- April 1, 2022
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
Most people focus only on and only know about active income. Active income buys fancy cars, expensive homes, and designer clothing, all while simultaneously being taxed at the highest rate out of any income.
Yep, read that last part again. Active income is the most heavily taxed type of income.
Why keep hustling at earning active income, only to have such a large portion taxed? The focus should also be to generate and build passive income until it equals or surpasses your active income, which is what we’re talking about in this article.
School Doesn’t Prepare Us
Unfortunately, the US school system grooms us to become cogs in the active income-generating and tax siphoning cycle. We’re taught to work and trade time for income.
Even degreed doctors and attorneys who land high-paying salaries are doomed to trade their time for money for the next 35+ years. That’s the only thing they’ve been taught – to work, earn their $16,000 paycheck each month, pay about 40% of it in taxes, and be left with $9,600 a month in earned income.
While that’s still a high income, pay attention to the tax value. How much do you pay in taxes?
In comparison, a person who earns $16,000 a month in passive income (cash flow from rental properties or other real estate), only $2,300 would be paid in taxes. Which means they can take home $12,800 each month. Which would you prefer?
You Still Need Active Income
To be clear, you need to earn and save active income so that you can invest to create passive income. Maybe your goal is to work only 4 hours a week, or perhaps that sounds boring. Either way, the goal is to accumulate enough savings to invest and then continue to invest until the passive income earned matches or exceeds your active income.
Financial Peace of Mind
It used to be that you went to college, got a good job with a pension, and rode that wave until the day you retired. Things aren’t like that anymore and we’re 100% individually responsible for putting away savings SO THAT we can retire.
This may resonate with you, which is probably why you’re here right now. Most likely, you’re on the hunt for a tried-and-true method of achieving financial peace of mind. In other words, you’re interested in building multiple streams of income to cover your living expenses, whether or not you work daily.
One way of achieving the “mailbox money” of your dreams is to have multiple properties generating passive income streams. This allows you to design your time and your life instead of fearing layoffs or being concerned about having enough money when you retire.
Why Real Estate Passive Income?
Think about how you dream of spending your extra time. If you’ve wished for more time freedom to spend time with your kids or to see the world, passive income is the ticket!
You may already know that it is possible to generate passive income from the stock market. You may also know that it’s a roller coaster ride, and you would rather avoid that drama.
Real estate investing creates reliable income streams because you’re investing in stable assets. If you make $200,000 per year in income, the goal should also be to generate $200,000 in passive income from your investments.
Passive Income Ingredients
Now that you’re aware of passive income and its vital role in becoming financially free, how do you get started generating passive income?
- Focus on building your passive income until it matches your active income
- Invest in things that increase in value and are physically tangible
- Only invest in assets that can’t be disrupted
Number 3 above is one of the key reasons you should invest in real estate. Multifamily properties have withstood the test of time – people always need a place to live, no matter the climate, the economy, or social status.
How to Create Passive Income in Real Estate Investing
Everyone is an investor. You’re either investing your time and energy to earn an active income, or you’re investing your money to build passive income.
As an example, a doctor treats patients and receives $150 from the insurance company. The doctor invested his time in exchange for that payment.
The trick is learning to invest your money so that it begins to earn more money without you investing your time. Because of the way we’re generally taught – to work for an income – people tend to sit on large savings accounts. This “rainy day” cash is reserved for a period of injury or unemployment, a sudden life emergency.
The downfall is that this massive pile of savings is not earning any additional money. An investment in multifamily real estate syndications could begin earning cash flow and appreciation, growing that money without the time investment
7 Steps to Building Passive Income Through Real Estate Investing
#1 – Start With Your Why
The first step toward building passive income is YOU and your ability to develop a clear why.
The BiggerPockets group says there are three things you must change to become wealthy. They say that all three steps are required – if one leg is broken, the tripod topples over.
The Wealth Tripod:
- You must believe that you can become wealthy
- You must learn how wealth is built
- You must live out the steps needed to make it happen
Not every investment pans out as you wished or planned, but having a strong why will help you learn from each experience, push past your comfort zone, and keep you on track toward your investing goals.
#2 – Take Action
As with most other things in life, the action piece is the real key to making progress toward a goal, often, we get excited about something, dive into books and YouTube videos to learn about it, but then never actually act on it.
Commit yourself to set aside time each day to take action.
#3 – Decide What Type of Real Estate Investor You Want to Be
Once you’ve developed your “why” and committed time blocks on your calendar, it’s time to decide which route you’ll take.
To be an active real estate investor, you need time and expertise at your disposal. To have a successful real estate business, you’ll need the skills and people in your circle to support the day-to-day operations of a successful business.
