Author: Christine Hsu

Imagine with me, that your workday began with the usual routine, but halfway through your morning, you received the news you’d been laid off.

For most Americans, that means zero income starting tomorrow morning. 

Now, let’s pretend that during your employment, you leveraged your money.

The rich don’t work for money. They make their money work for them. – Robert Kiyosaki

Three Types of Income

Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Residual or Passive income (or both!).

Active Income

Active income is from your employer and requires activity in exchange for money.  When you stop, the income stops. 

Residual Income

Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.

Passive Income

Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable sources of passive income. 

Remember the job loss scenario? Let’s pretend you’d built passive income, on the side, during employment. 

Since being laid off, your earnings decreased by your monthly salary amount, but you still have income. 

Financial freedom is achieved when your earned passive income supersedes your active income. 

Investing in Stocks vs. Real Estate

Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month.

To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000. 

However, with real estate, $100,000 could buy a $400,000 rental home. How? 

The bank brings $300,000 to the table.

You put in 25%, the bank puts in 75%, and you earn 100% of the profits.

A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.

The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.

But I Don’t Want to Be a Landlord

The numbers look enticing, but being a landlord does not.

This is where, instead, you join a small team to acquire real estate. 

When investing $100,000 in real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market. 

However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.

Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.

If, while employed, you’re able to create passive income, you’ll be less stressed when facing a layoff. You may even find yourself celebrating unemployment.

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If you’re like me, one of the last things you think about when investing in a new venture, is taxes. It’s way more fun to think about all the potential luxury vacations you’ll take and the new cars you’ll buy, than to think about the taxes you’ll be paying.

Well, I’m here to tell you that, when you start out investing in real estate, it’s actually okay that taxes aren’t on your mind. That’s because, unlike when you invest in stocks and mutual funds, investing in real estate tends to make your tax bill lower, not higher.

Yes, you read that right. Investing in real estate can often help lower the amount of taxes you owe, even while you’re making great returns on your investment.

But how is that possible, you ask?

There’s actually a HUGE difference between the way the IRS views stock market gains and the way they view real estate gains. And that’s exactly what we’ll discuss in this article, specifically from the standpoint of a passive investor in a real estate syndication.

But First, a Disclaimer

Just so you know, I am not a tax professional, nor will I ever seek to become one (those people have really tough jobs). As such, the insights and perspectives provided in this article come from my experience only.

You should speak with your CPA for more details, and specifics on your situation.

Okay, now that that’s out of the way, let’s dive in.

The 7 Things You Should Know about Taxes and Real Estate Investing

Okay, get ready to have your socks knocked off. As much as taxes can knock one’s socks off, anyway.

Here are seven main things I think every passive investor in a real estate syndication should know about taxes:

1. The tax code favors real estate investors.
2. As a passive investor, you get all the tax benefits an active investor gets.
3. Depreciation is hecka powerful.
4. Cost segregation is depreciation on steroids.
5. Capital gains and depreciation recapture are things you should plan for.
6. 1031 exchanges are amazing.
7. Some people invest in real estate solely for the tax benefits.

#1 – The tax code favors real estate investors.

You may have heard that more people become millionaires through investing in real estate than through any other path. And believe it or not, the tax code plays a big role in that.

You see, the IRS recognizes how important real estate investing is, in providing quality housing for people to live in. As such, the tax code is written in such a way that it rewards real estate investors for investing in real estate, maintaining those units, and making upgrades over time (more on these benefits in a moment).

So as a real estate investor, you’re like the IRS’s teacher’s pet.

Hey, there are worse things.

#2 – As a passive investor, you get all the tax benefits an active investor gets.

This is a big deal! This means that, even though you’re not actively fixing any toilets or climbing on any roofs, you still get full tax benefits, whether you’re an active or passive investor.

This is because, as a passive investor in a real estate syndication, you invest in an entity (typically an LLC or LP) that owns the property, and that entity is disregarded in the eyes of the IRS (these entities are sometimes called “pass-through entities”).

That means that any tax benefits flow right through that entity, to you, the investors.

Note: This is different for investing in REITs. With a REIT, you are investing in a company, not directly in the underlying real estate, and hence you don’t get the same tax benefits.

Common tax benefits from investing in real estate include being able to write off expenses related to the property (including things like repairs, utilities, payroll, and interest), and being able to write off the value of the property over time (this is called depreciation).

Let’s focus in on this thing called depreciation.

#3 – Depreciation is VERY powerful.

Depreciation is one of the most powerful wealth building tools in real estate. Period.

Depreciation lets you write off the value of an asset over time. This is based on wear and tear and the useful life of an asset.

What is depreciation?

To give you a simple example, let’s say you just bought a new laptop. On day one, that laptop works great. Over time, however, the keyboard gets sticky, the processor slows down, and the battery barely lasts more than a few minutes. Eventually, the whole thing will go kaput and be worth very little, if anything. This is the essence of depreciation.

Essentially, the IRS is acknowledging that, if the property is used day in and day out, and if you do nothing to improve the property, that over time, the property will succumb to natural wear and tear, and at a certain point in the future, the property will become uninhabitable (just like when that laptop eventually dies).

