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The primary goals of a passive investor are to build wealth while also drawing regular income from investments. Ideally, the investor will not have to deal with the routine stressors associated with hands-on investing activities and can simply enjoy a steady stream of returns. Two of the more popular options available for passive investing are income-producing properties and divided-paying stocks.

The path that you choose to take to achieve your passive income and wealth building goals should be selected after careful review of the facts. While some investors may lean heavily toward one of these opportunities, others may find a happy medium between both of them. What should you know as you make upcoming investment decisions strategically?

The Historical Return on Investment

When you analyze the historical return of these two investment types, you will immediately notice that the annualized return on stocks is between 9 to 10 percent. On the other hand, the appreciation on a traditional single-family home across the decades is close to 5 percent. However, this does not tell the whole story.

Keep in mind that asset value appreciation is only one aspect of the return. Everything from cash flow from investments to tax advantages and risk must be taken into consideration as well. The return that you will realize from your investing activities will depend on the specific investments that you select as well as how you manage those investments, your taxation situation and other factors.

The Ability to Produce Steady Income

Because passive investing is your focus, the ability for an investment to produce steady income is crucial. For stock investments, income is derived from dividends. The average stock dividend is approximately 3 percent today, but there is tremendous variation in this. Generally, stocks that pay a higher dividend are riskier.

Furthermore, those high-yield stocks may not have a history of maintaining that high dividend amount. The stocks that have maintained their dividend rate for many years often have a yield at or below the average. Given a yield of 3 percent, you would need to invest $100,000 in stocks just to draw $3,000 per year in dividends. Keep in mind that most dividends are paid out either quarterly or annually.

Rental properties, on the other hand, produce regular income through the rents paid by tenants. Tenants are contractually obligated by a lease to make regular payments, and this provides a level of certainty in the monthly income that you would receive from your investment. While some tenants will breach that contract, there are legal options to collect the money if that happens.

In addition, if you or your property manager maintain high standards during the screening process, the risk of a tenant not paying rent is minimized. Because businesses always have the right to adjust their dividend, income security is generally higher with rental properties.

Which investment type has the higher yield? You have significant control over your return with rental properties. Your net income from this type of investment will be based on the rental rate that you charge, the property’s operating expenses and the mortgage payment. Careful research prior to your property selection as well as adjustments to loan terms can establish a relatively steady return that you have strategically set up.

The Opportunity to Invest with Debt

The ability to leverage the purchase of a rental property is truly advantageous. You can certainly take out a loan against another asset to purchase more stocks, but you are placing that asset at risk and increasing your expenses with a new loan payment in the process. This is not the case when you buy a rental property with a loan.

Your new mortgage is secured by the rental property rather than by one of your other assets, and the mortgage payments are covered by the rental income. The tenants are essentially paying off the mortgage debt through their monthly rent. In the process, they are building up the value of your investment portfolio.

In line with the $100,000 investment example described previously, you could use that as a down payment on a $600,000 to $750,000 property depending on the loan terms that you qualify for. Property value appreciation will be based on the full value of the asset rather than on the amount invested out of your pocket. In addition, your rental income on a property this size could be substantially higher than the $3,000 annual return from a comparable stock investment.

The Tax Advantages

A notable benefit of stocks is that they can be purchased in a tax-advantaged retirement account. While this is important for wealth building, however, retirement accounts are not suitable for building a passive stream of regular income. This is because penalty-free distributions are dependent on age and other factors.

On the other hand, the tax advantages for real estate investments are considerable. Consider that the mortgage interest and all property-related expenses can be written off. These expenses offset the taxable income that the property produces. In some cases, investors can turn a sizable profit with regular monthly income, and the deductions result in only a modest amount of this income being taxed. Property depreciation is another major deduction that further offsets taxable income from your investment.

Tax benefits related to your properties continue when you sell the investments. Through a 1031 exchange, you can avoid capital gains tax altogether if you reinvest in a similar type of property. Overall, you can save a substantial amount of money through all of the allowed deductions on your investment property’s income.

