7 Strategies For Building Passive Real Estate Income
Most people, especially high-income earners, focus only on (and know only about) active income. They use active income to buy fancy toys like luxury cars, boats, watches, and designer clothing. What they don’t realize is that they should also invest for income. Active income is the MOST heavily taxed form of income there is. Why keep working hard, paying the highest amount of taxes possible when you can work smarter? The goal is to get your passive income to match your active income at some point in your career, and that’s what we’re going to be talking about today….exactly how to get started building passive income from real estate investing.
School Doesn’t Prepare Us
Unfortunately, our education system doesn’t prepare us financially. It ONLY focuses on active income. This includes:
Our schools only teach us how to work and trade our time for money. Again, this type of income (active) is the MOST highly taxed. For example, let’s say Jane graduates from law school and gets out making $200,000 a year in a large law firm. She’s so excited and tells her family that she’s making $16,000 a month and doesn’t have to live off Hamburger Helper anymore Little does Jane know that she’s getting ready to only focus on work that trades her time for money for the next 35+ years. Why? That’s the only thing she’s been taught. If she’s paid $16,000 a month, then the government is going to take 40% of her money. Uncle Sam is going to get his share no matter what. In Jane’s case, approximately $6,400 comes off her $16,000 a month ($16,000 x 40% = $6,400) leaving her with $9,600 a month in earned income. Unfortunately, most people don’t even know what their taxes are. Do you? If she were earning $16,000 a month in all passive income (i.e. cash flow from rental properties or other income from real estate), only $3,200 would be paid in taxes, so she’d end up with $12,800 at the end of the day.
You Still Need Active Income
Now, you can’t just go out and create passive income from scratch. You need to create and save up your active income first. Some people out there tell us that we only have to work four hours a week, and that’s it. We don’t know about you, but that’s not our goal. All of us at crest worth capital investments work more than four hours a week to grow our business, create positive cash flow, and continue to serve all of you. The goal shouldn’t be to only work four hours a week. The goal should be to create passive income so that you no longer need to rely strictly on your active income to cover your living expenses. That will allow you to follow your passion and do the work you truly love. The goal is to have both active income and passive income. As a side note, most of our passive income comes from real estate properties and rental income.
For most of us, we are taught to study hard, get a good job, and save up for retirement over the course of 40 years. Most of us are only taught about active income and are never taught about passive income. And if you want to work 40 hours a week for 40 years, go right ahead. But we’re guessing that that’s not what landed you here. Most likely, you’re looking for a way to achieve financial freedom, so you no longer have to rely strictly on your active income to cover your living expenses. Once you build up multiple streams of passive income, you’ll have achieved true financial freedom, as you can continue to cover your living expenses, whether you choose to work or not. We love the mailbox money that the passive real estate syndication deals are paying us on a monthly basis. Having multiple passive income streams from different properties will allow you to travel and live life exactly as you’ve always wanted to live it, without the fear of potentially losing your job and your sole source of income. If you’re married, we encourage you to sit down with your spouse and ask them, “How do we get passive income for extra cash flow?” Get them on board so that you can work together to build toward your common goal of achieving financial freedom.
Why Real Estate Passive Income?
When many people start investing, they begin by trying to make money from investing in the stock market. If you’ve ever tried investing in the stock market, you know that it can be a roller coaster ride, with your stock value constantly going up or down. If you want to create reliable passive income streams and generational wealth, you need to start investing in stable assets instead, such as real estate property. If you make $200,000 a year, what your goal should be is, “I need to match that with $200,000 worth of passive income. I want them both.” Ultimately, what you want is more passive income than active income. Why? Think about how you’d spend your extra time now. If you’ve been dreaming of spending more time with your kids while they’re still young, then passive income is the ticket!
Passive Income Ingredients
Now that you know that you can’t continue to rely on your active income, here are a few key ingredients to passive income
- Focus on matching your active income with passive income
- Invest in things that don’t go down in value such as real properties, not a piece of paper.
- Only invest in assets that can’t be disrupted.
