#123 Is Passive Real Estate Really Passive?

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone. Hope you're having another great week. This is Peter. I don't know about you, but I'm feeling really good this morning. I dropped off my kids at school and I got a chance to exercise. Got a few things knocked off my checklist, and then I really settled down to get things going. And I don't know about you, but if you just get a few things done before your day starts, it has a way of setting your day up right, makes you feel good. I don't know if you've listened to some of my previous podcasts about morning routines if you haven't checked those things out. It's an awesome way to start the morning and start your day off right. So I hope that's where you're at. I also know that our conference is coming up pretty soon. Pimdcon in just a few short weeks. I'm not sure when you're listening to this, but I'm getting really excited for it. Getting ready to hang out with people, connect with people, and just come up with ideas, share resources. And if you've ever been to any real estate conference in person, it's those side conversations that really create the energy and the juice for what's happening that for that weekend or whatever it might be. Anyways, I hope to see you there this week. We're going to be talking about a question that I get quite a bit, and the question is, is passive real estate investing really passive? I know people talk about it all the time. You've probably heard that real estate investing is a great way to create an additional stream of income. And they talk about it in terms of passive income. In fact, their whole brand is focused around that passive income md. But when people start talking about real estate, people get really concerned about how much work there is involved in getting a real estate portfolio started and then how much energy that they have to put in to set these things up. Now, I get it. Most people are really understandably intimidated by the idea of managing a whole bunch of different properties, finding tenants, making repairs. Then again, if the goal is to truly create passive income, then I know that people feel like maybe, maybe it isn't that passive. I know that people don't want to invest in real estate to have another job. And I totally, absolutely get that. But when people start talking about real estate in terms of passive or non passive, this kind of thing, I think it really helps to go back to what the definition of passive income is. Now, I know it can be different for everyone. It might be different for you versus me. For me, it means that passive income is income that is not proportional to the time you put into getting it or acquiring it. Now, what do I mean by that? Is that as we go to our normal day jobs, we pretty much have a set hourly wage. I know that sometimes you do procedures and, you know, things cost more, this kind of thing. But for the most part, you know that if you put your time in, you're going to get a certain amount out, and that amount is relatively fixed. Maybe reimbursements can change here or there, but someone else controls how much your time is worth. But when it comes to passive income, I say that that income is not proportional to the time you put into acquiring it. Now, to be honest with you, like initially, when you put in a bunch of time, the output or the amount that you get may not seem like quite a bit, might be a much lower than what you normally get in your day job. For example, when you first start investing in real estate, that first, I don't know, whatever, six months, a year, whatever it is that it takes to really maximize your opportunity. When it comes to investing in real estate, you're not getting a huge amount of cash flow initially, but it starts to grow and grow and grow over time. And the amount of time that you put in is probably going to either be the same, or my hope is that it's even less over time, but that income continues to grow and rise without you having to put more time, energy and capital into it. And that's what ultimately excites me about real estate investing and passive income that comes from it. But I thought it'd be really good to also talk about real estate investing in terms of a continuum, in terms of the whole field. To me, like, when people talk about investing in real estate, they just talk about one segment. It's kind of like telling people that you're in medicine. That can mean a whole host of things. Obviously, the field is humongous and there are different ways to be involved in medicine, just in general. And so when it comes to real estate investing, I feel like there are so many different ways to invest in real estate, to be involved in different segments. And each kind of way to invest comes with its own pros and cons and comes up with its own characteristics. So it's really important for you to understand what that continuum looks like that way when it comes to figuring out what works for you. And again, in the context of the goals that you set, you can decide what aspect of real estate investing works for you. In fact, it can be as passive as you want it to be. Now, I like to kind of break up real estate investing in terms of the really passive stuff to the really more active stuff. Now for the more active stuff. It typically means that you are the landlord, you own the properties, you either manage them yourselves or you hire property management. For example, you own an apartment building, you own a short term rental, you own a duplex, whatever it might be. But in any case, you not only own the property, but again, you are responsible ultimately for all the big decisions that happen. And hopefully in that case, you can hire a property manager who will help with most of the other decisions. But at the end of the day, you still have to deal with all the big complications that might occur. And of course, you've got to apply for the loan and these kind of things. Just so you know, it typically requires the most amount of experience that can be gained over time as you invest in more and you learn and you educate yourself. Usually it takes a larger amount of capital