Have you been on vacation and wondered how do people make money or survive while living there? I have these thoughts when we travel to Montana where my wife grew up and went to school. We recently vacationed and toured her college hometown where she went to Montana State University in Bozeman. We typically go in the summer, so it is easy for us to be in awe of the beautiful mountain area and weather. When we go on vacation, I like to connect with a commercial real estate professional to get their insights on the market and did so while vacationing in Bozeman. There are tech, tourism, bioscience, and education industries, however, the commercial real estate professional mentioned many people live off their passive income. Creating financial freedom through passive income is powerful!
What is passive income? This is income that comes from the money you have invested, also known as mailbox money. There are many types of investments out there, but the one I am the most passionate about is investing in multi-family real estate. Below are 5 reasons why I think everyone should consider diversifying their investments into multi-family real estate.
Enjoy the control in directing your investments
Invest with an experienced jockey and a great horse. Same goes in multi-family real estate, in that you choose the deal sponsor, and the property as the horse to invest in. From choosing who you want to invest with, risk tolerance level, and understanding the strategy before you invest, enjoy the control where your money is invested.
Reduce risk by pooling capital with other investors
Create equity positions of owning real estate by pooling capital with other investors. In today’s environment, capital needed to fund the acquisition expenses and renovations can be 25%-40% of purchase price. This includes down payment to secure the loan. If you are investing a minimum of $50K compared to $3M needed to buy and implement the value-add strategy, you are able to enjoy the benefits of real estate equity, while reducing overexposure to your capital. Many investors do not think they can own large multi-family properties due to not having $3M. Passively investing in multi-family real estate reduces the barrier to own and allows the ability to use retirement funds through a self-directed IRA or solo 401k.
Enjoy monthly or quarterly distributions while being truly passive
Creating financial freedom through passive investing, allows your money to work for you, while others are implementing the value-add strategy. Average value-add property annual returns can be 6%-10%, with a 12%-18% IRR over the life of the investment. Say you invested $100K and were receiving a 7% cash on cash returns, this investment will bring $7K a year in passive income. Multiply that by 10 investments and you can bring in $70K per year passively. During the sale of the property, typically 5-7 years, the initial investment of $100K can reach an equity multiple of 1.8x-2x or more in returns from cash received during the investment and the equity profit at sale!
This passive income has a huge tax shield!
Protect your returns through depreciating the asset as a tax write off. Each year during tax season you will receive a K-1 showing the income and depreciation in the prior year. Through cost segregation and bonus depreciation investors benefit from enjoying their passive income while paying a reduced to zero tax liability on the investment. Discuss with your tax advisor for personal tax impacts.
Risk Resilience
Multi-family has proven to be more stable and continues to outperform the stock market. This year has been a roller coaster in the stock markets. In one week, stock investors have made gains, with the next wiping out previous gains. Real Estate has shown to be more stable even with a worldwide pandemic, with distributions still being paid to investors. During times of crisis, everyone needs food and shelter, making rents a stable cash flow.
Conclusion
Passive income from multiple streams of income helps you in creating financial freedom. Investing in more traditional investments is still a good strategy. However, diversifying your investment in alternative options such as multi-family real estate should strongly be considered. Even if you are passively investing in one property at $50K, the passive income generated is a start to growing generational wealth for you and your family. Over 90% of the World’s Millionaires have created their wealth through real estate, why not learn more about this asset class for your wealth?
Consider joining our monthly meetup to learn about passive investments by going to https://www.meetup.com/Texas-Multi-Family-Investor-Meet-Up. In addition, check out my recent podcast with Travis Watts, who went from the oil fields to living off passive income full time, by going to: https://www.creipartners.com/podcasts/oil-fields-to-living-off-passive-real-estate-income-with-travis-watts/.
Additional Resources
Texas Multi Family Passive and Active Investor Meetup
Oil Fields to Living Off Passive Real Estate Income with Travis Watts
Unlock your Ideal Work-Life Balance by Passively Investing in Real Estate
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