Truly Passive Real Estate Investing

By | September 17, 2012

A little while back I mentioned that I may be jumping into real estate investing sooner than I had anticipated. I’m 25, don’t own my own home, but I am already planning my entry into real estate. Many of my friends question my sanity, but I know that I am setting up success for my future. As I shared in my last post, real estate investing became increasingly more viable because of one thing: connections.

It was at a friend’s wedding that I connected with another like-minded individual. He has a few years of experience and has a great connection with a mentor that is showing him the ropes of real estate investing. His mentor is a successful real estate owner that brings in more than 6 figures in rent each month, so it is easy to say that she is experienced. About a month had passed since I last talked to him and I was starting to think that I got my hopes up for nothing. I thought he wasn’t interested in working with me and had moved on. Fortunately for me, that wasn’t the case.

Investing in a Real Estate Limited Partnership

As it turns out, my future business partner was busy setting up a limited partnership with some of his closest colleagues. He contacted me a couple weeks ago and let me know that he set up a real estate limited partnership. For those who don’t know what they are, it is a business agreement that allows financial investors to invest without having to actively manage the business and without being liable. These financial backers are also known as limited partners. I’ll write more about this partnership in the future, but here’s what it means for me:

  • Ability to invest in real estate without having to actively manage it myself
  • Limited liability – this means that landlord insurance may be unnecessary

These two may not sound like a lot, but it is great when you consider the potential return. I crunched some numbers and have confirmed that the expected returns should be in the double digits after the first couple of years, and only increase from there on. In fact, while I am not counting on it, I would expect the return to be close to 20% because of the unique market. While I could consider REIT’s, this seems to be a closer connection to the actual business while still limiting my time involvement.

Why This is a Good Investment for Me

This seems to be a great investment for me right now for several reasons.

  1. Passive Investment – I am already pretty busy running my online business, so I have been looking for passive investments. Investments that will allow me to put my money to good use without any more of my time. Also, because it is truly a passive investment, I don’t have to pay self-employment tax. Talk about a win-win!
  2. Diversification – Every experienced investor knows the value of diversifying their portfolio. This provides a little extra protection from losing a significant portion of the portfolio. While most of my investments are in our retirement funds and my business, it is nice to spread it around a little. That way when one market is doing poorly, there’s a chance for the other investments to make up for it. To put it simply, it adds another revenue stream to our household.
  3. Put Money to Good Use – Instead of having my money in a high interest savings account, it will allow me to put my money to good use. While I was planning on buying some dividend-paying ETF’s, this will just postpone that a few more months. It’s hard to miss this type of an opportunity and the last thing I want to do is to regret not jumping on board when I can afford it right now.

What do you think? Am I making a wise decision?