As you can imagine, every asset has a different lifespan. You wouldn’t expect a laptop to last more than a few years. On the flip side, you would expect a house to still be standing several years, or even decades, later.

For residential real estate, the IRS allows you to write off the value of the property over 27.5 years.

Note: Only the property itself is eligible for depreciation benefits, not the land. The IRS is smart enough to realize that the land will still be there in 27.5 years and will still be worth the same, or more.

Here’s an example

Let’s say you purchased a property for $1,000,000. Let’s say the land is worth $175,000, and the building is worth $825,000.

With the most basic form of depreciation, known as straight-line depreciation, you can write off an equal amount of that $825,000 every year for 27.5 years. That means that, each year, you can write off $30,000 due to depreciation ($30,000 x 27.5 years = $825,000).

The reason that this is such a big deal is this. Let’s say, that first year, you make $5,000 in cash-on-cash returns (i.e., cash flow) on that property. Instead of paying taxes on that $5,000, you get to keep it, tax-deferred (i.e., without having to pay taxes on it until the property is sold).

Wait, really?

Yes, really.*

*Disclaimer: This depends on your individual tax situation. Please consult your CPA.

That $30,000 in depreciation means that, on paper, you actually lost money, while in reality, you made $5,000.

Plus, properties acquired after September 27, 2017, are eligible for bonus depreciation, which can really amp up the tax benefits for that first year.

This is why depreciation is SO powerful.

#4 – Cost segregation is depreciation on steroids.

But wait, there’s more!

In the last example, we talked about something called straight-line depreciation, which allows you write off an equal amount of the value of the asset every year for 27.5 years.

But, for most of the real estate syndications we invest in, the hold time is around just five years. So if we were to deduct an equal amount every year for 27.5 years, we’d only get five years of those benefits. We’d be leaving the remaining 22.5 years of depreciation benefits on the table.

This is where cost segregation comes in.

Cost segregation acknowledges the fact that not every asset in the property is created equal. For example, that printer in the back office has a much shorter lifespan than the roof on top of the building.

In a cost segregation study, an engineer itemizes the individual components that make up a property, including things like outlets, wiring, windows, carpeting, and fixtures.

Certain items can be depreciated on a shorter timeline – 5, 7, or 15 years – instead of over 27.5 years. This can drastically increase the depreciation benefits in those early years.

Here’s an example

Let me give you an example. And this one is based on a true story.

A few years ago, real estate syndication group purchased an apartment building in December of that year. That means that the investors only held that asset for one month of that calendar year.

However, due largely to cost segregation, the depreciation schedule was accelerated for many items that were part of the property, including things like landscaping and carpeting.

The K-1 that was sent out to investors the following spring showed that, if you had invested $100,000 in that real estate syndication, you showed a paper loss of $50,000.

That’s 50% of the original investment.

Just for owning the property for a single month during that tax year.

And, if you qualify as a real estate professional, that paper loss can apply to the rest of your taxes, including any taxes you owe based on your salary, side hustle, or other investment gains.*

*Again, this depends on your individual situation, so please consult your CPA.

This is a game-changer, folks.

#5 – Capital gains and depreciation recapture are things you should plan for.

You didn’t think that real estate investing would be 100% tax-free, did you?

Unfortunately, the IRS likes to be included in everything.

In real estate investing, the way they get their cut is through capital gains taxes when a real estate asset is sold, and sometimes, through depreciation recapture, depending on the sale price.

In a real estate syndication that holds a property for 5 years, you wouldn’t have to worry about capital gains taxes and depreciation recapture until the asset is sold in year 5.

The specific amount of capital gains and depreciation recapture depends on the length of the hold time, as well as your individual tax bracket.

Here are the brackets and percentages based on the 2021 tax rates:

For more details and the most up-to-date laws and info, I recommend you discuss the specifics with your CPA.

#6 – 1031 exchanges are amazing.

I mentioned above that when a real estate asset is sold, capital gains taxes (and often, depreciation recapture) are owed. However, there is one way around this. And that’s through a 1031 exchange.

A 1031 exchange allows you to sell one investment property, and, within a set amount of time, swap that asset for another like-kind investment property.

Doing so means that, instead of having the profits paid out directly to you, you roll them into the next investment. As such, you don’t owe any capital gains when the first property is sold.

Only some real estate syndications offer a 1031 exchange as an option. Often, the majority of the investors in a syndication have to agree to a 1031 exchange to make it a possibility.

Unfortunately, you cannot do a 1031 exchange on just your shares in the real estate syndication.

The sponsors must decide to do a 1031 exchange on the whole shebang. It’s all or nothing.

Every sponsor is different and approaches 1031 exchanges differently. If a 1031 exchange is something you’d be interested in, be sure to ask the sponsor about it directly.

#7 – Some people invest in real estate solely for the tax benefits.

The tax benefits of investing in real estate are so powerful that some people (namely, wealthier folks) do so purely for the tax benefits. You see, by investing in real estate, they can take advantage of the significant write-offs, and then apply those to the other taxes they owe, thereby decreasing their overall tax bill.

