of The umbrella term “Passive Real Estate Investing” includes almost anything that you don’t directly own. Common examples include: Real Estate Syndication (group investments in large scale real estate), private equity real estate funds, real estate secured debt funds, private placements, real estate crowdfunding investments, and private partnerships that invest funds as silent partners.
Selling our last rental property Digital nomad living abroadI love passive real estate investing, you can invest hassle-free from anywhere in the world.
When most people talk about building generational wealth in real estate, they mean passing on a real estate portfolio to their children and grandchildren. In that conversation, most people ignore passive real estate investing.
Here’s why many investors shy away from passive real estate investing for generational wealth, and why I love it.
Reasons against passive investing for building generational wealth
A favorite among active real estate investors Thoughts Tenants are required to gradually repay mortgages on rental properties over a period of several decades. By the time the investor passes away, their children will inherit the full fortune.-One It has been highly regarded for decades.
It creates a compelling visionright? Handing over the reins with pride Cash flow Give your child a portfolio. Your kids could live off that cash flow for the rest of their lives.
Active investors dislike passive investing, especially the lack of control over syndication. The average real estate syndication has a goal of a five-year hold, with a margin of error of a few years. As a limited partner (passive investor), you have no control over when or even if the sponsor will sell the property.
When the syndicated property sells, the passive investor receives the profit and that is the end of the story. You receive a share of the profit, which is after that Reinvest (or leave as cash). No set of jingling keys. Ritual passing on to children.
of the best Investors can also enjoy tax benefits during the first few years of owning a real estate syndicate. Huge Depreciation Depreciation occurs initially but diminishes over time. When you own the property directly, depreciation is usually spread out more evenly over time.
So when real estate investors stretch their financial planning out over decades and even generations, it’s easy to see why many stick to direct ownership rather than passive investing.
Why I prefer passive investing to build generational wealth
I have always questioned conventional wisdom. My wife calls me a contrarian, but I consider myself a contrarian. Nothing at all.
Before you give up on passive real estate investing in your generational wealth planning, consider the following discussion of its advantages.
The majority of heirs just want money
It’s hard for parents who It can be hard to understand a parent’s passion for real estate, but in most cases, your kids won’t want your property. Even if you dutifully accompanied them on property tours when they were growing up, they won’t share your passion. They are just want Cold, hard cash.
If you don’t plan your estate carefully, when you die your assets will go through probate, where you must decide what your heirs and executors will do. One To relate to them. You can allocate specific assets to specific heirs.of courseBut that doesn’t mean they want to keep it.
The majority of heirs simply Selling inherited property, often to a cash buyer, at a low price.
Passive investment turnover is Control
I actually I like the idea of my passive investments changing every 5 years. Or something like that.. that Give me a chance It’s about re-evaluating the market and choosing the best place to park your money for the next five years. RetireI will inevitably move some money from It turns high-yield real estate investing into a safe, boring investment, and there’s nothing wrong with that.
Investment turnover allows you to choose where you can best utilize your capital. both For my retirement, and ultimately for my heirs.
High profit potential without labor
SparkRental’s co-investment club aims to provide asymmetric returns – high returns on low-risk investments.
For equity investments, this usually means investments that are likely to return 15% to 20% or more per year. For low LTV debt investments with regular interest payments, you can accept 10% to 12%.
yes, Understood Seasoned, active investors can earn high returns on rental properties. However, to consistently earn high returns as an active investor, You are required to do two things: Skills and labor. that It takes time and effort Find great deals and manage your profitable properties—Even if you hire a property management company. The next thing you need to manage is Not to mention accounting and tax reporting, and managers too.
My wife and daughter don’t have to do anything when they inherit my passive investments — they can sit back and enjoy the dividends, interest income, and occasional profit share when properties sell.
Infinite Returns: How Long-Term Investing Gets Better Over Time
Not all real estate syndicates sell the property after four or five years. In some cases, the sponsor refinances the property after a few years and returns the investor’s capital.
At that point, you will get your investment back., but you Retains title to real estate. Not only will you continue to receive dividends from your original assets, but you will also earn income from any new investments you make with the same funds.
Investors are looking at this scenario Infinite Profits, This is because you can reinvest your capital multiple times and there is no limit to the returns you can earn. in addition.
When you die, your heirs will inherit all of your passively cash flow generating investments, as well as the original cash you invested.
Upon death, cost and depreciation are reset. Recapture
When you sell real estate, whether you own it directly or passively, you are subject to capital gains tax. Depreciation Recovery.
However, if you die while still holding these assets, their acquisition cost will be reset to their value at the time of your death, which will make them exempt from both capital gains tax and depreciation.
Also, notice This benefit also applies to real estate that you directly own. However, passive investors tend to enjoy the accelerated depreciation effect, making depreciation recapture a bigger threat to them. Huge For the first few years, they and their heirs were denied tax deductions. Must be repaid.
Estate Planning Benefits of Roth SDIRAs
Of course, it is possible to purchase real estate directly with a Self-Directed IRA. It just makes it harder to execute. Given the low annual contribution limits.
In our co-investment club, enter Syndications and other passive investments can be pooled together to allow each member to invest $5,000, which is much easier in a self-directed IRA than the $50,000 or $100,000 required in a regular IRA. Do you invest yourself? In syndication or fund, Or you may have to pay a down payment, closing costs, a cash reserve, and initial repairs.
Roth IRAs offer significant estate planning advantages: They allow you to skip probate and directly name beneficiaries, your heirs receive tax-free distributions, and you can keep the account open. Ten A few years later your Upon death, Roth IRAs also provide additional flexible options for planning trusts for children, but this can quickly become complicated, so you should discuss this with an estate planning attorney.
Heirs inherit long-term, no-exchange investments record
A while ago our collective investment club invested 10% in bonds. Cancellation possible This can be done at any time with six months notice. It’s safe With a first lien of less than 50% LTV One Personal guarantee, and One Enterprise guarantee.
If I die in a few years, my wife can end the investment if she wants, but she can also leave it alone and continue to receive the interest every month. In knowledge The bond has been paid off regularly every month for many years.
Yes, your heirs will also inherit a long track record of rental properties. However, rental properties are more work to maintain and less liquid. that It will cost tens of thousands of dollars Selling rental propertiesThis includes the hassle of hiring a real estate agent and waiting months for settlement.
Final thoughts
When I die, my wife and daughter will inherit a mix of cash, paper assets, and real estate investments. They can leave the investments alone without having to do anything if they wish. On their sideYou won’t have to deal with the hassle of dealing with a real estate agent or selling at a steep discount to a cash buyer.
Meanwhile, my passive real estate investments Hopefully Paying double-digit profits as expected. As syndication switches, where am I? want Reinvest based on current market conditions. For example, if the federal government actually I will push through. National Rent Stabilization ActI might rule out housing complex From my portfolio, I invest entirely and exclusively in less regulated property types.
I intend to leave myself with seven or eight figures when I exit, and to do that, I don’t want my daughter to have to become a landlord and take over the hassle of dealing with tenants, property managers, inspectors, contractors and real estate agents.
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BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
