Welcome to our first episode of *Passive Real Estate Investing*. We are excited to have you and look forward to many content-rich episodes.
In this inaugural episode we take a minute to introduce our host, Marco Santarelli, as he shares his real estate investing journey which started at the age of 18. We also lay out the goals for this podcast so you know where we will be taking you in future episodes.
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What Is Passive Real Estate Investing?
Hello. Welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli. This is a new show, a show where busy people like you learn how to build substantial passive income while creating wealth for the long term. If you desire to better yourself and desire to better your financial future, then this is the show for you.
What’s my goal with this podcast? It’s to inspire you to start or continue building your real estate portfolio. It’s to teach you proven strategies for making money with real estate in any market. It’s to help you avoid the common and costly mistakes, many of which I’ve had and made myself over the years. It’s to give you actionable tips and advice. It’s to help put you on the road to financial freedom. Because without passive income, it’s difficult or nearly impossible in today’s environment to actually achieve true financial independence and retirement, however you define retirement.
What is passive real estate investing? That’s what this show is all about. In order to understand passive real estate investing, let’s start by understanding what active real estate investing is. Active real estate investing is a do-it-yourself investment strategy. It involves your time, your capital, your risk. You are engaged and involved in the process, either entirely from beginning to end, or heavily in parts of the process as you go through it.
It takes up a significant portion of your time and involvement. It’s really you and your time working for cash. It’s you that makes it happen. It’s you that’s involved. It’s, in many ways, like a job, JOB. If you look at job as an acronym, for many people it means Just Over Broke. It still a job, whether you’re self-employed or not.
The primary objective is to generate chunks of cash. You do this through either assignments of contract or from the equity you build in a property, if you’re rehabbing a property. I’ll get to that in a minute here. The primary objective is to generate chunks of cash, piles of cash. It’s really just a one or two time payment and that’s it, there is no cash flow.
Let me give you a few examples here. Wholesaling, although I don’t really consider wholesaling by definition to be investing, because what wholesaling is, it’s the assignment of a contract. It’s not really selling a property, you’re selling a contract that you have in tying up a property to another investor. You’re getting an assignment fee. You’re just controlling property, you don’t technically own the property.
There’s many ways to wholesale. Some people drive various neighborhoods looking for distressed properties, other people are marketing through post cards and whatnot. But that whole process of wholesaling takes time, it takes some capital, it involves some risk, although not risk in the property but risk in lost time. That’s wholesaling. Once you sign that contract, you get a chunk of cash.
Another example of an active real estate investing strategy would be a quick flip. Some people like to look for properties that they could flip quickly. That could be because it’s a distressed property and needs work or maybe it’s a distressed homeowner and they can pick up that property up at a discount. You would essentially buy that property, which means you take title to it and then immediately resell that property. That’s a way to make a nice chunk of cash. There are many investors who get started with either wholesaling or quick flipping.
The most involved form of active real estate investing is what is known as rehabbing. That is essentially buying a property, fixing it up, that could be a light or a heavy rehab, but you’re essentially fixing that property up so it’s in like new condition. Then you either flip that property and sell it retail on the open market, through the MLS or you sell it on your own, but you’re selling it retail and you’re making the spread, the equity that you’ve built into that property.
Some investors will do that same strategy, buy, fix, but instead of flipping it, they may hold it for their own personal portfolio. Some investors might do two flips and then keep the third one. Flip two, keep one. That’s a way to build up a real estate portfolio while making those chunks of cash. But it takes time, it takes capital, it takes your involvement. You have to be engaged.
Passive real estate investing, on the other hand, is a method of real estate investing that can build true cash flow, true wealth building. It is longer term, it involves very little of your time. It is not an actively engaging form of real estate investing. This is really the true road to financial freedom, the true path.
Now, one caveat here, nothing is truly passive. There is no such thing as real estate investment or an investment of any kind that is truly passive. Even if you’re investing in mutual funds or RITS, real estate trusts, or any other type of paper assets.
You still have to be engaged to some degree and have some involvement, whether it’s just doing your research in due diligence, follow up and analyzing your statements and maybe getting an idea of what that company or what that market is doing. Nothing is truly passive, but passive real estate investing, once you’ve started building up a portfolio, is about the closest thing to passive income as you can get.
This is your cash working for you as opposed to you and your time working for cash. What we are looking at is cash flow as opposed to chunks of cash. It’s income that comes in every month passively. Let me give you a few examples here and then we’ll get into more detail and expand on this in future episodes of this show.
You may have heard of notes, most people have. Notes can be performing or non performing, but they’re essentially the mortgages that are on property. These are typically issued by lending institutions like banks. But banks don’t keep those notes. They don’t keep most if all of those notes. In fact, about 98% of those notes or mortgages that banks originate are ultimately sold to Wall Street. That’s where Fannie Mae, Freddy Mac comes in. It’s a very liquid market that’s publicly traded.