This is how real estate tycoons can make millions of dollars but owe next to nothing in taxes.

It’s perfectly legal, and it’s a powerful wealth-building strategy. And, you don’t have to be wealthy to take advantage of the tax benefits of investing in real estate. The tax code makes the benefits of investing in real estate available to every real estate investor.

Recap

Like I mentioned when I started this article, you don’t have to worry about taxes when investing in real estate, especially as a passive investor in a real estate syndication. In most cases, you’ll be able to make money via cash-on-cash returns, yet you won’t owe taxes on those returns due to benefits like depreciation.

To recap, here are the seven things I think every real estate investor should know about taxes:

1. The tax code favors real estate investors.
2. As a passive investor, you get all the tax benefits an active investor gets.
3. Depreciation is hecka powerful.
4. Cost segregation is depreciation on steroids.
5. Capital gains and depreciation recapture are things you should plan for.
6. 1031 exchanges are amazing.
7. Some people invest in real estate solely for the tax benefits.

As a passive investor, you don’t have to “do” anything to take advantage of the tax benefits that come with investing in real estate. That’s one of the benefits of being a passive investor. You don’t have to keep any receipts or itemize repairs. You just get that sweet K-1 every year, hand that over to your accountant, and that’s it.

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Ah, investment summaries. They’re the all-in-one marketing package / business plan / underwriting explainer / photo gallery / why-you-should-invest-in-this-deal packet for every commercial real estate syndication deal that everyone loves and hates.

Often, when deal sponsors are raising money for their deals, they’ll put together investment summaries to explain to potential investors why the deal is so great, what they plan to do with it, and how much the investors stand to gain from participating in the investment.

Investment summaries are like snowflakes. No two are the same.

Some investment summaries consist of gorgeous graphics and iconography, professional photos and clear tables. Others are written like textbooks and include haphazard low resolution phone pictures someone probably threw in at the last minute. Sigh.

But here’s the thing. Regardless of what an investment summary looks like, you have to be able to swallow your initial impressions (good or bad) and look at the numbers and business plan for what they really are.

If you decide to invest because the investment summary looks pretty, you may be putting yourself at risk, if you haven’t done proper due diligence on the deal and the team.

Likewise, if you write off a deal because the investment summary looks like your Aunt Ida’s tax returns from last year and causes your eyes to glaze over, you might be missing out on a great opportunity.

So what exactly should you look for? Good question.

Let’s take a look at a sample investment summary. I’ll walk through my thought process when I first look through an investment summary, so you’ll know what to look for the next time one lands in your inbox.

Please note: For simplicity’s sake, I’m using a one-page executive summary for this example, rather than a full-blown investment summary, which could be dozens of pages long.

Investment Summary At A Glance

Even though every investment summary is different, there are some basic elements that are pretty common across all multifamily real estate syndication investment summaries:

• Project name (often the name of the apartment complex)
• Photos of the property and area
• Overview of the submarket
• Overview of the deal
• Details of the business plan
• Projected returns and exit strategies
• Detailed numbers and analyses
• Team bios

In a one-page executive summary, you get bits and pieces of each of these elements, though you would need the full investment summary to get all the details.

If this executive summary landed in my inbox, here’s what I would do. I’d start by skimming through the whole thing.

In skimming this executive summary, here are the things that would jump out at me:

• Off-market
• Value-add
• Track record
• Strong submarket
• Proven model
• Equity multiple
• Unit count

Off-Market

When an asset is acquired off-market, it means that the seller chose not to list the asset publicly. Maybe the seller didn’t want the tenants to know that the building was being sold (this is quite common). Maybe the seller needed to sell within a set timeline. Or maybe the seller already had a buyer in mind.

Regardless, off-market is almost always a good thing. This means the deal sponsor team did not have to compete with other potential buyers on price. Thus, there’s a good chance that the purchase price is low, or at least very reasonable.

Value-Add

A value-add investment is exactly what it sounds like – an asset that presents an opportunity to add value in some way. Maybe the rents are significantly below market rates because the previous owner hasn’t raised rents in 10 years. Maybe the kitchens are still from the ’90s and could use some updating. Maybe there’s an opportunity to add some brand new additional units.

Whatever the case may be, value-add means more control is in the hands of the deal sponsor team. Rather than relying solely on market appreciation, there are things they can do to create additional equity, even if the market stagnates.

One of the most common value-add scenarios is one in which the units need to be updated. Let’s say the apartments haven’t been updated in 10 years, and the rents are $1,000 per month. Even if the team were to stay the course, that $1,000 per unit would still be able to cover the mortgage and fetch a modest profit.

But, who gets out of bed for modest profits? Not I.

Because there’s a chance to add value and improve the living conditions, as well as the returns for the investors, this is a true value-add. The team will go in, complete the renovations, then rent out the updated units for, say, $1,200 per month.

When you add up the $200 per month increases across all 250 units, that creates a ton of additional equity in the building, not to mention a ton of value for the residents who live there. Once residents see the updated spaces, they’re often happy to pay the higher rents and start to take more pride in their community.

