How Real Estate Passive Income Can Create Peace of Mind
Most people only really know how to achieve active income. This is what we’re taught as kids – to go to good schools, get a full-time job and put any extra money you have into retirement savings such as a 401K – without really understanding how to achieve our financial goals.
Most people know hard work and they know how to make extra money with gig jobs, but they don’t have a passive income strategy, and only know about active income. They don’t have an investment strategy that will pave the way for them to achieve early retirement. They don’t know the different ways that they can obtain multiple streams of passive income – especially with real estate investments.
Also, active income means you give up your time (a non-renewable resource) for money. This path forward, just working and saving, is a tougher way to get to financial independence, which is what most people ultimately want.
Additionally, active income is taxed higher than any other income type or income source.
Why Don’t More People Invest Passively?
Why do people keep working so hard leaving them without much time to really enjoy their lives and live life on their own terms? Well, there are various reasons, namely that we’re taught that we have to work hard for our money instead of learning ways to simultaneously have our money work hard for us to allow for an early (and solid) retirement. The good news is that there is an alternative and that is to create multiple sources of passive income that can pave the way to a healthy retirement.
The goal is to build passive income streams over the long term until it exceeds your monthly expenses. Once you have enough passive income to pay for all of your monthly expenses then you are financially free.
The Difference in Taxation to You
Let’s take, for example, someone who would be considered a higher income earner grossing $16,000 a month in an active income position – their full-time job. They would likely pay about 32% (or $5,120) in taxes and have remaining about $10,880 a month in disposable income.
Now let’s take a real estate investor who is earning passive income from investing in a real estate portfolio, by comparison they would only pay about $2,300 in taxes, so their disposable income would be $13,700.
Which would you rather have – $10,880 after working hard all month or $13,700 after just collecting a passive income distribution check?
It’s not that real estate investors have cracked the code, it’s just that the IRS tax code works in real estate investors’ favor.
You Still Need Active Income
To be clear, you still need a good, steady income while you’re building your investment capital, but the goal is to make enough passive income from the savings you invest to exceed your monthly obligations and living expenses, and other financial needs.
So, if you make $150,000 in earned income each year, your goal should be to have enough passive income investments that will be producing that amount of income for you each year.
The best way to create “mailbox money” is to generate passive income through various real estate investments such as short-term rentals or long-term rental real estate or – our favorite – investing in commercial real estate syndications, which we’ll talk more about. The passive income you have coming to you each month or each quarter allows you to live your life by design instead of always worrying about bills and retirement.
6 Steps to Building Passive Income Through Real Estate Investing
#1 – Start With Your Why
The first step toward building passive income in real estate is to understand your “why”. If you need a bit of help in discovering a compelling “why”, then Simon Sinek has a great book called: “Start With Why” that may be a good resource for you.
At Bigger Pockets, a real estate community that emphasizes education, they stress that you must possess 3 important tactics to becoming wealthy. They call it the Wealth Tripod.
Here are the steps to the Wealth Tripod:
- You must believe in your heart that you can become wealthy.
- You must systematically learn how wealth is attained.
- You must live every day implementing steps to make it happen.
Starting with the foundation of your “why” will help you gain clarity on the rest of the steps you need to do to accomplish your investment goals.
#2 – Take Action
Commit to taking action once you have set your goal. Begin with the end in mind and start pursuing ways that will increase your investment portfolio in such a way that produces as much money per month that would allow you to leave your job if that is your goal.
Set aside time (or time block) to focus on your goals every day.
#3 – Decide What Type of Real Estate Investor You Want to Be
Once you have figured out your “why” and committed time to the process on your calendar, then you will need to decide which investments will best help you reach these financial goals.
This is the time when you are going to want to do your own due diligence and start researching good investment deals by locating a good sponsor a.k.a. operator /real estate syndicator who has a good reputation, a solid track record that can produce the higher returns while mitigating risk as much as possible.
When you invest in a commercial real estate syndication you have the option of investing in all kinds of different commercial real estate such as office buildings, retail centers, industrial complexes, storage units, and – our favorite – multifamily apartment buildings.
Or if you want to go into residential real estate investing (the above example is commercial real estate investing) then you would need to get with a real estate agent and start looking at passive rental income opportunities. You could invest in such assets as short-term rental properties like Airbnb’s or you can become a long-term residential rental property owner in single-family homes, duplexes, triplexes, or quadplexes.
