[Editor's Note: Today's WCI Network post from Passive Income, MD discusses leverage in a different way than you might be used to when we're discussing real estate investing. Check it out!]
The phrase “passive income” gets used a lot on the Passive Income MD Blog; it’s right there in the title. I’ve talked about how to generate it, how to use it as a tool, and even the mindset you need to achieve it.
But believe it or not, there is a ton of debate whether “passive income” even exists at all.
For many people, “passive” is synonymous with “zero effort,” and in their minds, it gets relegated to all the other get-rich-quick schemes out there.
But there are a couple of things wrong with this assumption. Nothing is for free. Every investment initially takes time, capital, or effort. However, it doesn't always need to stay that way.
My own definition of passive income is “income that is not proportional to the time you put into acquiring it.” I’m certainly not saying it doesn’t take any time. It’s just income that comes from a more effective and efficient method than the traditional formula (time in = money out).
With the traditional method, if you take time off, the income machine stops producing income. The beauty of passive income, on the other hand, is that most of the effort is done upfront and the benefits come later. Investing in passive real estate is the perfect example.
Passive real estate is a type of real estate investing wherein you invest in other people’s deals. Sometimes called “syndications,” these deals are managed by professionals. They handle all of the operations, acquire the property, and sell it – and everything in between.
As an investor, this reduces a large amount of work required in traditional methods of investing in real estate.
However, it is vitally important to perform the proper due diligence upfront. Once this is done (and done well), then you can simply wait for the income and investment to pay off.
This is the closest thing to true “passive income” that the world of real estate investing can offer.
And while this is great, it can be better to use a clearer and more descriptive term. That word is “LEVERAGE.”
What is Leverage?
Put simply, leverage is the use of resources to multiply your desired outcome.
For example, if you’ve ever bought a home, you’ve used leverage. You put down a downpayment, then borrowed from a bank in order to purchase a larger property than you could otherwise pay for in cash.
Another example: when you need to lift something heavier than you could on your own, you use something else outside of simply your own body and effort to help you achieve the result, whether it's a lever or a mechanical device.
The same principles apply to investing in passive real estate. There are ways to use massive leverage to make a better investment, and hopefully, create more capital.
5 Ways That You Can Use Leverage to Your Advantage
#1 Leverage Knowledge & Experience
Let’s put humility aside for a moment. As a physician, you’ve spent, at minimum, ten years to become an expert at what you do.
Becoming an expert takes time, effort, and experience – no matter what field you’re in. Because of this, becoming an expert in passive real estate investing can be a daunting and time-consuming task.
But by learning from others who do this on a full-time basis, and who have years of experience, you’re able to leverage all of their experience in your favor.
Leveraging others’ experience is not only immensely valuable to your personal and financial growth, it’s also a major shortcut to reaching your own goals. After all, whenever possible, it’s better to learn from others’ mistakes, rather than making your own.
There's this meme I've seen in the physician world that goes something like this, “You don't pay for the 30 minutes it takes to do the procedure, you pay for the years it took to learn how to do it well.”
The same can be said for investments. When you invest along with others, you're tapping into the years of success, failures, and knowledge it took to get them where they're at without having had to go through it yourself. That's leverage.
Other ways to leverage experience in the world of passive investing is to find like-minded people in similar situations and learn along with them. You’ve already begun to do this just by reading this blog.
You can join local investment clubs, join Facebook groups, or simply ask colleagues. You can also take a course like our Passive Real Estate Academy.
Whatever you choose to pursue, if you can leverage experience, you’ll find that you reach your goals that much sooner.
#2 Leverage Financial Strength
Odds are, if you’re looking to acquire real estate, such as a rental property, you’re going to need to take out a loan. When that time comes, your history, credit worthiness, and experience go a long way in securing the best terms.
I know this because when trying to buy my first apartment building, I wasn’t able to secure the best terms due to my lack of experience.
Not only is it important to get the best interest rate possible, but it's also important to get the best term length that makes sense. Sometimes longer terms are ideal, as they’ll allow you to ride out fluctuations in the market.
However, you and I might not have access to those types of deals depending on our own financial strength, background, and lender relationships.
People who do this on a full-time basis, have a track record, and have dedicated years to creating these lender relationships will often have access to loan terms you or I probably can't secure.
However, investing with a professional can give you that access, that's how you leverage financial strength in your favor.
#3 Leverage a Built-Out Team
It is often discussed, but building a good team is a crucial part of the property buying process. You need to have an agent, property manager, lender, insurance agent, and more.
Building a good team from scratch can take time, and it’s important to “shop around” for people you trust and who have a good track record.
But by utilizing a professional sponsor, who will already have these teams built out and ready to go, you can bypass all the trial and error of building a team altogether. Instead, the sponsor will have taken years of trial and error to find just the right people and organizations. None of that risk transfers to you.
By investing through a professional sponsor, you’re able to leverage the team they’ve already built. You’ll also have the assurance that all of these groups work well together, and you can see their track record as a whole, not just individually. This can greatly reduce your time spent searching for just the right people, and all the headaches that go along with it.
#4 Leverage Capital
By investing in a syndication, my contribution is just a fraction of the overall investment. The benefit of investing with other investors, and with a sponsor, is that we’re able to essentially pool our resources and purchase a larger and better property than any one of us could have done alone.
There are economies of scale when it comes to larger properties, meaning that you still have one management team looking after one property, despite its larger size.
Investing this way allows you to leverage a relatively small amount of capital to buy into a property that would otherwise be unattainable. The larger property will likely have a better overall return on investment (provided you’ve done your due diligence), and once you’ve invested, all you have to do is wait for the distributions.
Some of the best deals I’ve invested in are those that are larger than I could have found on my own.
#5 Leverage Time
Finally, this point is probably the most important point of all.
The main benefit of investing in syndications like those mentioned in the previous section is best thought of in the long term. Although you spend time upfront doing the due diligence, afterward, all you have to do is wait for the distributions to roll in.
The point of passive income is to create financial freedom. For me, freedom is the ability to do what you want with your time; to spend it doing the things you love with the ones you love.
Passive income investments like real estate are my vehicle of choice for doing so. I can’t say I love buildings and real estate itself, but I love what it provides for me: freedom from my day job.
Passive income allows me to create my ideal life.
When I invest in passive real estate ventures, I’m leveraging what limited time I have. I may invest time upfront, but compared to the years of passive income a good investment can bring, that time is well worth it.
Instead of trading time for money, I’ve essentially leveraged a small amount of time for great, long-term benefits, like hanging out with my family, traveling, and enjoying my freedom.
And isn’t that the whole point of all this?
Leverage is a powerful tool. When it comes to passive income and real estate investments, using this strategy will make you a more efficient and effective investor. More than that, though, you can bypass hours and hours of research time, trial and error, and issues that crop up.
Not only will this reduce a ton of stress for you, it will help you reach your goals much faster.
Really, there are dozens of ways to use leverage to your advantage. Syndications and passive real estate are the best ways I’ve found. After all, our ultimate goal isn’t simply to make a great investment – it’s to make an investment that will allow us to live the life we want, and to spend it with the people we love.
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What do you think? How do you use “massive leverage” in your investments and the rest of your life? Comment below!