Track Record

The next thing that catches my eye is, “Similar to Beta Apartments (acquired just last year and currently undergoing renovations)…” This tells me that this is not this team’s first time at the rodeo. They’ve done this before and are currently in the trenches with another asset nearby.

I also see, in the Investment Highlights section, that they’ve started implementing their business plan at Beta Apartments and that they’re surpassing their original projections. This tells me that their business plan is working and that they would likely be able to continue to strengthen their track record through Omega Apartments.

Further, this tells me that they’ve likely built up a strong reputation in the area, amongst brokers, property managers, and other apartment owners. Otherwise, they wouldn’t have been awarded this off-market deal.

Strong Submarket

I don’t know about you, but if I’m going to invest in an apartment building, I want it to be in a growing and developing area.

The fact that this submarket is the “#1 fastest growing” within this fictional metropolitan area tells me that things are moving and shaking here. I would likely open a new browser tab and immediately google that metro area and that particular submarket, to learn more about them.

What am I looking for? Things like proximity to major employers in the area, shopping centers, decent schools, any news about developments in the area, what it looks like on Google street view, what nearby houses are selling for, and anything else I can find.

Much of this will be in the full investment summary, but I always like to do a little research on my own as well.

Proven Model

Did you catch it? “Ten units have already been updated and are achieving rent premiums of $150.” Jackpot.

Why is this so important? This takes all the guesswork and assumptions out of the value-add proposal. The previous owner already created the proof of concept. They updated a set amount of units, and they were able to fetch higher rents.

This is great news. This means that all we have to do is go in and continue those renovations to achieve those same rental increases. To me, this signals much lower risk in a value-add opportunity.

Equity Multiple

There are certainly lots of numbers in any investment summary, and they can be overwhelming. Percentages, splits, projected returns…what do they all mean?

One metric I’ve come to rely on is the equity multiple. In this case, the projected equity multiple is 2.1x. This means that during the life of this project, my money will be more than doubled.

That is, if you were to invest $100,000, you would come out of this project with $210,000.

This $210,000 would include your original $100,000 investment, as well as $110,000 of profits. This $110,000 would include the quarterly cash-on-cash returns you would be getting as long as the asset is held, as well as your portion of the profits from the sale of the asset.

Typically, I look for an equity multiple around 2x, so this one passes my test.

Unit Count

I always like to know how many units I’m investing in. In this case, Omega Apartments consists of 250 units. This is a pretty decent size. This means that the team would be able to take advantage of economies of scale (i.e., increasing efficiencies by leveraging shared resources across the many units).

I will typically look at anything above 50 units. Ideally, to maximize economies of scale, I like to see over 100 units.

Next Steps

Now that I’ve taken my initial look through the executive summary, my immediate next step would be to decide whether or not to request the full investment summary.

In this case, I would go ahead and request the full investment summary, as this opportunity ticks off most, if not all, of the things I look for in a multifamily investment opportunity – strong team, strong submarket, and opportunity to add value.

In the meantime, I would do some more research on both the submarket and the deal sponsor team. I would definitely google Alpha Investments and read about the core people on their team, learn about other assets in their portfolio, and see if I can find any negative reviews or stories out there about the individuals or the team.

Move Quickly

Once you find an investment summary that meets your investment criteria, it’s critical that you move quickly. Why? Because these opportunities fill up on a first-come, first-served basis.

Chances are, if this investment opportunity met your criteria, it likely met others’ criteria as well. Be ready to make a soft commitment to reserve your spot, then take time to review the investment summary in detail.

Pro tip: There’s no penalty for backing out of an investment down the road, so it’s to your benefit to reserve early, to ensure you get a spot in the deal. If you wait around to be 110% sure, others will have jumped in front of you in line, and you may be left on the backup list.

Request a Full Investment Summary Sample

If you’re interested in seeing a sample of a full investment summary, or to gain access to the deals in our pipeline, consider signing up for the Noblivest Investor Club.

We are here to support you in your investment journey and will never pressure you to invest. Our goal is to help you gain the knowledge you need to invest with confidence (whether in our deals or not), so that together, we can change the world, one investment at a time.

No matter how many jobs you’ve had or how far down the career path you are, facing any workplace transition brings up emotions, fears, and possibly, some sleepless nights. The bittersweet feelings of quitting a job include guilt, worry, anxiety, excitement, adrenaline, and gratefulness. 

It only seems sensible that a cushion of cash in the bank might make any transition less worrisome. In this article, we’ll share 3 steps toward making the leap from the ol’ 9-5 through real estate investing so you can spend less time behind a desk and more time doing things you love.

Why Leave Your Job

Unlike generations prior, it’s rare for anyone these days to remain with a single company or industry throughout their career. There’s a massive work-from-home, remote position, freelancer, and small business shift happening at the same time. 

There are many professionals (you included) who want to take the leap and are aware of the freedom they desire, but feel the guilt and fear associated with abandoning a career path, reducing their income, and still being able to afford a life they love. Some of these fears can be because of their need to support a family or because the cost of living in their area is high. 

