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How to Create Passive Income with Real Estate

Last Updated on July 5, 2020 by Mark Ferguson

I love passive income because it is money that you make without working. Examples of passive income are cash flow from rental properties, stock dividends, interest from loans, royalties, money from businesses, or other investments that you are not spending time on. A lot of people will argue that there is no true passive income because it takes some amount of work to create any type of passive income. Even the kid who inherits a billion dollars must do some work to not completely piss off their parents and become disowned. I agree that almost all passive income takes some work, but I still think the idea of passive income exists. To me, passive income is an investment or business that might take some front end work to set up, but once it is running, there is little to no work needed to keep the money coming in.

The great thing about passive income is it reduces stress because you know you don’t have to work all the time, it can allow you to be more aggressive with investments or business because you have something to fall back on, and it can help you live the lifestyle you want because you don’t have to worry about running out of money.

Why is passive income important?

A lot of people think someone is rich based on how much money they make per year. That is one way to judge if someone is rich, but if they lose their job, are they still rich? Did they have investments, or were they totally dependent on that income?

I think of someone as rich when they don’t have to work and can still live the lifestyle they want to live. They may continue to work because they love it or need a challenge, but they have passive income coming in that will pay for all of their expenses and then some.

I made a lot of money as a real estate agent selling foreclosures from 2007 to 2013. While I was making a lot of money, I was also stressed out. I did not have as much money in my bank accounts as I thought I should have. I was spending a lot, and things always cost more than you think they should. I knew I had to invest my money better, and I did by purchasing rental properties. I started to have passive income come into my accounts without working! Just the thought that my hard-earned money was now making me more money instead of wasting away reduced my stress. It also gave me the confidence to pursue my goals and more aggressive strategies because I had a safety net of passive income.

I also knew that if I built enough passive income, I would not have to work anymore. I could essentially retire knowing I would have a certain amount of money coming in every month, and that money would increase with inflation. I also knew that if I got sick or lost my income, I had money coming in to keep me going. It was not the end of the world.

When I have passive income, I do not have to worry about getting sick, missing work, or going on vacation.

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Why did I choose real estate?

I looked at many businesses and investments before choosing real estate. Yes, I was a real estate agent, and it may seem like the obvious choice, but I purchased my first rental property in 2010 right during the housing crash. Most real estate agents told me I was digging my own grave investing in rental properties.

I researched every investment I could because it was my money, and I wanted to make it grow as fast as possible. I did not want to take the easy way out. Real estate kept coming back as the number one choice for a number of reasons:

Cash flow

With every good rental property you buy, it should bring in a decent amount of cash flow or profit each month. I was seeing properties that would make me around a 15% cash-on-cash returns. That was a great return and really caught my eye.

Leverage

The cash-on-cash return is high on rental properties because you can leverage real estate fairly easily. That means I can get a loan for most of the purchase price. When buying an owner-occupied house, I can put as little as nothing down! On investment properties, you usually need at least 20% down, and that is what I was basing my 15% cash-on-cash return on. By using leverage, it increases your returns on the right properties.

Tax advantages

Real estate has some amazing tax advantages, like the tax-free gain on a personal house or the ability to depreciate a rental property. You can also sell a rental tax-free using a 1031 exchange or using an opportunity zone.

Buying below market

Another huge advantage to real estate is that you can buy properties below market value. A house could be worth $100,000, and I can buy that house for $60,000. It may need some work or none at all. It is not easy to find deals like that, but it is possible and a massive advantage when it comes to building wealth.

Is real estate really passive?

I hear all the time how people do not want to be real estate investors because they don’t want calls from the tenants at 2 .m. or they do not want to change out toilets. Guess what: I don’t want those things either, and I do not have to do those things. I have a property manager who handles all of that, and it leaves me time to do other more profitable things. Once I get a property set up, it is very passive.

While it is passive owning rentals after they are set up, it takes some time on the front end. I have to find the deal, which takes time. I might have to have repairs made to get the property rent ready, and I need to get financing lined up. All of these tasks take time. Once the property is ready to rent, I can hand it over to a property manager. In some cases, you may be able to find a property manager that will handle many of those things for you.

I will admit that using real estate for passive income can be more time consuming than investing in stocks or other investments. The reason I love real estate is that I make more money than investing in those asset classes because of the advantages I listed above.

How did passive income change my life?

I made a lot of money in real estate, but I felt stressed because no matter how much I made, I did not have much to show for it. When I bought rentals, I created instant net worth and passive income that would always be coming in. In fact, passive income allowed me to buy many things that I am passionate about, the big ones being exotic cars.

In 2014 ,I bought a Lamborghini Diablo, which had been a dream of mine since I was a kid. I felt comfortable buying the car because I had more than $5,000 a month coming in from rentals. That $5,000 a month was not enough for me to live on, but it provided a safety net, and coupled with my income, it allowed me to buy a dream and not feel bad about it. The car was well worth it and has helped my business in many ways, as well as doubling in value since I have owned it! I have since bought a few more cars: 1981 Aston Martin V8, 1998 Lotus Esprit V8, 1994 Supra 6 speed twin-turbo, and I had a couple of other cools ones before I bought the Diablo.

