How to Build Wealth Without the Headaches & the Truth About Rental Properties
“Hey Mr. Dexheimer, our basement is flooded. Can you come by to check it out?”
So, of course, I drive into Minneapolis to see what is going on with the basement. The odd part is that it hadn’t rained in weeks, and besides that, the basement had never previously flooded. I walk in, go into the basement, and see about 3 inches of standing water. As I walk around, I see something floating around and begin to understand what may be going on. I yell upstairs, “Can you please flush the toilet.” As the toilet flushes, I see water rushing out of a cleanout pipe and into the basement. I am standing in poop water! The floating things are poop floating around – nasty!
These tenants have been allowing this to go for 2 weeks before calling me. I call some of my laborers, supply them with HazMat suits, masks, and gloves, and put them to work clearing out the water and feces from the basement.
It’s the dream - buy a few rental properties and create passive income for yourself and your family! You go out, buy a few houses or duplexes and you rent them either as a long-term or short-term rental. Then you figure out just how much work they can really be and how little income they actually make. You see, your responsibilities include finding the property, funding the deal, renovating the property, finding and dealing with the tenants, and even performing or hiring maintenance. Even with a property manager on board to help with your rentals, the bookkeeping, strategic decisions, and maintenance/repair costs are still in your court. You’re basically running a small business, which can be challenging if you’re working a full-time job. Then add on the trouble tenant that destroys your property, and you can see how that passive income is not really passive at all!
The Case for Passive Real Estate Investments
On the flip side, there are fully passive investments in commercial real estate with professional investment companies. These are professionally managed and operated investments, so you don’t have to deal with any of the Tenants, Toilets, and Trash. If you’re a busy professional, making good money in your day to day, why add on more work and take more time from your family? Use that capital to create truly passive income, to do what you want, when you want, and with whom you want.
1. Minimal Time Required
Have you heard the phrase “set it and forget it”? In a syndication deal, you put money in, collect cash flow during the hold period, and receive profits upon the sale of the property.
You won’t be fixing toilets, screening tenants, or handling maintenance. The sponsor team and the property management team expertly attend to those things so you can sit back, enjoy the returns, and focus on living life.
2. Opportunity for Diversification
It would be unreasonable for anyone to attempt to become an expert in every phase of the property investment process, and even more so when it comes to different markets.
By investing with experienced deal sponsors, you can easily diversify into various markets and asset classes while rest assured that the professionals are taking care of the business. This allows you to quickly and easily scale your portfolio while also mitigating risk.
3. Did You Say Tax Benefits?
Similar to personally owned rentals, you get pass-through tax benefits when investing in real estate syndications. You’ll be able to write off most of the quarterly payouts, which means you basically get tax-free passive income throughout the holding period. Score!
You will, however, likely owe taxes on the appreciation income you earn upon the sale of the property. (Always check with your own CPA on your personal situation.)
4. Limited Liability
When you invest passively through real estate syndications, your liability is limited to the amount of your investment. If you were to invest $50,000, your biggest risk would be losing that $50,000. You wouldn’t be on the hook for the entire value of the property, and none of your other assets would be at risk.
5. Positive Impact
With personal investments, you make a difference in two to four families’ lives, which is wonderful. But with real estate syndications, you have the chance to change the lives of hundreds of families and whole communities with just one deal.
Each syndication creates a cleaner, safer, and nicer place for people to live and impacts the community and the environment positively. And that’s something you just can’t gain from stocks and mutual funds.
Final Thoughts
If you’re on the fence between active and passive real estate investments, the experience you gain from owning small rentals is irreplaceable. However, personally owning rental properties is not a prerequisite to commercial real estate syndications.
Either way, investing in real estate is a great way to diversify your portfolio and mitigate risk. It gives you an opportunity to have a positive impact on the families who will live in your units, as well as a positive impact on the environment and community.