For some people, they actually like their jobs. Maybe resigning isn’t for you right now, but it doesn’t mean there won’t be a moment down the road when you might consider it or even think about taking a sabbatical to just travel or spend time with loved ones.

The simple solution to all of the above is passive income. Income you earn without actually having to step foot in an office or head to work even a few hours a day seems like a dream, but we’re here to share with you how you can make this your reality. 

Step 1 – Find Your Freedom Number

The first step toward building a strong financial plan toward quitting your full time job with confidence is finding your freedom number. This number is the amount of money that would more-than-cover your regular monthly expenses based on your current lifestyle. 

This is the amount of income you need to earn passively in order to quit working and still cover all your bills worry-free. You can easily find this value by looking at your expenses from the past six months. 

Let’s pretend your expenses for the last six months look like this:

Month 1 – $ 9,500

Month 2 – $ 12,300

Month 3 – $ 8,700

Month 4 – $ 10,800

Month 5 – $ 9,100

Month 6 – $ 9,600

The average of these expenses is $10,000. Now, add a 10% buffer. 

Your freedom number in this case is $11,000. This is how much you need to establish in consistent, passive income so you can leave your nine-to-five with confidence.

Step 2 – Build Passive Income

Now that you have your target, freedom number calculated, you can get to work building multiple streams of income that will equal that total.

Some ways to generate passive income include writing a book, creating online courses, or designing products to sell online. My favorite though, the one that requires much less time and effort, is real estate investing. 

Actually, did you know there are more people who become millionaires through investing in real estate than through any other path? 

It’s true! This is because you don’t need to know how to write, design websites, or create products and market them. With some capital and dedication to research, you can invest in cash-flowing real estate and build your streams of income, one deal at a time. 

Passive investments in real estate syndications can earn between 8 – 10% annual cash-on-cash returns, plus additional income upon the sale of the asset after an average of 5 years. 

So, as an example, you could invest $100,000 and earn about $9,000 in passive income per year while doing very little work. 

Get a few of these going, and you build, brick-by-brick toward your income goal /freedom number ($11,000 per month in the example above). Even just an extra one or two thousand a month relieves some financial pressure and allows for more flexibility in your personal schedule. 

No matter how you choose to build your financial cushion – through real estate or online products or both, the main goal is to create multiple streams of passive income to reach your freedom number. 

Step 3 – Track Your Progress

As you build each stream of income, it’s actually quite fun to track your progress and see that passive income number increase over time.  Whether you’re an excel nerd or not, you’ll want to establish a way so you can easily see how much passive income you’re earning each month and which investments are out-performing others. 

If you were to choose real estate syndications, for example, you could see that for every $50,000 investment, you’ll earn about $350 per month in passive income. By this math, you might consider moving the $200,000 you have in the stock market over to syndications and begin generating $1,400 per month. 

While $1,400 is quite far from $11,000, it’s a building block. Plus, it will probably more than cover your groceries for the month – one less thing to worry about. 

Each additional passive income stream you add covers another current living expense and acts as one more tile to your freedom number mosaic. One day soon, you’ll reach the tipping point where you feel comfortable reducing your work hours or quitting your job altogether, without experiencing a true reduction in income. 

Recap

Drastic changes and quick transitions can easily stir up fear or worry in any responsible adult, but even more so if you feel the weight of providing for a family or achieving steep lifestyle/income goals. The biggest thing to remember though, is that countless others have built passive income like we discussed here, and you can too. 

The steps outlined herein will help you identify your personal, passive income goals, create a path toward creating that passive income, and track your progress. No matter your reasons for wanting to build passive income, following the three steps above will help you build the financial assurance you need to quit your job with confidence. 

I’m often asked about the best way for someone to get started in real estate investing. If you’ve been wanting to get into real estate investing but are sitting on the sidelines and not exactly sure how to jump in, you are not alone.

There are TONS of ways to get involved in real estate investing, which is why those who do it love it, but it’s also why those who haven’t yet taken the plunge are left feeling completely overwhelmed and intimidated.

If you’re one of those spectators on the outside looking in, rest assured that there are many ways to get involved. In this article, I will walk you through how to diagnose where you are, what you want out of investing in real estate, and the best way(s) for you to get started.

Here’s an overview of what we’ll cover:

1. Get a Macro View of Where You Are
2. Determine Your Why
3. Decide How Hands-on You Want to Be
4. Assess Your Risk Tolerance
5. Determine How Much You Want to Invest
6. Decide Which Types of Real Estate Investments to Pursue
7. Recap and Takeaways

Step 1: Get a Macro View of Where You Are

First things first. Before you decide on where to plunk your money down, you need to take a step back to assess where you are in life and your financial journey, and what you hope to achieve through investing in real estate.

Are you just graduating from college, mid-career, retired, or somewhere in between? How much money do you have to invest? What are you hoping to get out of investing? Are you looking for a one-time payoff or smaller ongoing payoffs? How much would it take for you to become financially free?