The Need for Regular Management or Oversight

One of the more notable reasons why the typical passive investor may forego the incredible benefits associated with rental properties is related to management. The amount of time and stress that may be allocated to dealing with tenant issues, property upkeep, vacancies and more can be considerable. None of these time drains are present with stock investments.

However, stocks do require regular oversight. The market moves throughout the day during trading hours. You may intend to hold your stocks as a long-term investment, but you still must observe market movement so that you can act quickly to preserve your assets if your stock price takes a nosedive. You also must be aware of announced changes in dividends and other news related to the companies that you have invested in.

You can see that both types of investments require regular oversight. You can hand over your stock portfolio to a broker. In the same way, you can hire a property manager to tend to your property’s daily operations.

The Importance of Diversification

Drawing all of your passive income from a single source can be unnecessarily risky. Whether you are focused on building wealth or building passive streams of income, diversifying your portfolio is crucial. Some investors will add both stocks and rental properties to their portfolio so that they can take advantage of the benefits that both offer.

Through passive investing activities, you must never lose sight of your ultimate goals. You have a limited amount of funds available to purchase investments. At the same time, your need for reliable income from your investments is predetermined. To optimize income potential, leveraging property purchases with mortgages may be essential.

A Word About Liquidity

Another reason why many people prefer to invest heavily in stocks is because they are highly liquid. With a few clicks of your mouse, your sell order can be placed. Within a few days after the transaction is settled, you can transfer the money to your checking account. On the other hand, it could take many months to sell real estate.

While liquidity is an important benefit, it has its downsides. Consider that you may be more likely to draw funds out on a whim or to sell stocks based on emotion. Selling real estate is a major undertaking that requires significant planning and effort. This ultimately can help you to protect the wealth that you built in your investment.

Structuring Your Portfolio Strategically

Research is essential as you set up your portfolio. This begins by identifying how much income you need to draw from your portfolio regularly in order to live comfortably. Defining the amount of your investment capital is the next step.

Because of the many benefits, it makes sense to draw a significant portion of your passive income from property investments. Researching investment opportunities and loan terms is the next step. At the same time, you can identify high-yield stocks that have not adjusted their dividend in many years.

Thanks to the ability to leverage rental property purchases, you may develop your passive streams of income more quickly than you realized was possible. The time to begin preparing for your future and to focus on wealth building is now.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

Why Apartments Are “The Asset of Choice”

Large multifamily properties have historically been owned by institutional investors such as mutual funds, REITs, insurance companies, and pension plans because of the stability and yield that apartments offer.

Being a Limited Partner investor allows an accredited investor and in some cases, a sophisticated investor an opportunity to buy a passive ownership stake and participate in these same large real estate acquisitions; a 100-unit apartment building, as an example. The Limited Partners (individual passive investors) can experience the same buying power, leverage, and potential tax benefits, just as institutional investors do.

The individual passive investor has the benefit of owning a percentage of an apartment community without the day-to-day management obligations. Additional benefits may include monthly or quarterly cash flow distributions, potential income sheltering through depreciation and tax benefits, debt leverage, principal pay-down, and potential appreciation in value.

Predictable Income

An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items such as covered parking spaces, fenced-in yards, coin laundry facilities, on-site storage facilities, to name a few. A strong property management team will focus on attracting qualified residents to the property and carefully have lease agreements executed, often with contracts lasting 12 months or longer. These practices in turn, generate long-term, consistent cash flow for the Limited Partner investors.

Forced Appreciation

By making improvements to an existing property (known as a value-add business plan), the property’s value can increase through this repositioning process. By increasing rents and occupancy, higher levels of revenue are generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can in-a-sense, “force” the property to appreciate in value rather than relying on market conditions or annual inflation. When the property is refinanced or sold, the proceeds can be returned to the Limited Partners or in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer the taxes.

Steady Cash Flow

One of the greatest advantages of real estate investing is the steady, and often tax-sheltered, monthly cash flow. Few investments can be bought with the same kind of steady cash flow return combined with the appreciation potential.

Tax Benefits

Distributions made to the Limited Partners are treated more favorably than most other types of investments because a significant portion of the distributions are often not considered income according to the tax code. This is due to the flow-through of expenses and depreciation. Additionally, the capital appreciation is deferred from taxation until the assets are sold and may be further deferred from taxation if a 1031-exchange is implemented.

