#67: Is THIS the Holy Grail of Real Estate Investing?

Foreign 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 a great week. This week we're going to be talking about one of my favorite types of investments. It's a real estate investment. We're going to talk all about it. I like to call it the holy grail of real estate investing and you'll find out why. But before we do that again, two things I have to remind you of because we're coming up on it pretty quickly. Number one is in about a month, depending on when you're listening to this, from September 10th through 12th, we're going to have our annual PIMDCON or our Financial Freedom to Real Estate Investing Conference. We're going to have some amazing speakers come. I cannot share who they are yet, our keynote speakers, but I promise you, you will recognize them. If you are in the world of real estate investing at all, you will recognize them. We're so excited to have all these people and experts in terms of real estate, both physicians and non physicians to come talk to you about how they've been successful creating, I guess, their own life, creating their ideal life with real estate investing. And they're going to teach you a bunch of things about how they did it themselves. So look out for that. September 10th through 12th we tickets are not available yet, but again, it's going to be free with a VIP option, so look out for that. That's number one. And also I know many of you have been asking about it. Next month we'll also be launching our next class of Passive Real Estate Academy where we help you confidently invest in real estate without being a landlord in four weeks. It's a simple academy. We've had thousands of people now go through it. The wait list is now open. So if you go to passiverealestateacademy.com passive realestate academy.com you can join the waitlist. And if you join the waitlist, it's no obligation, but we will let you know when it's coming out and you'll have the option and the opportunity to get in at a discount before anybody else does. So look out for that. Passive realestateacademy.com check it out. Now let's get to today's episode. Now I know what you're thinking. Is there Such a thing as the perfect investment. If you're anything like me, you've been on the hunt for years and years looking for what I call the holy grail of investing. Kind of like Indiana Jones on a hunt. And maybe you don't know exactly what that investment is, but you kind of have an idea what that investment would look like. I mean, I know I do. Number one, it has to have a high return on investment. Has to make good money for you in terms of return on investment. I mean, when I look at investments, I put them in different categories where I put them in low, mid and high return on investments. I mean, I consider low return investments to be anything that doesn't beat inflation. Now, most financial institutions will use an average inflation of three to three and a half percent per year. If you've been watching the news lately, you've heard that the rate of inflation seems to have grown quite a bit. I mean, a lot of cash has been infused and printed in the market. There have been so many other reasons why inflation tends to be running a little bit higher right now. And if your return is anything less than that, then, then you're just not keeping up with it, right? Not keeping up with inflation and it's slowly burning a hole in your pocket. Right. The value of that money that you're holding or going to get in terms of that low return is not really helping you keep pace with kind of the devaluing of your dollar over time. Now, in terms of mid level returns, I consider that to be anywhere between that three and a half to nine to 10% range and then high returns to be anything over 10%. I mean, that'd be great to have a high return on investment. Number two, I want it to be passive. Well, as passive as possible. I mean, that means that it doesn't require as much ongoing time or energy or commitment moving forward. Now, I've talked a lot about passive income. I mean, that's what this whole podcast, the whole brand is all about. But I know that passive is a relative term. I mean, I believe that, you know, these investments take either time, energy or capital up front, right? For this thing to happen, it doesn't take no work. It takes just maybe less work. And hopefully you can find the one that produces the most passive, highest return on investment that you can find. Obviously, the less that's required of time, energy or capital to make good money, the better. And number three, you want an investment to be low risk. I mean, this one's also very personal. It's all relative to Your goals and your risk tolerance. Do you consider low risk to be an investment where the chances of you losing your entire capital is very low? Maybe just losing a little bit is very low. You know, where do you put that mark? But again, whatever low risk means to you, the ideal investment would be lower than your tolerated risk. So whatever your holy grail of investing looks like, we're all on the quest to find it. We're looking for multiple streams of income, apart from our day jobs. And you probably look through blogs, listen to podcasts like this, online forums, Maybe you're even in one of our Facebook groups like Passive Income Docs, and maybe you read some of these amazing books out there. But maybe you haven't found that perfect investment. Well, let me tell you why. It's because it doesn't exist. Because if there was one perfect investment with all