Why Passive Income Matters
Building enough wealth to retire comfortably typically requires decades of active income from your career. But relying solely on active income to fund retirement has some downsides:
- Your income stops when you quit working.
- You are dependent on increasing your salary over time.
- Burnout can result from working full-time for 30+ years.
- You may be forced to work longer than desired if savings are inadequate.
Generating passive income solves many of these issues and is a key ingredient for an ideal retirement.
What is Passive Income?
Passive income is earnings received on a regular basis without having to punch a clock or actively work for them. The money is generated by assets or ventures that operate with minimal day-to-day involvement on your part.
Building even modest streams of passive income that supplement your career earnings can make a huge difference long term. Passive income can provide:
- Cash flow without requiring your time and effort
- Income diversification beyond your job
- Financial freedom to retire early and on your terms
- Ongoing earning power outside of employment
- Residual lifetime income in retirement
Real Estate for Passive Income
One of the best assets for generating sustainable passive income is real estate. Rental properties provide passive income from rents consistently. And equity in properties builds over time as mortgages are paid down and values appreciate.
Founder of NT Capital and host of the Passive Wealth Strategies podcast, Taylor Loht, joined Jim Pfeifer on the Passive Investing from Left Field podcast to discuss the advantages of passive real estate investing. Taylor remembered when he came to realize that real estate was one of the greatest tools for passive investment: ”I had a light bulb moment when I heard about real estate syndication because it helped me see how people invest in all these big assets that we see around us.”
Long-term rental property ownership can generate strong ongoing cash flows decade after decade. The equity can also be tapped via refinancing or selling to unlock significant lump sums.
But owning and managing rentals yourself requires substantial hands-on work. Being a landlord can feel like a part-time job and comes with headaches like tenant issues, maintenance, and vacancies.
Thankfully alternatives exist to invest in real estate passively.
Options for Passive Real Estate Investing
There are several ways to invest in real estate beyond direct homeownership:
- REITs – Real estate investment trusts allow you to invest in large-scale commercial properties as a shareholder. A passive way to diversify but offers limited control.
- Crowdfunding – Platforms like Fundrise allow you to buy shares of a rental property along with other investors. More passive but higher fees.
- Syndications – Pool capital with others to buy commercial real estate overseen by a sponsor. Very passive with higher return potential.
Passive options like REITs, crowdfunding, and syndications allow you to invest in income-producing real estate without having to deal with tenants and toilets.
Crafting an Individualized Passive Strategy
Within the passive real estate investing universe, you have to craft a tailored strategy that aligns with your specific goals and constraints.
Important factors to consider when developing your personalized passive real estate plan include:
- Goals – What are your total return targets and desired cash flow levels? What is your retirement timeline?
- Time Commitment – How much time do you want to spend on your investments? What’s your comfort level analyzing deals?
- Overall Risk Tolerance – How much portfolio volatility and illiquidity are you willing to take on?
- Liquidity Needs – Do you need regular cash distributions or prefer long-term capital growth?
- Investment Size – What total amounts can you deploy? What are your per deal minimums?
- Tax Considerations – How much passive gain do you need to offset with passive losses?
- Diversification – How much portfolio concentration are you comfortable with per project, operator, or region?
- Hands-On Interest – Do you want zero involvement or open to some optional engagement?
- You likely have a mix of factors pulling you in different directions. Plot these out clearly before settling on a passive real estate strategy tailored just for you.
Passive Real Estate Syndications
One passive model that checks many boxes for investors is real estate syndication. Here’s how it works:
- An experienced sponsor sources, acquires, and operates a substantial commercial property like an apartment complex or office building.
- You pool capital alongside other private investors to fund the equity portion of the purchase.
- Ownership of the purchased property is structured as an LLC. As an investor, you own proportionate LLC shares based on how much you invested.
- The sponsor executes the business plan as the general partner while you and other investors are limited partners who share in profits.
- You receive periodic cash flow distributions plus your share of appreciation upon an eventual sale.
Syndications provide passive exposure to institutional-grade real estate while leveraging experienced sponsors to navigate the entire investment lifecycle. With little day-to-day responsibilities, you can sit back and collect consistent income from high-quality assets.
This path can generate strong risk-adjusted returns that may not be otherwise achievable as an individual rental property owner and operator. Top sponsors target 15%+ average annual returns on their deals.
Suitability for Retirement Investing
Intelligently selected real estate syndications well match the needs of retirement investing:
- Diversification – Each deal represents just a fraction of your total portfolio. This dilutes risk compared to owning just a few rentals directly.
- Cash Flow – Profit distributions provide tax-advantaged passive income to supplement your salary or retirement accounts.
- Wealth Appreciation – The value of the assets often appreciates over the investment term, which can be 5-10+ years.
- Reduced Tax Burden – Depreciation deductions offset taxes on rental income. Capital gains taxes can be deferred and reduced.
- Wealth Transfer – Interests can be transferred to heirs in a tax-efficient manner.
- Hands-Off – An experienced sponsor completely handles sourcing, execution, and management. You have no landlord responsibilities.
- Reinvestment – Refinancing and sale proceeds can be recycled into new deals for further compounding.
A potential downside is liquidity options. Occasionally deals allow partial or full redemption options after a set hold period if liquidity is needed. However, this is rare.
A prudently assembled portfolio of syndication assets can generate perpetuating cash flow and equity growth for sustainable retirement income. As your equity base grows, so does your annual passive earnings potential.
Mesh With Other Investments
For most passive investors, syndicated real estate represents one part of a broader investment portfolio and retirement strategy. A traditional retirement strategy will have many investments like those listed below:
- 401K, IRAs, etc. – Take advantage of tax-deferred compounding in retirement accounts.
- Dividend stocks – Invest for quarterly income and growth in public stocks.
- Alternative income streams – Build other passive revenue sources like online businesses.
- Cash reserves – Maintain an emergency fund in cash.
- Rental properties – If open to being active, directly own rentals.
- Peer lending – Earn interest lending money on platforms like LendingClub.
However, by focusing on syndications, investors create passive income streams that they can then complement with traditional retirement savings. A diversified passive investment portfolio can provide multiple compounding income sources serving as the foundation to a retirement strategy. Then investors can supplement their retirement savings with the traditional sources, such as retirement accounts or stocks.
As real estate investor Taylor Loht suggests, “Have buckets of money that you allocate to different strategies, to different investments.” This balanced approach helps manage overall risk in both passive investing and in overall retirement planning.
Getting Started with Syndicated Deals
If interested in exploring passive real estate syndications, here is a high-level process for getting started:
- Learn about syndications – Plenty of free resources exist to learn about how syndications work, risks involved, anticipated returns, etc. Assemble a knowledge base. Left Field Investors is a great place to start learning the ropes.
- Determine your investing criteria – Decide which investment parameters match your current situation like investment amounts, cash flow needs, timelines, etc.
- Join investment communities – Learn about syndications, sponsors, and deals by joining a passive investing community.
- Evaluate potential deals – As investment offerings arise, assess the business plans, target returns, markets, asset types, risks, and sponsors. Compare these to your investing criteria.
Real estate syndications can be a powerful vehicle for generating passive retirement income. By partnering with experienced sponsors and leveraging their expertise, investors get access to institutional-grade assets with strong return potential. When combined with other income streams in a diversified portfolio, prudently selected syndications provide perpetual cash flow, steady appreciation, and tax efficiencies to fund your lifetime needs. Continue your passive investing education by joining Left Field Investors.