Getting a good high-level picture of where you are will help you assess how much risk you’re willing to take on, how aggressive your real estate investing strategy should be, how much money you can comfortably invest, the types of returns you’re looking for, and the timeframe you’re aiming for.

All of these elements will come in handy as you decide how and when to get started in real estate investing.

Step 2: Determine Your Why

Because there are so many different opportunities in real estate, from investing in notes to corporate housing, from house hacking to investing in syndications, and everything in between, it’s very easy to fall prey to shiny object syndrome. One day you’re set on buying a cute cabin upstate for Airbnb, the next day you look into self storage.

In pretty much every real estate investment opportunity, there’s a good chance you’ll make some money. That’s why it’s hard to say no when you come across an opportunity. Someone will tell you a jaw-dropping story about how they are making boatloads of money investing in X, and suddenly, you think, hey, I could do that too!

Then, hopefully before you get too far down the path, you realize that it would take too long, or it’s not long enough, or it’s too hands-on, or it’s too passive, or it’s just not the type of investment that’s right for you.

This is why it’s so important to determine your why.

What’s the reason you want to invest in real estate? Why did you seek out this article? Are you hoping to create passive streams of income so you can quit your job and spend more time with you family? Are you hoping to go into house flipping full time? Are you in it for the tax benefits? Perhaps you’ve heard about house hacking and want to give it a go?

Whatever your reasoning, make sure to take some time to step back and gain clarity around what you hope to get out of real estate investing that you’re not getting out of your current financial vehicles (stocks, bonds, CDs, savings accounts, etc.).

This will better prepare you to resist the temptation when shiny object syndrome strikes.

Step 3: Decide How Hands-on You Want to Be

I’m sure you’ve seen all those house flipping shows on HGTV, where they do the whole shabam, from dilapidated junker through gorgeous showstopper, complete with a champagne-laden open house.

They go into the house with sledgehammers, masks, and protective eye gear. They crawl through moldy spaces. They come across unexpected critters. Sometimes there’s yelling, sometimes there’s drama. But in the end, they get that incredible sense of achievement from having turned an eyesore into a work of art.

If the previous paragraph excites you, fantastic. Then perhaps you want to be more of an active, hands-on real estate investor. More power to you. I’ve been there, and I know it to be incredibly gratifying, yet often very difficult, work.

If, on the other hand, that description made you cringe and almost close this article, don’t fret! The world of real estate investing has options aplenty for you too. Perhaps you want to be more of a passive, hands-off investor.

You put in the money, leverage other people’s expertise and sweat equity, and reap the rewards. Of course, they will take a piece of your returns, for all their work, but it’s a small price to pay not to have to deal with cockroaches and dirty toilets, don’t you think?

The decision of whether to be more of an active or passive investor is an important one, so take some time to step back and feel out where on the spectrum you’d like to be, given your current life situation and goals.

Step 4: Assess Your Risk Tolerance

Every real estate investment, just like every stock, every mutual fund, every dental procedure, heck, even walking out your front door, comes with a level of risk.

As with any investment, in real estate, there’s a correlation between risk and reward. The greater the risk, the greater the potential reward. The lower the risk, the lower the reward.

For example, a ground-up development in a transitioning neighborhood might come with a higher level of risk, whereas an existing apartment building, whose current as-is rents would cover the mortgage and expenses, might come with lower risk.

In real estate, because there are physical assets and paying tenants, there are often ways to mitigate risk. However, there’s always that teeny tiny chance that you could lose it all.

If the thought of losing money makes you fidget in your seat and your palms start to sweat, take that as a sign to start off slowly and with smaller amounts of money. This will help you learn the ropes on a smaller scale. Your cash returns might not be as big, but your educational returns will more than make up for it.

Step 5: Determine How Much You Want to Invest

Now that you’ve got a pretty clear picture of where you are, why you’re investing, how hands-on you want to be, and how much risk/reward you’re willing to take on, it’s time to think about the size of your investment.

Obviously, you don’t want to put your entire life savings into real estate, and especially not into a single investment. If you’re starting out, choose a modest amount you would be comfortable losing, or at least living without for a few years.

Unless you’re doing a short-term project, you should be prepared to have your money invested in the asset for a few to several years, so make sure you’re not investing so much that you don’t have enough to pay for your groceries next month.

When choosing an investment, make sure to take exit strategies into account as well, just in case you need to get your money out sooner than you’d expected.

Step 6: Decide Which Types of Real Estate Investments to Pursue

Now comes the fun part. You’ve taken time to reflect on where you are, where you want to be, and how real estate investing can get you there. With that information in mind, you can begin to narrow down the types of real estate investments into those that best fit your situation and goals.

Most likely, you fall into one of these categories:

• The Lots of Money / Little Time / Hands-off Investor
• The Little Money / Little Time / Hands-off Investor
• The Little Money / Lots of Time / Hands-on Investor
• The Lots of money / Lots of time / Hands-on Investor

Using these loose categorizations, let’s take a look at some different types of real estate investments that would fit into each of these scenarios.