Some questions you may want to ask yourself are:
- Do you have spare time, outside of family and your job, to dedicate to active investing?
- Do you have time to manage rental properties yourself?
- Are you physically able to keep up with rental properties and the repairs needed?
- Do you have supportive (soon-to-be) team members who can help manage the property, or will you hire a property management company?
- Do you have the capacity to make strategic decisions (renovations, evictions, purchases, and sales) about your property?
If not, that’s okay. It might be best for your lifestyle and current capacity to pursue passive investing in real estate syndications over individual rental properties.
#4 – Decide What Type of Real Estate Assets to Invest In
Whether you choose the active or passive route to real estate investing, there are two main categories to choose from, residential and commercial.
Residential properties consist of four units or less and include single-family homes, duplexes, triplexes, and quads.
Commercial properties include office buildings, retail (strip centers), storage units, and multifamily (five or more units) properties.
Many investors like myself, start in the residential real estate market but quickly realize that, to scale, commercial rental property investments would be more beneficial. All investments come with risk and require you to do your research before jumping on board. We view real estate syndications as posing less risk than others and have chosen this as the option for our family.
#5 – Learn and Utilize the Wealth Generators
When investing in physical properties, there are four main Wealth Generators to watch:
a. Cashflow: One of the most attractive reasons for investing in physical property is the potential for cash flow. Cash flow is leftover money after the property expenses and mortgage is paid each month. We love putting our feet up and knowing that money is “flowing” into our lives.
b. Appreciation: When a property increases in value over time, that is appreciation. As with any investment, there are ups and downs, but historically the value of real estate has continued to increase in the US.
One way to “force” appreciation is by investing in value-add property, where improvements increase the value of the asset through physical updates and renovations.
c. Leverage: When you take out a mortgage to buy real estate, each month, your tenants pay rent. Their rent money pays down your loan balance. This helps you automatically build wealth over time.
Pretend you bought a rental property valued at $300,000 with a mortgage of $200,000. During your ownership, the property broke even and never appreciated – which is very unlikely.
Once the mortgage is paid off, you own a property worth $300,000 free and clear you never had to pay or save for. How is that? Your tenants bought it for you by paying rent (which you used to pay off the mortgage). That’s awesome!
d. Tax Advantages: One of the most overlooked advantages of building wealth through real estate is the tax benefit. Owners of real estate get to deduct interest, insurance, maintenance, and depreciation.
Also, when an investor sells a property and uses a 1031 exchange to reinvest the proceeds, they can defer all capital gain taxes. Passive investors reap these rewards and more.
#6 – Find the Right Investment Opportunity
Once you decided to take the passive real estate route over active investments in rental properties, you must find an opportunity that supports your passive income desires.
Once you apply for and join the Sage Investor Circle we’ll share upcoming investment opportunities with you in an effort to support you toward your investing goals.
Rest assured that we pre-vet deals ourselves and require that they meet our high standards for deals we want to invest in ourselves. Some things we look for are:
- A robust operating team with a solid track record and a history of integrity and excellence
- A, B, or C class multifamily assets in markets with strong job growth, population projections, and job diversity
- Value-add business plan with conservative underwriting and multiple exit strategies
We encourage you to review deals and craft your own set of criteria as well.
#7 – Reserve and Fund
Investment opportunities fill up first-come, first-serve, which is why it’s crucial to educate yourself first, before there’s a live deal in front of you.
Once you’re well educated and adequately researched, you can take advantage of a soft reserve while taking the time to review the investment materials.
If you decide to move forward, you review and sign the Private Placement Memorandum, a legal document that goes into detail about
- The investment opportunity
- Risks involved
- Your role as an investor in the project
The final step is to wire your funds or send a check. This completes your active role in the process. You’ll receive an update when the deal closes and then monthly after that. On most deals, you can also expect quarterly passive income distributions.
If you’re ready to find financial peace of mind, you’ve got to go all-in on the passive income game. Invest in yourself, grow your active income and begin saving toward buying assets that increase in value.
The only thing that can hold you back now is fear. Create an intentional mindset shift in yourself through learning about passive investments in real estate syndications.
You can do it and we’re here to help. If you’re ready to begin building passive income for retirement so you can find financial freedom, join the Sage Investor Circle.
Want to Learn More?
Ready to learn more about passive investing? Join our community and sign-up for the Sage Investor Circle. Next, please Schedule a Consultation Session so we can learn more about you and your investing goals. As a part of our community, you’ll be invited to our bi-weekly live webinars, receive our quarterly newsletters and other valuable educational content to help you become a well-informed investor. Our members are notified first when a syndication deal passes our rigorous vetting process and becomes available.