By Dr. Peter Kim of Passive Income MD, WCI Network Partner
While many of us like to believe we’re superhuman—or at least we try to act like it—the truth is that we don’t have infinite resources at our disposal. The greatest limitation is the amount of time we have. There are only 24 hours in a day and 168 hours in a week.
When we dedicate our time to something, it means we can’t give it to something else. Something has to give.
For example, you want to spend as much time as you can with your family, but you also need to work to create income to support your family. You also want to spend time doing other things that you enjoy doing. So, the key is to minimize the time doing things you “have to do” but don’t enjoy, but still maximize the benefits you get from doing those things.
For example, how can you squeeze out the most benefit from time spent working? Well, the best way would be to figure out how to get compensated the most for your time. If you knew that working eight hours a day and getting paid $150 an hour would give you the lifestyle you want, then why not try to figure out how to work four hours a day and get paid $300 an hour? Then, you’re able to free up your time to do other things you truly enjoy.
One of the best ways to do this is to create passive income, where you’re not getting compensated directly for the time you put in. You’re able to leverage your time to create more income. Real estate investing is a great way to create that passive income, but even within the realm of real estate investing, there are ways to maximize the benefits while minimizing the time and effort you put into it.
I like to focus on the 80-1 rule, and we’ll get to that in a moment . . .
Benefits of Investing in Real Estate
Any discussion on maximizing benefits should start with outlining what those benefits are.
As discussed in previous posts, the major benefits of investing in real estate are:
- Cash Flow (Income in your pocket each month)
- Appreciation (Value of it goes up over time)
- Tax Benefits (Provides ways to minimize your tax burden)
The Pareto Principle states that 80% of the benefits come from 20% of causes. For example, he found that 80% of the harvest came from 20% of the crops. Not everything produces benefits in the same way.
Think about how this rings true in your life. Eighty percent of enjoyment in your life probably comes from a handful of things you do or people who you spend time with. It’s probably close to 20% of how you spend your time or the people you come into contact with.
I’ve thought about this rule quite a bit when it comes to real estate, and I have been trying to figure out how to squeeze the most benefits out of the least amount of time and effort. And I’m absolutely convinced I’ve found it investing in passive real estate deals like syndications and funds.
What Is Passive Real Estate Investing?
Passive real estate investing is what I typically refer to as investing in syndications and funds. It means that real estate professionals are putting together deals, and I have the opportunity to invest in that deal as a limited partner.
The word “limited” means that I have little control on how the deal is run, but also my time and effort are limited.
By investing in these deals (and by now I’ve invested in nearly 40 of these), I’m able to leverage the collective knowledge, experience, connections, financial strength, and team to create passive income. When done right, it doesn't require a whole lot of your time or effort.
After the initial due diligence period and capital investment, the process is somewhat automated. You receive an ownership stake in that investment and income checks in the mailbox (or direct deposit). Essentially, you build a system to make money even while you’re enjoying time with your loved ones.
One of the major downsides of passive real estate investing is the lack of control as compared to active real estate investing (owning your own rental properties). I’ve found that “control” is worth an additional 20% of the benefits. These benefits include the ability to decide what you want to do with your investment—keep it, sell it, exchange it, etc.
However, the downside to active real estate investing is also the control, meaning that you’re expected to make the very best professional decision to optimize the investment. It’s not that we’re not able to do this, but it just takes a serious amount of commitment and experience to produce results.
Don’t get me wrong, there are times when I really want that extra 20% of benefits; and when I do, I make sure to add cash-flowing properties to my personal portfolio.
But most of the time, I want that income coming to me passively.
I’ve found that passive real estate investing offers 80% of the benefits of direct ownership with just 1% of my time and effort. That’s why I like to call this the 80-1 Rule.
Through passive investing, I’m still able to see cash flow and asset appreciation; get tax breaks; utilize others' time, experience, and connections; and, most important of all, gain time to do the things I love.
What does that 1% of time and effort entail? Well, it’s used doing the proper due diligence to make sure that the investment meets your goals and risk tolerance. You should have confidence before investing in a deal that you know why you’re investing in it.
You worked hard for the money you saved up. It would be a shame to throw that money (and the time you spent creating it) on something that will be a poor investment.
So, learn how to properly vet the sponsor, the deal itself, and the market surrounding the deal. No investment comes with a guaranteed return or capital protection. Once you learn how to do this well, you’ll be able to get to a place of confidence quite quickly.
Then once you’ve invested, you literally sit back and wait for distributions and updates to come your way. It’s as close to passive income as possible.
Are you looking to maximize your income and the benefits of investing in real estate with the most focused time and effort? Does the 80-1 rule sound like something you’re looking for?
If so, passive real estate investments might be the way to go for you. We talk in-depth about all of this and more in our upcoming course—Passive Real Estate Academy. Want to learn everything about investing in real estate with confidence? You can grab your seat right here!
As busy professionals, TIME is our most limited resource. With real estate investing, we're looking to leverage that time as best as possible by receiving the most benefits with the least amount of time and effort.
Would you rather invest in real estate in an active or passive manner? Have you participated in real estate syndications before? What was your experience like? Is the 80-1 Rule possible? Comment below!