We take a long term view, realizing it has achieved about a 10-percent annual return. That is why many FIRE practitioners invest in the stock market. But past performance does not mean it will go up for the next two or three years.
Some FIRE proponents prefer real estate. Real estate can provide consistently better returns.
But finding properties and being a landlord takes time. Time to handle rehabs, tenants, and toilets.
This can lead to more questions.
How can I capture the benefits of real estate as a passive investor and achieve FIRE?
How can I maximize my total return as a passive investor?
Should I be an active or passive investor? How involved should I be?
That depends on how much time you want to spend managing the investments and where the funds are coming from.
You may prefer to spend the time with family. Or generating additional income.
REASONS TO BE A PASSIVE INVESTOR
Even real estate investors who actively manage their properties sometimes prefer to invest passively. Here are a few reasons why some people become passive investors in real estate:
- A regular job takes too much of their time.
- Don’t want to be a landlord or property manager
- Money to invest with is in a retirement account
- Idle cash needs a place to go to work
- They want to travel without being bothered with tenants and toilets
- They want to spend time doing something else
- Let someone else do what they do best, manage real estate for cash flow and growth, while you continue to do what you do best, whatever that may be.
- Create multiple streams of income without significantly increasing your time commitment. These may be for income or growing the nest egg.
THREE WAYS TO USE PASSIVE REAL ESTATE
Here are three ways to use passive real estate to get better returns.
- Can get a non-recourse loan and leverage up to 50% LTV.
- Be a private lender for someone else’s real estate.
- Invest in a syndication. The syndicators obtain the loan. Usually non-recourse. This lets you take advantage of leverage.
Let’s explore each of them a little closer.
ONE. Purchase a rental property and get a loan and leverage up to 80% LTV, or Loan to Value. If the property is in a retirement account you are limited to using non-recourse loans, which are generally limited to 50-percent LTV. Non-recourse loans are generally based on the asset value and cash flow, rather than your personal credit.
Using the BRRRR strategy does not sound very passive. It stands for Buy, Renovate, Rent, Refinance, and Repeat. Each of these steps takes a significant amount of time.
To make this approach more passive, you can use a property management company to handle all the rental activities including finding tenants, processing collections, and dealing with maintenance and repairs.
As an alternative, start with a turn-key property with a tenant already in place.
Depending on whether you are seeking growth and appreciation or have a need for cash flow, you can consider going for a higher LTV and gains in appreciation, or a lower LTV and cash flow. During the building years we primarily seek growth. Later we put an emphasis on cash flow.
TWO. We can become a private lender for someone else’s real estate.
Real estate investors need private lenders and frequently prefer them over banks. Private lenders are easier to work with. Have you seen how much paperwork and documentation is required to get a bank loan recently?
Returns vary considerably. Sometimes a lender can get a higher return by waiting to get paid interest until the note becomes due. Or the interest might be calculated in part based on the equity growth of the property. This could be in the form of an equity participation note.
THREE. We can invest in a real estate partnership.
A syndication is a form of partnership that is registered with the Securities and Exchange Commission, or SEC. It typically consists of general and limited partners and may invest in some form of commercial real estate.
The general partners find the property, put it under contract, arrange the financing, and generally handle decisions related to the property. The limited partners provide funds for the acquisition and sometimes capital improvements. Liability is limited for the limited partners to the extent of their investment. Limited partners also are not required to use their credit to get funding.
Some properties provide cash flow almost immediately. These can be preferred when we are seeking to draw funds from the nest egg.
Similar to single-family rentals, some of the properties need improvements to bring them to their best potential. We call these “value-add” properties. These are more ideal during the years when we are building our nest egg as they tend to offer the highest total return.
Attune Investments can assist you in becoming a passive investor. We might have a syndication in which you can become a passive partner. We might have an opportunity for you to loan money (be the bank) and get a fixed rate of return.
Get in touch with us so you can get to know us better and learn how this might work for you.
HELP US GET TO KNOW YOU BETTER
Are you on a path to FIRE? Or working toward financial independence? What have been your chosen investments to get there?
Attune Investments provides a better return for our investors. And we make a positive impact in people’s lives and in our world.
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Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.
Or you can choose to loan money, get in with a clear return, and get out earlier.
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.