The Lots of Money / Little Time / Hands-off Investor

Let’s start with those of you who may have some money saved up. Perhaps you’ve invested in the stock market, perhaps you have a decent amount in your savings account. You’ve heard about the many benefits of real estate investing, the tax breaks, the passive income, and the impact your money can have on families and communities.

But, given that you’re a very busy person, you simply have no time to put in all the research it takes to feel comfortable investing in something, and you definitely don’t have the time to actively renovate or manage a property.

There seem to be a bazillion real estate listings out there…how would you ever have time to research neighborhoods and markets, nevermind tour properties with agents and sign all that paperwork? Just thinking about it makes you exhausted.

Recommendation: Become a Passive Investor

If you’re in this camp, one of the best options for you to get started in real estate investing is through passive real estate investments, either through turnkey rental properties or through commercial real estate syndications.

Turnkey Rental Properties

On a smaller scale, you could get into turnkey rental properties. Turnkey is exactly what it sounds like; you buy it, and it’s ready to go, with minimal involvement or work needed.

Commercial Real Estate Syndications

If you want to go bigger, you can get into commercial real estate syndications, perhaps one of my personal favorite ways to invest.

What is a syndication, you ask? Quite simply, a real estate syndication pools together money from different investors.

Let’s say I’m a syndicator. I’ve spent tons of time researching markets, analyzing properties, and meeting up with brokers, contractors, and property managers. I find an apartment building that I think would be a homerun investment.

This apartment building costs $4 million, which requires a $1 million down payment. I have $100,000 to put in, which leaves me with a $900,000 deficit. I need to find investors to fill in the rest.

As an investor in my syndication, you rely on my time and expertise. I take care of all the day-to-day operations, renovations, accounting, etc. You just put in your money, and every quarter, I send you a check with your percentage of the returns. You would also get a portion of the profits when the apartment building is sold.

Your money goes toward revitalizing and improving an apartment community, and you see great returns. Win-win.

Overview of These Types of Real Estate Investments

What you put in

Your money

What you leverage

Other people’s time and expertise

What you get

Ongoing passive income, confidence knowing your money is being put to good use by an experienced team

The Little Money / Little Time / Hands-off Investor

Now, on the flip side, let’s say that you don’t have very much money or very much time or interest in real estate. You just know that it’s a good investment, but you have different passions and goals in life.

That’s okay. There’s a place for you too, in the world of real estate investing.

For you, one of the best and easiest ways to get involved in real estate investing is through real estate crowdfunding sites.

Recommendation: Invest through a real estate crowdfunding site

That’s right, just as Kickstarter crowdfunds new products, real estate crowdfunding sites crowdfund commercial real estate projects. However, unlike Kickstarter, these investments come with cash returns, rather than rewards in the form of t-shirts and sneak peeks of beta releases.

Real estate crowdfunding sites are available to the public, often have very low barriers to entry (as low as $500 minimums), and serve both accredited and non-accredited investors (what the heck is an accredited investor again? Find out here) .

These conditions make commercial real estate much more accessible to the general public than it once was. It used to be that you needed to know someone directly involved in a real estate syndication in order to invest in one.

And while this is still true in many cases, new SEC regulations have opened up a channel to allow certain types of syndications to be advertised to the public, which has led to the birth of many, many real estate crowdfunding sites.

So, if you’re strapped for both time and cash, but you still want to try out real estate investing, crowdfunding is a great place to start.

Overview of These Types of Real Estate Investments

What you put in

Your money (in small amounts)

What you leverage

Crowdfunding platforms, experienced deal sponsors, strength in numbers (i.e., lots of people all putting in small amounts of money)

What you get

Tons of choices on crowdfunding platforms and real estate projects, ability to invest with very little capital, various types of projects and project lengths to suit your investment goals

The Little Money / Lots of Time / Hands-on Investor

If you’ve been bitten by the real estate bug and want to start investing but don’t have a lot of capital at the ready, yet you are not afraid to roll up your sleeves and get dirty, you might fall into this category.

Even though you might not have saved up as much as you would have liked, you are interested in learning more about real estate investing and are willing to put in some time and effort (aka, sweat equity).

In my opinion, this is perhaps one of the most fun positions to be in. Count yourself fortunate that you actually have a passion for real estate, as many people get headaches just thinking about the analyses, paperwork, and potential rehab nightmares.

There are many ways to get into real estate investing with little or no money, as long as you’re willing to hustle and be creative.

Your Strengths, Interests, and Goals

Take stock of which aspects of real estate investing interest you the most. Is it the thrill of the hunt for those great deals? Planning and executing renovations? Running the numbers? Analyzing neighborhood trends and markets?

Figuring out what you’re most passionate about, as well as where your strengths lie, will help you hone in on how to start your real estate investing journey.

Moreover, what are you in it for? Are you looking to create short-term capital, or long-term equity? Passive income, or a quick buck?

Recommended Real Estate Investment Strategies

Below is a quick rundown of some of the most common ways people with little money and lots of time and interest can get started in real estate investing.