The last of these ingredients is one of the main reasons you should invest in real estate, because it’s withstood the test of time. No matter what happens, people will always need a place to live, which is one of the key reasons we focus on multifamily investments.
How To Create Passive Income In Real Estate Investing
Whether you realize it or not, everybody is an investor. People are constantly investing their time and energy and exchanging it for money. If you’re a doctor and treat a patient and their insurance company pays you $150, you’ve invested your time in exchange for that money. That’s an investment. What you have to learn is how to invest your money so that it continues making money so that you don’t have to invest your time for it to grow. There are too many people that we talk to who join our crest worth capital who have piles of cash that they’re sitting on. When we ask them about that, they tell us that it’s for a “rainy day.” If you haven’t noticed lately, cash money is going down in value. If you think saving it will get you somewhere, it won’t. Unless you enjoy your money not growing. Consider investing some of the money sitting in accounts not earning interest and buy real estate property instead. If you’re just starting out in your career, invest in yourself. You’ll never lose it, as nobody can take away the knowledge you acquire. For example, if you read a book and learn a new skill or about a specific type of real estate investment such as multifamily syndications, then no one can take that knowledge from you.
7 Steps To Building Passive Income Through Real Estate Investing
#1 – Start With Your “Why”
The first place to start when it comes to building wealth through real estate is the person staring at you in the mirror…YOU! Many times when we seek to make a positive change for ourselves (lose weight, meet new friends, become wealthy), it’s our lack of a clear “why” that holds us back. Brandon Turner over at Bigger Pockets, says that there are 3 things that you must change if you want to become wealthy. He calls these 3 things “The Wealth Tripod“ and states that: “All three steps are required if you want to build and maintain wealth. Like a camera tripod — if one of the legs is broken, the entire tripod will fall down.” The Wealth Tripod is made up of three legs:
- You must believe wealth is actually possible for you.
- You must learn how wealth is built.
- You must live out the steps needed to make it happen.
Not every real estate investment works out as perfectly as you like. But that’s okay, as long as you LEARN something from it and not make the same mistake(s) again. Your “why” is going to help you get over some of those humps and push past your comfort zone to keep you on track.
#2 – Take Action
How many times have you wanted to do something that you were excited about? What happened? Did you do it? If not, you probably started reading and learning about it but never did anything else with it because you didn’t take action. We can “want” to learn how to become better at real estate investing watching YouTube videos about how to evaluate properties until the cows come home. But we all know that is not going to happen by itself. You can think you can do it, you can learn how to do it, but if you don’t take action, it’s not going to happen. As with anything else, “action” is the real key to finding success in whatever we go after in life. Without it, you have nothing. Make a commitment to yourself to set aside a certain amount of time each week, or better yet each day, and take action.
#3 – Decide What Type Of Real Estate Investor You Want To Be
Now that you know “why” you’re wanting to pursue investing in rental properties and you know you must take action in order to continue moving forward, it’s time to decide on which route you want to take: Active vs Passive Real Estate Investing Most active investors that we personally know that also have a day job typically have been involved in real estate in some form or fashion in the past. Usually their family owns rental property and they already have some type of support for the day-to-day operations it takes to run a successful real estate business. If you want to pursue the active real estate route, you need to have two things at your disposal:
Does your full-time job, along with your family obligations, leave you enough spare time to be an active investor? Do you have time to physically keep up with the day-to-day management of the rental properties themselves? Even if you hire a property management company, you’ll still need to make strategic decisions about your rental property, including decisions about renovations, evictions, and more. If this doesn’t sound like your cup of tea, no worries. Perhaps a better path for you would be to invest passively in real estate syndications (group investments), rather than investing in rental properties. The good news is that there are multiple different ways to invest in real estate, whether through rental properties, syndications, or otherwise. The key thing to remember is that investing in physical property is a great way to create stable and reliable streams of passive income, which will help you achieve financial freedom.
