Prior to discovering real estate syndications, like many, my idea of passive investing was mutual funds and looking at my statement a few times per year. For most of my professional career, I was a business owner in the IT industry. Working 80-hour weeks left no time for anything other than setting up a monthly auto-transfer into my brokerage account and 401k. My first investing mindset change happened around 2013 when I looked up from my keyboard and realized that 100% of my livelihood and nearly all of my net worth were wrapped up inside of my business. While the business was doing well and continuing to grow, I felt I needed more diversification for cash flow. If the business hit a rough patch, how would I provide for my family? I realized the diversification I needed was multiple streams of cash flow!
Options Trading?
My first path, interestingly enough, was deeper into the stock market in the form of active options trading. I figured out ways to carve out 15 minutes here and there throughout the day/evening to actively trade options and futures. I had some initial success and from that point was hooked – not on the trading part, but on the cash flow. I could earn money while I slept! However, I quickly realized this would be difficult to scale, and there was a large amount of risk and leverage being taken to accomplish these returns – not to mention the volatility of my profits. So while I continued to remain active in the public markets, I started searching for other cash flow ideas – preferably more steady forms of cash flow.
Real Estate Crowdfunds?
The first time I discovered real estate syndications was in 2014, which, at the time, I knew as “crowdfunding” via sites like Real Crowd and Crowdstreet. I jumped right in and made two investments in commercial and multifamily deals. I thought it was cool to own a piece of an apartment community or a building in New York City. At the same time, peer-to-peer lending was a popular thing so I waded into that pool as well. Satisfied that I had some diversified income streams in place, I shifted my focus back to my business and, to some degree, forgot about real estate in general.
A few years later around 2017, the business was continuing to do well, but I was hitting burn-out. I knew I needed to start planning for an exit. Again, I looked up from my keyboard to realize that one of the multifamily deals had gone full cycle and the commercial NYC property was underperforming. By this time, my active options trading was still successful, but I had traded through a great deal of volatility. While I thought I could trade full time, it didn’t provide the steady cash flow that I desired.
Turnkey Rentals?
My next stop on the passive cash flow train was discovering the Bigger Pockets podcasts. That was it! Single-family rentals (SFR) was where it was at. It sounded perfect, except for the facts that I had only bought two houses in my entire life, was not handy with tools, and was living in a very expensive housing market. But turnkey rentals were the fix for all that! Still feeling the pressure to get moving, I was off to the races. I started dialing up turnkey providers and learning how to analyze SFR deals. Over the course of more than a year, I purchased ten single-family rentals and duplexes in areas of the country that I had never been to, nor ever wanted to visit. I never laid eyes on a single SFR that I purchased. While the process to build this rental portfolio was time-consuming and painful, it got off to a good start. I was generating 8-10% cash flow with no debt. I felt good, but it wasn’t enough cash flow that I needed to step away from the business. I also realized rentals were not easily scalable and not 100% passive.
Taking a Deep Dive Into Syndications
I then remembered syndications and specifically, my previous success with multifamily. However, this time around, I had some hindsight to realize that with the previous investment, I had no clue what I was doing. I liked the pretty pictures in the brochure, wired my money, and got lucky. Beyond diversification, there was no other thesis for investing in multifamily. I began studying this asset class by looking at every deal I could get my eyes on – not investing in any, but learning. How is this deal structured? Why might it work? Where could it break? I purchased some real estate books and attended a lot of webinars to the point where I felt educated and ready to make an investment. Only now do I realize that I was still focused on the wrong thing. I was focused solely on the deal.
Luckily, I stumbled upon some solid multifamily operators and began making investments with them. Around this time (2018), I also discovered notes and note funds. This spoke to me because of the steady cash flow so I deployed some capital into this asset class too. This was also the time that I was in the process of selling the business. Satisfied with my passive cash flow, I focused most of my attention on this process (which is a bit stressful if you have never experienced it).
Passive Cashflow
In late 2019, the business sold, passive cashflow was in place, and I was free! My plan now was to sit by the pool with margaritas in hand, and occasionally, stumble out to the mailbox to watch for passive income checks. Mind you, I am in my mid-forties! However, it sounded great and it was…for about 2 weeks. I knew this could not be it. So I threw myself back into searching for more passive cash flow, as it had now become somewhat of a passion. About this time, COVID hit. That somewhat paused things for a while and created some distractions. I also realized how inconsistent the single-family rental cashflow could be even before the pandemic took hold. I was now laser-focused on syndications and continued to invest in that space with an emphasis on further diversifying. I had also come to the realization that the operator/sponsor is the most important piece of success. I began vetting operators in new asset classes such as self-storage and mobile home parks. I also started the process of selling the single-family rentals. While I did end up making money on them (mostly from inflation), I already knew that they were not for me.
Today, I am a full-time passive investor with a focus on private syndications. I have not had a W-2 job in almost 3 years! So far, everything is working out as planned. While I have a nice stream of passive income, the power of depreciation allows my tax returns to tell a different story. This also has brought on other benefits such as affordable healthcare. In my first year without a W-2, I purchased private health insurance to keep the costs down. However, by year two, most of my profits from passive investing were shielded by the depreciation. This allowed me to go back to the Healthcare Exchange (healthcare.gov) and get a good plan for an affordable price due to my tax returns showing low adjusted gross income. This will vary year to year pending profits and level of activity. I have recently taken on some IT consulting projects to keep the lunchtime tequila to a minimum. However, I do spend a considerable amount of time on my passive portfolio. I consider myself a very “active” passive investor.
Lessons Learned
Along the way, I have learned a lot of lessons – some of which I mentioned, like sponsor first, and know what you are investing in. My “SFR phase” taught me to have patience. I was too pressured to generate income that I was willing to go deep into something that I really had no experience with. However, one of the more important lessons that I have learned in my journey is the power of networking. I have always been a DIY person with my investments, but with real estate and syndications, you have to get out there, get to know people, and build trust. This is where a group like PassivePockets is so valuable. Finally, the most interesting thing that I learned is that the “financial freedom” that I was chasing is not what I thought it was. I have learned that financial freedom is not about losing the stress of the job or even about the time freedom. Being relatively young, financial freedom to me is simply a mindset that I can choose to do anything I want to do with the safety net of the diversified income streams. I have even had crazy thoughts of starting another business…but that could just be the margaritas talking!