You can buy those notes. In fact, there are companies and institutions that sell performing and non performing notes that you can buy at a discount. Essentially, what you’re buying is a yield. You will get that monthly mortgage payment or note payment every month. That is a fairly passive investment as long as the note holder, you, gets paid by the person who is required to make those monthly payments, which is usually the mortgage holder, you will get those monthly payments.
A similar type of passive investment is private lending. This is where you take your capital and you invest it like hard money to other investors that will take that capital and use it to acquire properties, rehab those properties and flip those properties. Then you get paid the interest and sometimes you get paid interest and points. Then you get your capital back. It’s really your money working for you. Private lending is a form of holding a note on a property, but it’s not institutionalized, it’s really just between you and another investor.
The third area of passive real estate investing are rent ready properties. Let me define what a rent ready property is because it’s a little bit different than the fourth area that I’m going to talk about. A rent ready property is simply a property that is in safe, clean, functional condition. It’s a property that a tenant could literally move in tomorrow. It is leasable, rentable, it can start generating cash flow for you, maybe it already has a tenant in place, but it’s not a distressed property that requires work. You can get started right away with a rent ready property.
Often you’ll find those by combing through the MLS, maybe with a help of a real estate agent. Although it is a diamond in the rough, you don’t find a lot of them on the MLS. Usually you find these types of deals by talking to other real estate investors or just driving certain neighborhoods and looking for properties that you can just acquire and convert into a rental.
Finally, there’s another category of passive real estate investing that is what my company was built around. That is the turnkey model, the turnkey real estate investment model. A turnkey property or turnkey real estate investment is a property that, at least as we define it, is in a good market, a good neighborhood. It’s completely renovated or it could be new construction. It has tenants in place. It’s under professional property management. It’s generating cash flow for you from day one.
You’ve got a property that is new or like new that’s cash flow positive and really doesn’t involve much of your time other than of course doing some due diligence and having the home inspected, closing escrow and of course if you’re financing it, which we recommend, having that property financed. It is the simple path to property acquisition, if you will.
The nice thing about passive real estate investing is the depreciation. This is one key thing about holding property and why I’m such a large advocate of real estate portfolios and building your wealth and your retirement and your financial freedom through real estate. It’s the depreciation. We’re going to get into this in more detail in another episode.
Just to give you a very quick taste of what the power of depreciation is, you can take that real estate that you own and depreciate the value of that over 27.5 years. That is a deduction that you get, that the IRS allows you to take over that 27.5 years, that you can take against your other income. It lowers your taxable income. Of course, you do need to talk to your financial advisor about this because there are some nuances about how it works and how much you can take and who qualifies.
The magic of it is that, it’s a non cash expense. Meaning, that you don’t need to spend any of your own cash in order to get that depreciation. You get it because the IRS says you can take the improvements on that real estate, which is the property itself, and then depreciate it over the 27.5 years. It’s an amazing deduction. If you don’t realize the power of that, you will as we go along here in the next several episodes.
There are six key elements when comparing real estate investment strategies. Think about it this way. First and foremost, look at the time involvement. If you’re a busy person, then time’s a factor. You have to analyze active real estate investments versus passive real estate investments within the context of time. How much time is it going to take?
Second, how much effort is it going to take? It may not take a lot of your time, but it might require a lot of heavy lifting. The learning curve maybe steep but you need to look at the effort. Third is the risk. How much risk do different investments take? I’m talking about any kind of investments here, not just real estate. It’s important to look at who’s holding the bag if something goes wrong. What is the collateral or the asset backing up a particular investment? Could it vaporize, like some securities or stocks can, where they just become worthless? Some stocks become unlisted.
You need to look at the return. How much profit are you going to make? That could be measured in terms of cash flow, dollars. It could be measured in terms of capitalization rates, which we’ll discuss later. It could be measured in terms of cash on cash returns and so on.
What’s the value of that investment? In other words, not what its worth but how does it benefit all parties involved? How does it benefit you in terms of your return? How does it benefit the other parties involved, such as your tenants, with investment real estate? You have to keep in mind that not all investments provide benefits.
Lastly, market conditions. Is the strategy that you’re looking at, will that work in the current market condition? If not, do you need to look at other markets? Do you need to look at a different type of strategy to work within the markets that you’re considering? Time, effort, risk, returns, value and market conditions. Those are really the six key elements when you’re comparing real estate investment strategies.
All right, who is passive real estate investing for? Passive real estate investing is ideal for busy people. Let’s face it, we’re all busy. Not everybody has time to be an active real estate investor, to be a rehab-er, to maybe be a wholesaler or a fix and flipper. At the end of the day, we all have jobs, whether that’s our own business or we punch a clock or work nine to five. We’ve got family, we’ve got other obligations, we want to spend time with our kids, we want to do things on the weekends that we enjoy, not necessarily dealing with tenants and rehabbing properties or fixing problems at those properties. We want to be enjoying our life and building our real estate portfolio.