#4 – Decide What Type Of Real Estate Assets To Invest In
By now, you should have a better idea of whether you want to pursue the passive or active investment route. For most busy people, passive real estate investing is the better option. Why? Because it allows you to benefit from passive income, without the headaches and time commitments of managing properties yourself. Regardless of the path you decide on, the next step is to decide what type of assets to invest in. There are two main asset categories when it comes to rental properties and real estate:
Residential and Commercial
First, let’s define what each of these encompasses. An easy way to remember the difference between the two is that residential real estate property is four units or less and includes:
- single family homes
On the other hand, commercial real estate property encompasses:
- office buildings
- retail (strip centers)
- storage units
- multifamily (five units and larger)
When people first begin investing in rental property, they typically want to start off small by investing in single-family homes. There are those out there that make money in this space but again, it all boils down to your goals. When we first started investing in real property, we also thought the way to go was with single-family homes. Once we started educating ourselves, we quickly learned that in order to scale for larger success, it would make more sense to invest in commercial rental property. Another reason involved the risk factor. We, like many of you, have a family and wouldn’t want to jeopardize them in any way. In our opinion, we think multifamily rental property poses a lesser risk than most. You know as well as we do that ALL investments pose some form of risk. But not all have the SAME risk. For instance, there’s a big difference between investing in penny stocks versus saving money in a CD. We like to try to get the best possible return while taking the least amount of risk. And multifamily property is one of those investments where you can achieve this.
#5 – Learn And Utilize The Wealth GeneratorsWhen you invest in physical property, there are 4 main “wealth generators” you must pay attention to:
a) Cash FlowOne of the biggest reasons people invest in physical property is for cash flow. We love the thought of spending time vacationing with our families knowing that each month positive streams of money is “flowing” our way. Cash flow is nothing more than what’s left over after all the property expenses and mortgage is paid each month.
b) AppreciationAppreciation happens when the value of a property increases (appreciates) over time. Just like the stock market, there are ups and downs in the housing market (2008 crash). But historically, the value of real estate has continued to increase in the U.S. We typically invest in value-add property, which produces forced appreciation. This is the concept of increasing an asset’s value while physically updating or improving the property.
c) LeverageThe leverage means If you take out a mortgage to buy real estate, each month your tenants pay you rental income, right? What they’re essentially doing is paying down your loan balance for you. This is great because as they continue doing this, it helps you to build wealth automatically over time. Here’s an example: Let’s say you purchased a local property for $500,000 with a mortgage of $400,000. During the time that you held it, it broke even (had $0 in cash flow) and never appreciated – which is very unlikely. So after the 30-year mortgage is paid off, guess what? You now own an apartment complex free and clear worth $500,000 that you never had to save for. Why? Your tenants bought it for you by helping you pay down the loan via rental income. Good stuff!
d) Tax AdvantagesOne of the most overlooked advantages of building wealth with real estate are the tax benefits. Some of the advantages owners get to deduct include:
- even depreciation over time as business write-offs
#6 – Find The Right Investment OpportunityIf you’ve decided, like most members of the crest worth capital, to take the passive real estate route (rather than investing actively in rental properties), then the next step is to find the right investment opportunity for you, based on your passive income goals. After you apply for and join the crest worth capital, we’ll take time to get to know you and your investing goals, then share upcoming investment opportunities with you. You can rest assured that we only share deals with you that we have pre-vetted ourselves and that meet our high standards for deals we would invest in ourselves. Here are some things we look for in potential investments:
- A strong operating team with a solid track record and a history of integrity and excellence
- B or C class multifamily asset in a market with strong job growth, population growth, and job diversity
- Value-add business plan with conservative underwriting and multiple exit strategies
#7 – Reserve And FundMost opportunities fill up on a first-come, first-served basis, as many are found in hot markets with strong deal sponsors. That’s why it’s crucial to make sure you take the time to educate yourself NOW, before there’s a live deal in front of you. If you prepare and research ahead of time, then when an opportunity comes out that meets your criteria, you can jump on it right away. As part of our investment process, we’ll first give you an opportunity to hold a spot in the deal (via a soft reserve) while you take time to review the investment materials. If you decide to move forward, you would then review and sign the PPM (private placement memorandum). This is a legal document that goes into detail about:
- the investment opportunity
- risks involved
- your role as an investor in the project