Most people want to get into real estate because they’ve heard it's a wonderful passive investment. Truth be told, it’s not always passive, and it’s definitely not hassle-free.
Let me give you an example. I have a fourplex in downtown San Antonio I've owned for about 25 years. It's in a historical area and right now I have to change out all the windows. The 15 windows alone are $20,000! And then I'm going to have to paint the building. It's a 4,400 square foot building, so there’s that expense. People may think that real estate investing is passive, but not when you consider all of maintenance that goes into it.
I used to lay awake at night when we got heavy rains because I worried I’d be receiving calls from my tenants about leaky roofs. The same thing happened when it got really hot. I’d worry about getting calls about broken AC units. Now my property management company takes care of those issues so I don’t worry as much, but you get the idea.
And then there's the constant issue of rental income. It's not as passive as it sounds. It's not more income. It's less income. When you think about it, what you're really investing for is appreciation.
For example, if you own a rental property that brings in $1,000 a month, you may have to escrow $300 a month that will go to property taxes, maintenance and insurance. So now, you have $700 left. If you have a $600 mortgage payment, you only have a positive cashflow of $100 a month. That’s only $1,200 a year.
So, what happens if you need to replace the roof or AC unit? The roof could cost you $5,000 or the AC could be $4,000, so there went your passive income for the year. And I see that with real estate investors. I see that over and over again. Even if you had $300 or $400 a month in passive income, one major repair can wipe out a year’s worth of gains.
I just had a tenant move out of one of my properties. They lived there for four years and left the house in perfect condition. I still spent $4,000 just to get the house ready to rent again even though they didn't tear it up and left it clean. I had to paint it, get the trees cut and hire a cleaning person. I spent $4,000 just for a simple make ready.
Real estate is not really the wonderful passive investment people think about.
True passive investing is private lending
I believe truly passive investing is when you become a private lender. If you're investing X amount of dollars for a good rate of return, and getting paid on a monthly basis with none of hassles and headaches (or repair projects) then that is truly passive income. The person getting their hands dirty is the real estate investor. He or she is taking care of the toilets, the taxes and the tenants. All you're doing is basically acting as a bank. Then you can even request to have your monthly payment deposited directly into your bank account via ACH, saving you a trip to the drive-through.
In the old days, we used to call it “mailbox money” because all you had to do was go to the mailbox and get your check, then go deposit it at your bank. Now it's not even mailbox money, it's virtual money.
I once had an individual who offered me $60,000 to buy one of my rental houses. I asked him if he had any experience being a landlord and he said he did not. I then explained to him the best way to invest his money was to invest it with me as a private lender. Once I explained the benefits of private lending, it really helped him and made a big difference in his life.
I had a conversation with my daughter the other day and we were talking about rental properties and the lack of cashflow. However, with rental properties you do have the benefit of appreciation. If you bought a house for $100,000 ten years ago, it may be worth $120,000 or $130,000 today because of appreciation.
But I told my daughter, the problem is you can't go to the grocery store and spend the equity in your house. Even though you have appreciation and equity in your property, you can’t use that equity to buy groceries at HEB.
But if you’re receiving a $700 check every month as a private lender, that $700 can put food on your table. It can fill up your gas tank. It can help make your car payment. It can take you on a weekend getaway or vacation. So, there's a big difference between investing for appreciation and investing for truly passive income. Most people don’t know the difference.
If you are ready to become a private lender in residential real estate, please call me. We have several opportunities available for you to earn a safe, consistent 10% on your money. ~ Samuel Madrid (210) 228-8023
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