[Editor's Note: Today's post from Passive Income, MD is about real estate investing and the various ways it can be done. Only one or two of them are really compatible with full-time medical practice, but they certainly would all work if done right. I might even add a 5th one — AirBNB/VRBO, where you essentially go into the hotel business.]
When I first started working on this blog post, the working title was “Different Ways to Make $1 Million in Real Estate.”
However, I realized that if you're reading this, you're likely looking for a similar type of life that I'm interested in… a life of financial freedom where I'm also able to make huge contributions to society as well.
Unfortunately, $1 million may not be enough these days to make that happen [particularly if you live in California like PIMD-ed]. So, I scrapped that title and have multiplied that goal 5x for greater impact. Let's go for $5 million and figure out different ways to make that happen through investing in real estate.
1) Direct Ownership
Direct ownership is a fantastic way to make money with real estate. What does that mean? It simply means owning your own rental properties.
I've previously discussed the four major ways to make money in direct ownership:
- Cash Flow
- Tax Benefits
- Mortgage Pay Down
I invest in rental properties primarily for cash flow, meaning that cash that hits your bank account on a monthly basis. It's just like a salary that allows you to live life on your own terms.
Sure it has its positives mentioned above, but it also has its negatives – primarily the extra work that goes into managing the operations of a property yourself and dealing with tenants. However, hiring good property management in place helps to create a buffer so you're not dealing with issues late at night or on weekends.
So how could one make five million dollars in direct ownership?
Well, personally I receive close to six-figures in passive income each year from my properties. My plan is to acquire more and by the time they're all paid off, I could see them producing several hundred thousand a year in cash flow. Over the lifetime of these investments, they could definitely produce over $5 million in cash flow.
Another way to create that $5 million is through appreciation of the property. I don't primarily invest for the appreciation potential but it is definitely a way to generate wealth depending on where you invest.
For example, a physician friend of mine purchased a rental property in an improved area of Los Angeles for $1 million nearly 20 years ago. He told me that the value of the property is over $5 million today. He purchased the property using leverage with a 30% down payment. The property has been rented since that time and the loan on the property is nearly paid off. He lives off of the cash flow but he could essentially sell it today and receive $5 million in cash.
Yes, I know, you have to consider taxes, but we're just having fun with this $5 million for now, aren't we? If he held for another 15 years, who knows what this property might be valued at.
2) Passive Real Estate Investing
Interested in investing in real estate, but aren’t sold on the idea of taking care of tenants and the maintenance of the building? Then passive investing in private real estate might be right up your alley and still be quite lucrative.
Many busy professionals decide to go down this path because they might have the capital, but not the time to control an investment themselves. They would rather have other professionals do the work and receive monthly/quarterly distributions, completely passive after vetting the opportunities.
These opportunities typically consist of real estate syndications and funds. I've talked about these things quite a bit and even built my own course on the subject, but a syndication is simply a pooling of money by investors to purchase a property.
A syndicator is the person or group that operates the investment by identifying a property, figuring out how to improve operations and therefore the value of the property, find and manage investors, then ultimately sell the property at a future date.
The most difficult aspect of these opportunities is the initial vetting. It takes some knowledge and experience to get to a place of confidence investing in a particular deal and syndicator, but it's something that everyone reading this post can attain.
So is it possible to reach $5 million passively investing in real estate? It may take some time but it's completely possible.
Let's assume the high-income earning is willing to invest $500,000 in passive investments. I've seen many syndication deals complete within 5 years with an equity multiple of 2. That means that in that time, the investor doubled their money. So, that's now an aggregate of $1 million.
So we can avoid taxation at this time, let's assume the investor uses a 1031 exchange and invests that $1 million into another similar deal and is able to get similar returns. You can see that it would only take a few cycles to achieve a return of $5 million in total.
This is just one pathway to achieve high returns through passive investing. Yes, in these cases, it helps to have capital to start with to get great returns, but that's something that high-income professionals should have access to with smart, intentional saving.
3) Fix and Flipping
This is probably one of the most involved and potentially lucrative of your options, but probably carries the largest risk as well as time commitment.
What does the term “flipping” mean? You've probably all seen the shows on HGTV, but it's the concept of buying a home, renovating it, and selling it at a new, higher value.
I know several successful house flippers who flip high-end homes. These are homes that are valued in the $2-3 million range, put a good amount of work into it and sell it for $4-5 million. In certain areas of the country (including mine), it's common to see renovated homes selling for millions over what they originally bought it for. Sure, they might have put several hundred thousand dollars or millions into the renovations, but the payoff can be huge.
But there is a lot of inherent risk built into these projects. What if the budget gets overrun? What if the market takes a large downturn. What if the project takes much longer than expected? Any or all of these things can turn into massive losses for the renovators.
But again, you can see how millions can be made through flipping.
I have a friend who started flipping a small single home, then took those funds and flipped several homes at once. He then started flipping high-end luxury homes and his business and returns scaled tremendously from that point. $5 million over the lifetime of a successful flipping / developing business is definitely a possibility.
4) Becoming a Professional Syndicator
Above, we discussed pooling resources together in order to form a real estate syndication. But what if you were the group leader instead of just a passive investor? It would certainly be more involved than a passive investor, but it would have quite a few advantages as well.
Again, as the operator of the deal, you're responsible for all of the details including finding the property, the business plan to improve operations, finding investors, then ultimately selling the property.
The syndicators not only get fees from running the deal, but they also get a piece of the upside.
For example, I've often seen deals where the investors receive an 8% preferred return (meaning they get the first 8% of the distributions), then after that, the remaining profits are split 80% investors / 20% syndicators or 70% investors / 30% syndicators.
As a syndicator, once you start managing several deals at once and start to scale the size of these deals where the returns are in the millions, you can easily imagine how profits of $5 million are created.
Oftentimes the syndicators also invest their own funds as part of the deal and create returns that way as well.
The role of the syndicator isn't always easy though. They have to run that rental property like owning a business and manage all aspects. They also have to keep investors informed and happy. They also have to constantly course-correct with shifting markets and conditions. In the end, they should get compensated well when the investors do well.
$5 million dollars as a syndicator? With smart deals and savvy operations, it's definitely a possibility.
Make It Happen
As you can tell, there are a lot of different pathways to hitting five million dollars through investing in real estate.
If one of these options stands out to you, start putting in some research and see what avenue makes the most sense for you. Or do a combination of the above.
I'm just trying to introduce the possibilities, you have to go make it happen!
What do you think? Do you see real estate as a lucrative venture, or are you nervous to dive into investments? Maybe you are using another form of investing to reach your financial goals? Leave us a comment below to share and let us know on our Facebook group, Passive Income Docs.
Featured Real Estate Partners
Self-Storage / Mobile Homes
Fund / Syndication