Like most who invest in real estate, I started with single-family homes.
That was 20 years ago. Today I haven’t the slightest interest in owning properties directly.
Why?
Because I don’t want any labor or liability. My family and I spend most of the year overseas, and I want to spend every precious second of free time with the people I love. The older I get, the less appetite I have for wrangling excuse-happy renters, contractors, or property managers. And the less appetite I have for legal liability or loan liability risk.
But I’m getting ahead of myself.
When I graduated college, I had no idea what I wanted to do with my life. I fell into a job by accident handling loans for a hard money lender.
My clients were real estate investors. Some flipped houses, others used the BRRRR strategy to hold onto fixer-uppers as rentals. The thought occurred to me: With enough rental income, I wouldn’t have to work anymore. (This was before the FIRE movement, so I thought I was clever for this not-so-novel idea.)
I started buying up properties left and right, with no clue what I was doing. I compounded my errors by buying extremely low-end properties in Baltimore City, with as much leverage as possible. Which in 2005–2007 was a lot.
You know where this story is going. I lost my shirt in 2008 and beyond. It took another decade for me to eventually divest all those properties — many for a loss.
In the meantime, I heard every excuse in the book from tenants who prioritized their other bills over the rent. I did my best to manage contractors, all of whom promised the moon when trying to win my contract and then inevitably blew their budget and timetable. I hired property manager after property manager, none of whom did a particularly conscientious job of managing my rentals.
In 2015 my wife took a two-year position at an international school in Abu Dhabi. We figured we’d have a two-year sabbatical abroad and then move back to Baltimore.
Several countries later we’re still abroad, currently based in Lima, Peru. We enjoy a low cost of living, a high quality of life, and outstanding benefits through my wife’s job. International educators get free furnished housing, premium health coverage for the entire family, and paid flights home every year. We get to live a comfortable lifestyle on her modest salary and save and invest all of my income.
Which we largely invest in real estate — just not directly anymore.
Moving abroad forced me to acknowledge an uncomfortable truth: I was subsidizing the properties with not just my money, but also my time and labor. All too often when I lived stateside, I stepped in personally to deal with uncooperative renters or messy renovation projects. It ate up my nights and weekends and reduced my “real” returns even lower than they looked on paper.
In 2018 I sold my last property. Good riddance.
Around that time, I started experimenting with real estate crowdfunding platforms. Some have performed well, others less so.
But they didn’t scratch my itch. As someone who serves and teaches hard-won lessons to real estate investors in my business, I didn’t feel authentic without actually owning any investment properties anymore.
For years, our course students had asked my cofounder and me: “Can I just invest money in some of your projects?” We kept saying no until one day we turned to each other and asked, “What would it take to say yes?”
So, we partnered with a boots-on-the-ground single-family investor and we put together a few co-investing projects. Our audience went in with us on these properties as joint ventures. They performed perfectly well, but my partner Deni and I quickly realized that single-family investments required too much labor for us to scale.
I had recently invested in my first passive real estate syndication, so the thought occurred to me — why not go in on these larger investments with other people?
Passive real estate syndications target high returns (typically 15%–25%), often pay strong cash flow, offer full tax benefits, and are a way to diversify away from stocks and bonds. In other words, syndications deliver all the benefits of owning real estate without any of the headaches.
For that matter, passive investors also avoid certain types of liability. Ever been sued as a landlord? I have — twice. It was about as pleasant as it sounds. As a limited partner (LP or passive investor), you don’t have any legal liability or exposure.
You also don’t have any loan liability. You don’t sign a personal guarantee on the loan, so lenders can’t come after you if the deal goes awry.
Of course, these group investments aren’t all rainbows and unicorns. They require a high minimum investment (typically $50,000–$100,000), no liquidity, a long-term commitment, and no control over the exit strategy. Oh, and most of them don’t allow non-accredited investors.
Deni and I wondered if these might be a good fit for co-investing. After all, these completely passive investments don’t require much effort after the initial work of vetting the deal.
So we invested in a pilot deal with members of our “tribe.” We each invested $5,000 to collectively meet the minimum investment. It worked out so well that we launched a passive real estate investment club that meets every month to vet and participate in group investments together.
The best thing about passive investing in syndications? You can do it from anywhere in the world. It doesn’t matter whether I’m in Lima or Little Rock, in Rome or Rio or Rochester. I can vet the deal and wire the money just as easily.
The best thing about passive investing with other people? You can spread small amounts of money across many different property types, regions, and sponsors. Last year, we vetted and invested in 13 deals together as an investment club. I invested the same total amount that I would have invested in a single deal if I’d been investing by myself. But instead of lying awake at night worrying about how that one deal was performing, I can sleep knowing that I’m earning the average across all 13 of those deals.
In the meantime, I get to collect passive income from many of them. I had a distribution come in last week while I was hiking the Osorno Volcano in Chile with my wife and daughter.
It reminds me why I started investing in real estate in the first place: to build enough streams of passive income that working becomes voluntary. Now that I work for myself, I know that I’ll never actually stop working. But the closer I get to financial independence, the more control I get over when and how I work.
And that’s the beauty of passive real estate investing.
About the Author:
Brian Davis is a real estate investor, personal finance writer, and co-founder of SparkRental with over two decades in the real estate and finance industries. He owns fractional shares in over 2,000 units and regularly contributes as a real estate and personal finance expert for Inman, BiggerPockets, R.E.tipster, and more.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.