Conclusion

The great thing about passive income is that you make money when you sleep. I don’t have to constantly struggle to bring money in. My money works for me by making more money. If I keep investing that money I make, then the passive income grows and turns into a snowball that gets bigger and bigger. It can be tough saving the money to invest, and finding the right investments, but the effort is worth it!

Source: investfourmore.com

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Can you Get Rich Quick With Real Estate?

Many of us dream of getting rich quick! We dream of hitting a big deal or an amazing opportunity falling into our lap that makes us a ton of money. Or maybe, we do nothing at all and a rich uncle we never knew leaves us his fortune! Wouldn’t that be amazing? However, the reality is very few people have rich uncles, let alone rich uncles who they didn’t know existed, and how many of those uncles end up leaving an unknown heir their fortune? If you are not waiting for a rich uncle, you may be on the lookout for a way to make yourself rich…and fast. Real estate is one avenue that is often touted as a get-rich-quick scheme. Can you get rich quick with real estate, and what does “quick” mean? I have done very well with real estate, but it did not happen overnight. How did I do it, and how long did it take? I will go over all of that!

What does it mean to get rich quick?

Unless you were born rich, I think all of us have dreamed or at least thought about getting rich quick. That dream may quickly fade away as reality hits you or someone tells you that your ideas are dumb or unrealistic. Some people keep that dream forever and constantly look for a way to get rich fast. So what does “get rich quick” mean?

I think the definition depends on who you are. When you look at wealthy, self-made people, the vast majority took years to get there—or even decades. It did not happen overnight. Some people seemingly get rich overnight with a new website or idea that takes off, but we don’t see the years of hard work and failures that occurred prior to that success.

The idea of getting rich quick also depends on what your definition of getting rich is. Is it a few hundred thousand dollars, or a few million, or a hundred million? We are all different in what we think rich is, and the more money you have, the bigger that number needs to be in most cases.

My definition of getting rich quick is making a few million dollars over a few years. I am not talking about making it big overnight or just making $100k. I have been pretty successful, and I see bank-robbery movies where the robbers hope to make a couple hundred thousand and I think, “Really? How long is that going to last?” Put that effort and planning into a business!

Is real estate a good way to get rich?

When looking for a way to get rich quick, real estate is often one of the avenues that is pursued. Real estate is often taught as a way to get rich by guys driving Lamborghinis with tons of women draped all over them. To be honest, I do have a Lambo, but I am happily married with three kids and do not have any bikini-clad women hanging out with me.

Real estate can create a lot of wealth, but it is not easy. It took me many years to build wealth and feel comfortable enough to buy a Lambo (1999 Diablo). There are many ways to get rich with real estate.

  • House Flipping: Buy houses at a huge discount, fix them up, and sell them for a profit. I have done 201 flips as of the wiring of this article.
  • Rental Properties: Buy properties (hopefully at a huge discount), fix them up, rent them, possibly refinance them to get your money back.
  • Wholesaling: Finding great deals and selling the properties or assigning contracts to other investors.
  • Agent/Broker: Helping buyers and selling conduct real estate transactions.

Some of these avenues to make it big are advertised as ways to get rich quick.

H0w much money can you make with real estate?

I have done very well with real estate and made myself a millionaire a few times over. But it did not happen overnight. I was an agent to begin with. I also flipped houses with my father to start and eventually invested in rental properties as well. I also know many very successful real estate entrepreneurs.

While I know many millionaires in real estate, I do not know any that made it big overnight. In a few years? Some, yes. Most of the successful real estate people I know took more than a few years to become millionaires and make it big.

I have also written articles about how to make it big with these varying business in real estate.

The final verdict?

I have made millions with real estate, but it took many years. It has taken most people many years who have made it big in real estate. If you really hit the business hard and go after things, you may be able to create a million dollars or more in a few years with real estate. I was able to create more than a million dollars with one deal, but that deal took a couple of years, and I had a ton of experience before I did it.

I think real estate has some amazing potential and can provide some amazing opportunities to build wealth. Is it a get-rich-quick business? Maybe—if “quick” is a few years. For some people that is quick, but for others, a few months is quick.

Real estate is a business that offers a lot of opportunities for those without a lot of money. It is possible to buy houses with little money down and slowly work your way into bigger and bigger deals. If you have some capital or a tremendous drive, you can make a lot of money fairly quickly.

I don’t like the term “get rich quick”, but if there was a business that allowed people to get rich fairly quickly, I think real estate is it.

Source: investfourmore.com

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Good Debt and Bad Debt: Is There Really a Difference?

Many people think all debt is bad, others think it is okay to have good debt, and still some like all kinds of debt! Is there a difference between good debt and bad debt and what is good debt vs bad debt? Most people will tell you that good debt is debt that is against an appreciating asset like a house while bad debt is on a depreciating asset like most cars or furniture. Other people will tell you that all debt is bad! I am a real estate broker, investor, and author, and while I understand the good debt vs bad debt argument I do not agree with it. I do not think the most important factor when considering debt is what the debt is against, but what you use the debt for. Some people like Mark Zuckerberg, are able to pay cash for most everything but still use debt because they see the value of borrowing at a low-interest rate and investing to get a much higher interest rate.