those more people out there, everybody would be pouring their money into that one investment. But I think it's possible to get at least pretty close or at least satisfy some of those things that we talked about. Now, I think the thing that makes the perfect investment so difficult to really find or attain is it's a concept of low risk. I mean, finding investments that can promise high returns or potential for high returns is quite easy. Just ask anybody who's been on the whole cryptocurrency wave the last few years. You know, you can see some really, really ridiculous returns. But I mean, what's the risk that comes along with it? Now, one of the reasons that I invest in real estate so heavily is that I actually think there are many ways to mitigate risk. Now, one way is to have a collateralized asset. Now, what do I mean by that? I mean, one of the best parts about investing in real estate is that you're investing in a real underlying asset, meaning that there is actually something physical, whether it's ground or a building or something like that, that is an asset that can be sold in the worst case and can be used as collateral against whatever the investment might be. So if the borrower, for example, or whoever that might be defaults on a loan, at the very worst case, there is an asset there for you to take and sell and that sort of thing. Another way to mitigate risk in real estate investing is just have experienced people helping you, right? Experienced managers. I mean, if you own your own real estate, then having an experienced property manager to guide you through these things, I mean, that's huge. Also working with these really experienced sponsors or operators or syndicators, whatever you might call it, who run these deals and you invest in their deals, that helps you mitigate risk because they've been through the ups and downs. And so when I look for to make any sort of investment, whether it's my own or invest in somebody else's deal, especially when it comes to real estate, I definitely look for those experienced people with great track records. Now, when it comes to investing in the stock market, we all know, and we've seen and you probably heard on different sites that even the most experienced managers by probability tend to not do better than oftentimes just the market will do in terms of the s and P500. Okay. Another reason that I love real estate is that you can find examples of conservative underwriting. Now, what does that mean? It means that the potential for return, the way they've calculated it or kind of looked into it or created these models, it can be done in a very conservative way. And the way one way that they can do that is to responsibly use leverage to use debt. Now, we saw a lot of issues back in 2007, 2008, when the loans were out of control. Leverage was used carelessly. Underwriting from banks was just not done very much. And there wasn't much of much of a buffer. And so when things went down and went down hard and that kind of caused the whole recession to happen, right, the whole economy to collapse, you know, it's possible to look at these deals and underwrite these deals as if you're going to be using very, very, I guess, on the lower end of leverage, which gives you that margin of safety, especially when you're looking at these deals. And then lastly, the reason I think that in real estate you can mitigate a lot of risk is because of diversification. I mean, there's multiple ways to diversify within real estate investing. One way is the property type, right? Whether it's residential, single, multifamily to commercial properties like hotels, retails and offices. And we all know that industrial warehouse is just killing it right now. You know, with companies like Amazon out there now, whenever you hear about the real estate market, usually really hear about it as the whole. Right. It goes up and down together. But we all know that just like anything else, the market fluctuates and things move at different paces, up and down. And so having different properties really can help mitigate risk. Another way that you can get diversification in real estate is by having geographic diversification. I mean, we all know that real estate is very local. You know that when you've been looking for your Own home, you know, that one area of town is much different from another area of town. Maybe certain areas go down, certain areas go up. Certain areas. Areas are dependent on really one industry. Like, for example, like Detroit was back in the day when the auto industry had issues. But talk to the experts and they'll say that real estate investing is extremely local. It's important to understand the small area of town that you're investing in. And so what people will do is that they'll get some diversification by investing in different areas of the country. And you're able to do that through real estate investing. So putting all those things together where I'm looking for a great investment with those goals that I mentioned before, backed by something that's collateralized like a real asset or property, trying to work with very experienced people, great track records, and has, you know, and uses conservative underwriting, looking for diversification both in terms of property type as well as kind of geographic and across the country. Like, what type of investment would actually fulfill all those. To be honest with you, the thing that I found closest to that are private real estate funds. Now, what's a real estate fund, you say? I think it's important to