1. Fix and Flips

As seen on HGTV, this is where you buy a fixer upper and then put in the sweat equity to renovate and sell it. If you have no money to put down, you can look into short-term private loans, which will give you several months to a year to complete the renovations. Once you sell, you can pay off your loans and take the profits.

2. The BRRRR Strategy

The BRRRR strategy is similar to fix and flips, except that you hold onto the asset long term, rather than selling. BRRRR stands for buy, renovate, rent out, refinance, and repeat.

Similar to the little/no money down option mentioned above, where you take out a private loan to cover the down payment, except you pay off that loan upon refinance.

If you buy and underwrite correctly, the after-repair value (ARV) will be significantly higher than the purchase price, allowing you to do a cash-out refinance and pay off any private loans you might have taken out for the down payment.

3. Wholesaling

Those of you who love to network and find off-market deals might love this one.

Wholesaling is when you find a deal and get it under contract for a low price. Then, while the asset is under contract (i.e., you haven’t completed the purchase yet), you wholesale it to another buyer for a higher price.

Who pockets the difference? That’s right, you do.

4. House Hacking

Depending on your market, house hacking might be a potential option for you. This is exactly how I got my start in real estate investing many years ago.

Basically, you buy a property (typically a duplex, triplex, or fourplex) where you can rent out some of the rooms or units. The rent from your tenants helps pay down your mortgage.

Pro tip: If you’re able to get an FHA loan, you can put down as little as 3.5% of the purchase price, making this an even sweeter deal.

5. Real Estate Crowdfunding Sites

If you’re interested in commercial real estate and/or running your own syndications some day, real estate crowdfunding sites might be a great place to start. This allows you to learn about syndications without the pressure of having to run one.

You can learn how to find and compare deals, what to look for in deal sponsor teams, and what types of communications and returns investors can expect. All of this will come in handy if and when you decide to lead your own syndications.

Overview of These Types of Real Estate Investments

What you put in

Your time

What you leverage

Other people’s money

What you get

Firsthand experience, potential for great returns on very little cash investment

The Lots of Money / Lots of Time / Hands-on Investor

Hi. Can you be my best friend?

If you’re in this category, you’re perfectly positioned to make your money work hard for you. Perhaps you have a large amount of capital in the stock market and are looking to shift some of that over to real estate. Perhaps you’ve already built up a healthy portfolio of rentals and are looking to go bigger, or transition into a more passive role.

Recommendation: Lead commercial real estate syndications

If you’re looking to be an active investor, you might want to pursue leading your own syndications. This puts you in the driver’s seat. You can find the deals, put together the team, raise the capital, and deal with day-to-day operations after acquisition, or you can partner with others to create a real estate syndication business.

Recommendation: Become a passive investor in commercial real estate syndications

If you’re looking to become a passive investor, you can still be involved through finding and vetting deals, either through real estate crowdfunding sites or direct connections to real estate syndicators or private equity firms.

To be a savvy passive investor, you will need to know the lingo (cap rates, equity multiples, and IRRs, oh my!), as well as have some basic understanding of how deals are structured and underwritten. After all, any team can put together a fancy marketing package, but savvy investors know the right questions to ask to ensure that the deal and team are solid.

Overview of These Types of Real Estate Investments

What you put in

Your money and your time

What you leverage

The power of others’ expertise, time, and money to help you go bigger, faster

What you get

The freedom to carve your own path and maximize how hard your money is working for you

Recap

By now, your head may be spinning a little. It’s okay, that’s natural. 

Here’s a quick recap.

We started out by getting a macro view of where you are in life, your investing goals, how involved you want to be, your risk tolerance, and how much money you want to invest.

Given your current profile, we then explored a few different scenarios, with some real estate investment recommendations for each.

The Lots of Money / Little Time / Hands-off Investor

Consider investing passively in commercial real estate syndications

The Little Money / Little Time / Hands-off Investor

Consider investing small amounts through real estate crowdfunding sites

The Little Money / Lots of Time / Hands-on Investor

Lots of options: Fix and flip, BRRRR method, wholesaling, house hacking, crowdfunding, and more

The Lots of money / Lots of time / Hands-on Investor

Active: Consider leading your own commercial real estate syndication

Passive: Invest through real estate crowdfunding sites or directly through syndicators and private equity firms

Takeaways

As you can see, there are many, many ways to get involved in real estate investing. And, the options included above barely skim the surface.

If you walk away with nothing else, remember this. No matter where you are in life, how much money you want to invest, and how much time and interest you have, there are ways for you to get started in real estate investing.

If you’re still overwhelmed or anxious, there are ways for you to start small, with a few hundred or few thousand dollars. If you lose it all, consider it tuition for the College of Real Life. Each lesson you learn makes you a savvier investor, so don’t be afraid to fail. Even the most successful real estate tycoons have lost money, but they kept going.

Above all, remember that real estate gives you a unique investment opportunity, different than any other type of investment. Real estate allows you to invest in places where people live, work, and make memories. Investing in real estate allows you to make your money work for you, and also to make an impact on families and communities. And that’s something that a stock certificate could never give you.