It’s ideal for busy people. It’s also great for people who don’t have a lot of knowledge. We all start somewhere, we don’t necessarily know everything we need to know, and you never will, about real estate investing or how to build a portfolio or how to analyze markets or analyze particular deals, but you learn that over time. Passive real estate investing is great for people who have little to no knowledge. But you build that knowledge and rather quickly.
It’s great for people who have limited experience. You will learn a lot about real estate as you start getting involved and then you acquire your first or second property. That learning curve maybe a little bit steep but it’s not that difficult. As you go, you’ll realize and look back and say to yourself, “Geez, that wasn’t so hard. I’ve learned a lot but it’s really common sense.”
It’s also great for people who have limited resources. We don’t start off with a great Rolodex, if you will, of contacts. Team, we don’t have all that in place. As time goes on, you build that team. You will have contacts in terms of contractors, property managers and whatever else. You don’t necessarily need that if you’re working with the right people, the right companies, or you just have the right contacts.
Passive real estate investing is ideal for people with limited time, limited knowledge, limited experience. Let’s look at the flip side. Let’s just say you do have a lot of real estate investment experience. Let’s say you have a lot of knowledge because you already have a large portfolio. You could do this on your own if you wanted to. That doesn’t necessarily mean you have the inclination or the desire because you may be very busy with your other obligations, your business, your family.
If that’s you, then passive real estate investing is exactly what you need to continue building your monthly cash flow, your annual cash flow, your real estate portfolio for your retirement so you can retire early or do other things or focus on your hobbies and whatever else you want to do.
Passive real estate investing is all that and so much more. It’s all about passive income. It’s about cash working for you. It’s about getting a check in the mail every month or deposited into your account. Getting that payment every month, passive cash flow, is how you get out of the rat race. It’s how you escape the nine to five. It’s how you build your financial freedom, your time freedom. It’s what allows you to do what you want, when you want, however you want to do it with your time.
Passive real estate investing is about changing your focus from making chunks of cash to building cash flow. Passive real estate investing is about freedom, it’s about getting out of the rat race. I had an interesting story happen here just the other day. I got a call from a new person, looks like they’re going to be a great client because they’ve got the right mindset. This particular person, I won’t mention his name, but I did tell him I’d love to have him as a guest on a future episode of our podcast.
He told me he’s well paid, he’s a professional, his wife and him both make a significant monthly income. But they both have to punch a clock essentially. They have to get up at a certain time, deal with the kids, bring them to school, go to work, work the eight to five, nine to five shift, get home. He told me the other day that he had to stay a little late, he couldn’t get back to his son’s soccer game or baseball game at [spp-timestamp time=”5:30″]. He was missing out on a lot of things that he wanted to enjoy as part of his life.
He said, “I’m absolutely done with this.” He says, “I just don’t want to do this anymore. I don’t want to commute back and forth to work every day. I am done being stuck in this rat race.” He said, “I know what I need to do. I need to build my passive income. I need to build a real estate portfolio that will pay me every month passively so I don’t need to be actively involved and I can face out of my current job.”
There are lots of people in the same situation, this is how they can do it. You can retire far sooner than you thought possible and fund your dreams by building a health real estate portfolio. That’s what this show is going to be about, is to show you how you can do that. We’re just getting started. There is so much more to come.
In future shows, we’re going to cover investment strategies to help you build your passive income. We’re going to talk about different types of cash flow and the different types of investments. We’re going to talk about the top real estate markets, the different types, cash flows, appreciation potential in neighborhoods within those markets and how to analyze those. We’re going to talk about financing strategies, how to maximize your credit, how to get ten or more mortgages on your credit, which is beyond the Fannie Mae, Freddy Mac limitations. In fact, there are ways to get unlimited number of mortgages, stated income loans, loans for foreign nationals if you’re listing in another country.
We’re going to talk about economics like inflation and how inflation is your friend. Interest rates and how that plays into the investment equation. The politics and policy around it. Demographics such as population growth, age dynamics and how millennials will affect your investment strategy going forward.
We have a long list of special guest that we’re going to bring on covering all kinds of topics to help you achieve success. If you have a question or a topic suggestion, we would love to hear it from you. You can submit those questions on our website or you could leave a voicemail right from our website. There’s a little button on the far right that allows you to leave a voice message. We set up a brand new website for this show specifically and it’s easy to remember. In fact, it’s just the name of the show, PassiveRealEstateInvesting.com.
Please remember to subscribe. The content is 100% is free. My team and I are working hard on all these shows so we can bring you great shows, full of content and make them as short as possible so you can get the maximum value without us cutting any corners.
Remember, this is a new show. If you would be so kind to leave us a comment on iTunes, it would really help us out. We really want to get the word out. As a thank you, we’re offering $100 Amazon gift card every week over the next couple of months. Your reviews and comments will help us spread the word and that’s so important to us. We’ll randomly pick someone every week to give a free $100 Amazon gift card. We’ll just send that to you via email. Again, thanks for listening. We’re excited to have you on board. We’ll see you on the next show. Thank you.
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