start by talking about what is a syndication. For example, Imagine people pulling their money together to purchase a single property, right? And some group, a management group runs that deal. Everyone who is an investor in that owns a piece of that building. But the managers run that deal. They do all the financing. They find the properties, they manage, they rehab and ultimately, you know, disposal of the property. And they distribute profits to their investors. That's what a typical standard syndication looks like. And as an investor, you know, you can expect to be in there for a deal for about five to seven years, but it's completely passive after the initial due diligence and doing the investment. And then you can just sit back and hope that you get distribution checks every three months. Well, if you think about syndication as like a single property or like a single stock, a real estate fund is kind of like a mutual fund. It's like a basket of properties that are bought together using one pool of funds. And then the investor gets really ownership of every property that's in that basket of properties. So it really helps to diversify your investment through that one investment. You're able to essentially invest in multiple properties at the same time. And even better if they're located in different parts of the country. Now, if you do your proper due diligence and you do your research and you do your digging, you can find These private real estate funds that are managed by, by operators or sponsors, whatever you want to call it, who have been in the game for quite a while. They've been through multiple real estate cycles, ups and downs, so they know what it takes to succeed in all types of markets. Now I'll tell you, when you look at these things like you're not usually not investing in the properties themselves, you're usually investing more in the managers, right? Oftentimes when you're investing, you may not even know what's going to end up in that fund, but you are investing in the business plan, the expertise of the people running the deal. So I'll tell you that the most important part of investing in these real estate funds is the due diligence before you invest. I mean, that's really important for you to learn how to figure out who these sponsors are, who's a good one, who actually has a good track record and figure out, hey, they are somebody that you're willing to make a bet on. Now, what kind of returns can you expect? I know people ask that all the time, but it varies widely, right? According to the type of fund and what they invest in. Now, typically I look for returns for funds somewhere in the 12 to 15 or 16% range. It varies widely, but when I look to invest in funds, I'm looking for returns in the 12 to 16% IRR range. Now that's something. Of course, I prefer something in the 20% plus. But let's be honest, in today's kind of real estate environment, that's actually less likely. And when I do see promises like that, it makes me take a little pause. I'm not saying it's impossible, but I just want to make sure that I understand what their underwriting standards look like to make them be able to promote or market that type of return. Again, anybody can say anything on paper, but who can actually deliver and deliver those returns. So where can you find funds like this? I mean, back in the day you had to basically hear about them through word of mouth, through personal relationships, SEC guidelines. I mean, they can be really restrictive. But now, now that we're all so well connected through the Internet, we, we have, you know, investor clubs like ours, the Passive Income MD Investor Club. I would love for you to be a part of it or there's a lot of investor clubs out there. There are Facebook groups where people talk about these things and share that kind of information. And so access is better these days. But I will tell you that before I invest in a fund, I will Spend a significant amount of time vetting them. Now, you might be locked into a fund for somewhere between eight to 10 years, you know, which can allow for some great returns over time. But again, you are betting on them for that long period. So make sure you do your proper due diligence before you invest in any sort of fund. So who out there has invested in real estate funds? I mean, does it sound like the perfect investment? I mean, to be honest with you, it's not the perfect investment, but it's pretty close and it can be. I mean, every investment does come with risk though, right? I mean, I'm okay with it there. Without risk, there isn't that reward. Right. Again, my goal and has been from the very beginning was to create multiple streams of income so I didn't have to rely on my day job. Right. As an anesthesiologist, I always felt that the biggest risk was not doing anything and just assuming that, you know, things are going to get better over time. And I knew that that wasn't going to be the case. So real estate funds, they may not be the holy grail, but I believe that they could be a major player for you and for me to help achieve whatever your goal is, whether it's financial freedom, maybe it's a couple thousand dollars a month passive income. And if you're an accredited investor, you're a high net worth individual. These real estate funds are available for you. I'd say at least find out more about them, see if they might be a great investment to add to your portfolio. Hope that helps. 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. 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