#4 – Learn and Implement The Great Wealth Generators
When investing in physical real estate assets, there are four main ways to generate wealth:
Cashflow
Cash flow is the remaining revenue after all of the expenses and debt service (mortgage) have been paid each month. It’s a great feeling to just know that money is flowing in every month without you ever having to work for it.
Appreciation
U.S. real estate is some of the most sought-after real estate in the world, both commercial and residential, because of the appreciation. While real estate historically has had setbacks such as the Great Recession, we can see today, at the time of this writing that real estate has bounced back in a fierce way creating an enormous amount of wealth for so many individuals simply because of appreciation.
We can “force” appreciation in a commercial real estate syndication by way of improving the value through renovations and by streamlining efficiencies.
Leverage
When you leverage a property with a mortgage and rent the property out, you are having your tenants pay your mortgage each and every month. This will help you to build your net worth take and increase your wealth.
Once the mortgage is paid off, you now own a free and clear property that you never paid the mortgage on. You can think of it this way: your tenants bought you your property by paying rental payments to you each month. Pretty sweet deal, right?
Tax Advantages
One of the biggest advantages of investing in real estate is the wealth-building component in the tax benefits. As a real estate investor you are able to deduct interest payments, insurance premiums, all maintenance costs and the depreciation on the property.
Additionally, when the asset is sold you can defer your taxes indefinitely if you implement the 1031 exchange strategy. This is a great way to build long-term wealth for your family as well.
#5 – Find the Right Investment Opportunity
So, you’ve decided that investing passively in commercial real estate syndications is the way to go to attain your financial goals. Now what? Well, you’ll want to find great investment opportunities that will fit your goals.
Once you join the PCRP Group Investor Club, we’ll be able to share upcoming investment opportunities with you in an effort to help you meet your financial goals. Most of our investment opportunities are available if you are an accredited investor. But, don’t worry if you’re not, we can help you learn how to invest in real estate so that you can potentially become an accredited investor sooner rather than later.
You can be confident that we vet the deals that we offer to our investors. We have very high standards for our investors, and we want the opportunities to be deals we would invest in ourselves.
Some factors we look for in syndication opportunities are:
- An experienced and knowledgeable operating team with a solid track record of success, ethical conduct, and care for their residents and investors alike.
- Multifamily apartment communities in growing markets that display long-term job growth, population projections, and strong job diversity.
- A robust value-add business plan that demonstrates conservative underwriting and a variety of exit strategies.
We would encourage all of our investors to always conduct their own due diligence on the asset and the team and the real estate market, then develop your own stringent set of criteria before you invest in any real estate opportunity.
#6 – Reserve and Fund
Virtually all investment opportunities are first-come, first-serve. Deals fill up very fast if they are good, so that is why it is critical to understand what you want from a deal, a market and a sponsor ahead of time so that when that great deal comes along you can jump on it.
What we recommend to our investors is just put in a soft reserve to save your spot in the deal. This buys you some time to do some more research on the investment summary and various other factors before you put in a firm commit.
If you decide that you want to invest in the deal, then you would review and sign what is called a Private Placement Memorandum (PPM), which is a legal document detailing such items as the investment opportunity, the risks involved in the investment, and your role as a passive investor in the project.
The final step is to wire your funds or send a check. Then, your job is done. You will receive a formal notification once the deal closes and then monthly updates on the project thereafter. You can then expect either monthly or quarterly cash flow distributions depending on how the PPM address distribution schedules.
In Conclusion
If you want to find peace of mind as it pertains to your finances, then you will want to go all-in when it comes to passively investing in real estate. Grow your earned income and start saving as much as you can to put into passive investments. This may just be one of the best things you can do for your financial future and financial freedom.
The only thing that may keep you from moving forward is fear. Just be intentional about the goals you have set for yourself. Learn as much as you can about investing in commercial real estate syndications. Conduct your due diligence. Have a predetermined set of criteria for your investment strategy, and then when that deal comes along, you’ll be confident and ready.
Note: we are not financial advisors and are not offering financial advice of any kind. Please consult with your advisors before making any investment or financial decisions.
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!