because you own the property yourself. Maybe you own it with somebody else, but for the most part, you have to put down that big down payment, you have to take on the loan yourself. And so there's probably some more liability in that case, both to your own finances and then maybe even personal liability. And because it does take a lot more capital, a lot of times you don't have an opportunity to diversify as much because that all that capital has to be poured that one building. But honestly, the great thing about it of owning your own property is that you have the control. You're able to make all the decisions necessary to really improve that building. You're able to decide how much you want to spend on it, what not to spend, whether you want to sell it, keep it, refi, whatever it might be. And then there are also some tax benefits that come along with that that you can maneuver to make it work best in your favor. Now, on the other end of the spectrum is the stuff that's totally passive, where you invest in someone else's deals. And we talked a lot about it on this podcast. But there are things called syndications, these private real estate funds, as well as REITs, you know, real estate investment trusts. In this case, you're taking Your capital that you probably make from your day job and then you're investing with someone else, letting them make all the decisions, letting them handle the whole business plan and ultimately implementation of that business plan. So it doesn't require much experience on your part. Definitely the least amount of hassle. And it's possible you can invest a smaller amount. For example, let's say invest $50,000 versus $250,000 or $300,000 to really buy your own property. The downside is that you don't have a lot of control over what's going to happen with the deal. Sometimes you're able to take your money and put it in and take your money out. There's redemption periods. But sometimes you're locked into the deal for the life of the deal that might be three, five, seven years. So you don't have that type of control and you might not be able to decide whether it's best to refi the property, sell it at that time, spend this much or that sort of thing. Ultimately, if this is something you're interested in, you want to leverage the experts knowledge, you want to leverage their knowledge, experience their people on the ground to do all the work and you want to just have your capital working. Hey everyone, real quick, are you going to be joining me for the Financial Freedom Through Real Estate Conference 2022 in Los Angeles on September 23rd through 25th? It's also known as PIMDCON. It's a conference we put on every year and it's the largest real estate investing conference for doctors and high net worth individuals. It's your opportunity to network with others, learn from 30 plus experts in the areas of real estate. We're gonna have Brandon Turner, who is the host of the Bigger Pockets podcast as our keynote speakers. And again, there's gonna be tons of other doctors who have created Freedom through real estate who are gonna be there to share their knowledge. It's gonna be your chance to network with others who are like minded and trying to go for the same goal of financial freedom. It's a ton of fun and I will tell you it's going to be a high yield event. I'd love to see you there. Definitely check it out in person. There are limited seats left. You can find out More info at www.pimdcon2022.com. Look forward to seeing you there. Thanks. So what's our job? Our job is to look at this continuum, obviously again, figure out our goals first and then figure out what on this spectrum, on this continuum is going to Help us get where we want to be. And I will tell you right off the bat myself, I have a portfolio that includes both active and passive types of investments. Because at different times of my life, at different times of my financial life, one seems more attractive to me or the other. And I'm just always looking for that right balance. There's no doubt to me that, that it's possible to get higher returns when you own your own properties. Cause you make all decisions. There aren't any fees involved. You're not splitting profit with anybody else. The downside to that is again, you have to put in your own time and then you have to rely on your own expertise and knowledge to make the best decisions to maximize that income. Then there's times where I'm just busy or I don't want to put in that time and energy and effort. And so what I've done in the past is I've sold some of those properties that I've owned and then really converted that or shifted that over to more passive investments. I was very happy to let somebody else take part in some of the profits. I've been very happy in that situation to let the operators or the sponsors of those deals, like the syndications and funds, do what they're, what they do best. Let them find the properties, manage it, optimize it, and then ultimately decide what they do with the property and hopefully create a nice profit and cash flow for everyone. And the whole time while they're doing that, all I'm doing is waiting for quarterly distributions or whatever it might be. I'll read the updates that come from time to time. And then hopefully, and this has happened before, where I've gotten a just an email letting me know that they've sold the property and I can expect a huge check coming up in the next few weeks. That's always an amazing feeling. I know that I can potentially get hired with Active, but there have been definitely situations where with the passive stuff, I created these amazing returns. Totally passive. So now, after having given you this overview, I'm going to go back to my original question that people again ask me all the time. Is passive real estate investing really passive? And so when it comes to passive real estate investing, again, I'm talking about that side where you're not a landlord, where you invest in syndications, funds and REITs. Now, just speaking from my own experience, I personally invested in, I'd say close to 40 deals, give or take a few, over the past eight years. I can honestly say that the amount