The no-debt argument

Dave Ramsey has tried to turn the world into a no debt society. He thinks that all debt is bad and no one should have debt if they want to get ahead in life. Dave uses his real estate fails to prove his point but his failure is not even possible to duplicate in today’s world. He was using risky 90-day mortgages on commercial properties to take advantage of a tax rule. That tax rule was changed and he went bankrupt when the banks called his loans due.

The tax rules he was taking advantage of do not exist today and it is very tough to get a 90-day commercial loan for 99% of the population. When you get a traditional rental property loan the term is usually 15 or 30 years but some commercial loans may have a balloon payment due in 5 years which means the loan has a 5-year term. The bank cannot come to call your loans due when things go bad as long as you are making your payments.

I do not care for the no debt argument because it makes it impossible for most people to get ahead in life using real estate. I am a real estate investor and debt is a wonderful tool if used in the right way. I make so much more money using debt than paying all cash. It takes most people decades to save up to buy a property with cash if they are even able to.

I talk much more about the advantages of using debt over cash here.

Mark Zuckerberg bought a house in 2012 for $6 million when he was worth $15 billion. Even though he was a billionaire he got a mortgage on the home! He knew that he could invest that money and make much more than the mortgage cost him.

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Good debt vs bad debt

For those who like debt, there is the argument that there is good debt and bad debt. The argument goes like this:

Good debt is debt that is against an asset that will appreciate or make you money. Rental properties would be an example of an asset that will make you money, but a car most likely will not make you money and most cars go down in value not up. Bad debt would be a loan used to buy a car.

The idea of good debt verse bad debt is that you should only borrow money for something that is an investment. Something that will make you money. On the surface, this seems like a good idea. “Don’t borrow money against things that may decrease in value.” However,  I am still not a fan of good verse bad debt.

Why I don’t think the asset matters when it comes to debt

I agree that people can get themselves into trouble when taking out loans and you need to be careful about getting into too much debt. However, debt can be a wonderful tool to build wealth as well. Where I differ with the good debt bad debt argument is that I do not think the asset the debt is against matters.

I think the most important aspect of debt is that you make more money from the investment you use the debt for than the debt costs you. If the debt costs you 5%, the investment needs to make more than 5%, hopefully, quite a bit more than 5%.

“But if you buy a car with a loan you obviously are not making any money from it!”

On the surface this is true. However, I need a car to work and I also have many other cars that I own because I love cars. I am going to buy those cars whether I use a loan or cash. I have the cash to buy the cars if needed, but I get loans on some of those cars because I can make way more money investing the cash, than what the loan costs me.

For example:

  • I buy a car for $100,000 with a loan that has a 5% interest rate (we assume 100% financing)
  • That loan costs me $5,000 a year as opposed to using cash
  • If I can make 10% with that money I will make $10,000 a year

Even though the loan is against an asset that may go down in value (many of my cars go up, but most go down), it can be a good loan!

Another example:

  • You need a car for work that costs $30,000.
  • You have the cash to buy it, but that means you cannot buy your first rental property.
  • The interest rate is 3% which means the car loan costs you $900 a year.
  • You have studied how to get a great rental. You are getting an awesome deal that will give you $30,000 in equity, and $400 a month in cash flow.
  • That rental could make you more than the car costs in one year!

In both of these examples, it makes more sense to me to use debt to buy the car than to use cash even if the asset may go down in value. I care about how much money the debt will make me, not the asset the debt is against.

What about over-leveraging or bad purchases?

There are limits to this strategy. It is not an excuse to go buy everything because all debt is good. I did not say all debt is good, I said a debt against a depreciating asset can be good.

  • If you want to buy a Ferrari but it will put you in a dire financial position, do not buy a Ferrari!
  • If you really want a nice couch but the only way you can afford it is to take out a credit card with the furniture store, that is not good debt.
  • If you are operating on a razor-thin margin every month but you like the looks of the new Ford Bronco, getting a loan to buy that car is probably not a good idea.

When I talk about using debt on any asset to make more money, I mean that you are actually using the money to invest. Too many people use debt to spend and they never have anything left to invest. If you are in a position where you can’t pay off your credit cards every month, more debt may not be the answer (unless that debt is used to pay off credit cards at a much lower rate).

Conclusion

I do not believe in good debt and bad debt based on the asset that is financed. I do believe there is good debt and bad debt based on why a purchase was made and the borrower’s financial position. Car loans can be a good or bad debt depending on the situation. Even a rental property loan can be good debt or bad debt depending on the situation. Not all real estate loans are a good idea. Just like with most of my advice, there is no one size fits all answer. We are all different, have different goals, and different financial situations. Make sure you analyze your situation and what makes sense for you, not blindly trust people who write articles online. 🙂

Source: investfourmore.com