Total Returns

An apartment’s combination of stable cash flow (primarily derived from rents), capital gains (resulting from increased property value upon sale), principal paydown (from residents paying down the loan balance over time) and tax savings (due to the current IRS rules and the additional benefits from the Tax Cuts and Jobs Act passed in 2017) provide returns that can be quite impressive given the current state of the stock market and the lack of yield offered by banks, money markets, CDs, and bonds.

A Hedge Against Inflation Historically speaking, rents, property values, and the replacement cost of real estate improvements rise with inflation. This makes real estate a particularly effective hedge against inflation, and might be an asset class to help you balance your investment portfolio, especially in the low yield environment we are in today.

Ownership of Real Estate Passive investors desiring steady income with a balance between risk and reward, may consider multifamily apartment investing as a Limited Partner to provide a solid foundation for building lasting wealth. Additionally, the ability to use a “hands-off” investing approach can be useful in building passive income streams that, in turn, free up time to spend on what matters most to the individual investor.

Visit us at our website to view more blog posts on Apartment Syndication. 

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.

In our previous post, we touch on the 5 Most Important Things To Know Before Investing In An Apartment Syndication.

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.

Do Your Research Ask QuestionsConnect with Other InvestorsReview Previous DealsTake Your TimeConsidering Everything

When you first begin to consider real estate syndication as an investment option, it can feel lonely, intimidating, or even like you’re going in blindfolded. 

I personally experienced fears around investing in a property I’d never seen, concern about how I’d get my money back, and doubt around the inability to log into an account and see my money.

These fears were addressed head-on through research. Every article I read and every conversation I had built my certainty until I began to feel confident toward taking the plunge.

If you’re considering your first syndication and feeling hesitant, I recommend doing your research, connecting with other investors, reading through previous deals, and taking your time. 

The best way to build your investing confidence is through self-education and research. Listen to podcasts, read books, and find websites on real estate.

Books:

Rich Dad, Poor Dad by Robert Kiyosaki

It’s a Whole New Business by Gene Trowbridge 

Principles of Real Estate Syndication by Samuel Freshman  

Podcasts:

BiggerPockets Podcast 

Best Real Estate Investing Advice Ever with Joe Fairless

The Real Wealth Show with Kathy Fettke

Relevant Facebook groups and forums like BiggerPockets can help you learn what questions you should be asking.

It’s likely that other people have asked about your same concerns and, just by reading through the forum’s questions and answers, you’ll gain clarity.

Remember there are no dumb questions and that you have the right to be diligent about gathering answers to your concerns. 

A successful investor needs a supportive community, and considering that syndication is a group investment, you’ll want to get networking.

Any new investors will share similar anxieties, questions, confusion, and excitement. Experienced investors can provide invaluable firsthand accounts of their experience with various projects and sponsors.

Find other investors through online forums like BiggerPockets, local networking events, or by asking sponsors if they’ll connect you to their current investors.

Finding comfort with financial projections, summary data, and investment lingo may feel overwhelming.

As you review more investment summaries, you’ll start to understand the flow of the deal packages, how each sponsor communicates, and exactly which investments interest you.

Each new investment opportunity fills up quickly. This can make new investors panic and start to believe they are missing the best deals.  

Remember, there will always be another opportunity. 

Allow yourself time to complete the steps laid out here, so that when you make your syndication choice, you are confident about every step.

If you take nothing else from this article, remember it’s completely normal to feel skeptical, anxious, and even timid when making your first syndication commitment.

The ability to take action is what separates the successful from those who give up. 

Your first real estate syndication deal is a huge milestone in your investing journey, and, even though your head might be spinning now, this is a time to savor.

We just want to start out by introducing ourselves as Park Ave Capital! We are an apartment-multifamily syndication company serving the greater Midwest. As of righting this post, we currently have over 700 units valued at roughly $46 million. Park Ave Capital was established to help qualified investors leverage the power of multifamily assets. We strive to create passive income and generational wealth for all of our investors. This allows them to free up their time and to spend it as they please.

We will be sharing much more of our story and what we can do for people to start generating passive income.