of time I'VE spent collectively on all those 40 deals. After the initial due diligence period really only comes out to a few hours a year, meaning I get the quarterly updates, I read the reports, and then I check my bank account to look for the dividends. Then at the end of the year or kind of around tax time, I look for something called a K1 that they send you, which basically talks about the amount of money that you made and depreciation and things like that. Really that reflects my ownership stake and. And then I forward that to my cpa and that's about it. All of the work for these type of passive real estate deals, it comes at the front end of the deal when you're performing your due diligence of the sponsor and the deal. Now, it used to take me days and days to evaluate an offering. Somebody used to send me something along. I had no idea what I was looking at. I had to cobble together some info from a few books that I look at, maybe listen to some podcasts. I had to ask some people. I had to look online. And it took me quite a while and I still wasn't sure if I was making a good decision. So honestly, it did take me a few years of investing to feel confident in my decisions when it came to investing in passive real estate deals. Now, obviously, I've gotten a lot more experience. I figured out a basic roadmap for how to evaluate these deals. And now those days have shrunk into hours and honestly even into minutes now. So when I think about my income to time ratio, and I think that's really important to think about, how much money do you make for the time you put into getting that income? That to me is like a big key factor and I've seen that grow over time. I want more income for less time. That's. That to me is what creates freedom. I don't know if that's something you get excited by, but it is really a big goal of mine. How much am I getting paid for the hour that I spend on whatever income or whatever investment it might be? So over time, with these investments, yes, I put some time upfront, but that income continues to drop in every quarter. And then of course, at the end of the deal, it gets returned to me, hopefully with a large check once they sell the building. And to me, that is my definition of passive income. It's income that isn't proportional to the time you put into acquiring. It mean that in the beginning you might put a little bit of extra effort in to find out and learn about the deal, find those sponsors, find good communities of people doing this so that you can learn from each other. Like we have part of the passive real estate academy. But then once you've got that set and you put that time into learning how to evaluate these deals again, it's a lot quicker to look at these deals. Takes you a lot less time, and then that income continues to come in passively. So to me, that's my definition of passive income. It seems to fit really, really well. Sure, when the deal ends, you've got to figure out what to do with that cash, but usually that's three or five or seven years down the road for some people. For a fund I have, it's probably eight or eight to 10 years when I've got to decide what to do with that capital. For me, it's actually pretty easy though. Once I find a good sponsor that I trust and really appreciate and understand what they do, I usually will take that large check that I get at the end of the deal and then roll it back in with them. Because now I've got a bigger pot, a bigger basis to get started with, and that only improves my cash flow. And then at the end of the day, the, the payout at the end also multiplies as well. So that seems like a good trade off for me that I have to put the due diligence and the time in, you know, once every three to five to seven years and then just keep rolling that capital into the next deal. So ultimately, the answer to that question of whether passive real estate investing is really passive, I think it's simple. The answer is yes. If you're looking for an opportunity where you're willing to put in the time and effort to maximize returns, then yeah, you might do better with direct ownership. And again, I do have a portion of that in my portfolio. I'm only willing to spend so much time on that and that's okay. And it's done really well for me. And again, I love those properties. I talk about my short term rental all the time now, so I do invest in those, but I'm only willing to allocate a portion of my time to it. Now on the other side, if your primary goal is to protect your time and use it in different ways than sitting there managing an investment, then this whole passive real estate investing, like syndications and funds, that might sound like a great option for you. So my suggestion is now having thought about these things, obviously go back and look at your goals in terms of income, how much time you want to spend what else you want to be doing with your life and then see how you can mix and match. Whether it's more of the active investing, passive investing, owning your own properties, investing in syndications and funds, see what's going to produce the cash flow for you, see what's going to actually help you get where you want to be. Considering the amount of time that you want to put into this thing, I hope that helps put things in perspective. You guys are awesome. Again, people that are listening to this, whether you're in your car, whether you're in between cases, whether whether you're walking your dog, running around. Again, I really appreciate you. The feedback from you has been amazing. I know that many of you have told me that you've gotten some value from this podcast. I really appreciate that. Please share it with some of your friends that you might think also might get value from this because that helps us continue to grow and then figure out ideas for what to do next with this whole platform and podcast. Anyways, I hope you have a great week and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in, and if you haven't already, make sure to hit subscribe. Are you a part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group PassiveIncome Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.