this umbrella term “Passive real estate investing”Includes almost all property that is not directly owned. Common examples include real estate syndicate (collective investments in large properties), private equity real estate funds, debt funds secured by real estate, private notes, real estate crowdfunding investments, and private partnerships in which you make a financial investment as a silent partner.
A “recovering landlord” he sold his last rental property and Foreign digital nomad, I love passive real estate investing. I can invest hands-free from anywhere in the world.
When most people talk about creating intergenerational wealth through real estate, they mean passing on a portfolio of properties to their children and grandchildren. Passive real estate investing is left out of the conversation by most people.
This is why many investors shy away from passive real estate for generational wealth—and why I love it.
The case against passive investing for intergenerational wealth
Popular among active real estate investors idea Let their tenants pay off the mortgage on their rental property over decades. When investors break free from this mortal bondage, their children inherit a free and clear estate-one This has been greatly appreciated over the decades.
it creates a compelling visioncorrect? Proudly passing on one’s reins cash flow Portfolio for your child. Your child could even live off this cash flow for the rest of his or her life.
Active investors don’t like the lack of control they have over passive investments, especially syndicated investments. The average real estate syndication target is to hold for five years, give or take a few years. As limited partners (passive investors) we have no control over when or even if the promoter sells the property.
When the syndicated property is sold, the passive investors are rewarded and the story ends. You must share the profits Then Reinvest (or leave cash). No set of jingling keys Pass it on to your children solemnly.
this the greatest There are also tax benefits available during the first few years of owning a real estate syndicate. investors get huge depreciation There are initial write-offs, but over time these write-offs are gradually reduced. With direct property ownership, depreciation is typically spread more evenly over time.
So as real estate investors extend their financial planning across decades and generations, you can see why many focus on direct ownership rather than passive investing.
Why I love passive investing for intergenerational wealth
I have always questioned conventional wisdom. My wife calls me a contrarian, but I consider myself a contrarian—it’s different It’s just a matter of fact.
Before you write off passive real estate investments in your generational wealth plan, consider these arguments in their favor.
Most heirs only want to money
It’s so difficult for parents Who is Understand that there is a passion for real estate, but in most cases, your children don’t want your property. They won’t share your enthusiasm, even if they dutifully followed you around the property growing up. them only think Cold hard currency.
Unless you carefully and intentionally build your estate, your property will go into probate when you die. What your heirs and executors must figure out in probate oops It’s about them. You can assign specific property to specific heirscertainlybut that doesn’t mean they’ll want to keep them.
Most heirs simply Selling an inherited property – usually at a reduced price to a cash buyer.
Passive investment turnover rate provides control
I actually Like the idea that my passive investments rotate every five years or. it give me a chance Reassess the market and choose the best place to park your money over the next five years. When I reach retirement ageI will inevitably move some money outside of A high-return real estate investment transforms into a safe, boring investment. There’s nothing wrong with that.
Investment Turnover allows me to choose where my money will do the most good: Both For my retirement, and ultimately for my heirs.
High return potential, no labor required
In SparkRental’s syndicated investment club, we seek asymmetric returns: low venture capital returns and high returns.
For equity investments, this typically means those that may pay annualized returns of 15% to 20% or more. For low LTV debt investments with regular interest payments, we accept 10% to 12%.
Yes, I realized Skilled active investors can earn high returns from rental properties. But as an active investor, to continue to earn great returns, you need to do two things: Skill and labor. it requires time and effort Find good deals and manage income properties— Even if you hire a property manager. then you have to manage managers, not to mention accounting and tax reporting.
When my wife and daughter inherit my passive investments, they don’t have to do anything. They can sit back and enjoy the distribution and interest income, as well as the occasional profit payment when the property sells.
Infinite Returns: How Long-Term Investing Gets Better Over Time
Not every real estate syndicate will sell the property after four or five years. In some cases, the originator will refinance the property after a few years and return the investor’s capital.
At that time, you will get your investment back, but you Retain your ownership interest in the property. You can continue to receive distributions from the original property, but you can also use the same money to make new investments to earn returns.
Investors refer to this situation as unlimited returns, Because you can reinvest your capital again and again, there is no limit to the returns you can earn on top.
When you die, your heirs will inherit all of these passive cash flow investments along with the original investment cash.
Death resets your cost basis and depreciation recapture
When a property is sold – whether owned directly or passively – you will be subject to capital gains tax and depreciation recapture.
However, if you die holding these assets, the cost basis will reset to the value at death. This eliminates capital gains taxes and depreciation recapture.
again, I realized This advantage also applies to directly owned property. But passive investors tend to enjoy highly accelerated devaluations, making depreciation a major taboo for them again. Passive investors gain huge Neither they nor their heirs have a tax write-off for the first few years. These must be repaid.
Estate Planning Advantages of a Roth SDIRA
Of course, you can purchase property directly through a self-directed IRA. It’s just more difficult to do, Given the lower annual contribution limits.
In our co-investment club we go in The syndicate is syndicated with other passive investments, so each member can invest $5,000. It’s much easier to use a self-directed IRA than the $50,000 or $100,000 typically required. Why don’t you invest it yourself? in a syndicate or fund, Or pay for a down payment, closing costs, cash reserves and initial repairs.
Roth IRAs offer tremendous estate planning advantages. You can skip probate and designate beneficiaries directly. Your heirs can also take tax-free distributions and keep the account open 10 A few years later your die. Additionally, a Roth IRA can add some flexible options for planning a trust for your children, but discuss this with an estate planning attorney because it can get complicated quickly.
Heirs inherit immediate, hands-off long-term investment Record
Not long ago, our United Investment Club invested in a 10% note Cancellation allowed At any time and with six months’ notice. it is safe Through first position liens below 50% LTV, A personal ensure, and A company’s ensure.
If I die in a few years, my wife can end this investment if she wishes. But she can also keep it and continue to collect interest every month, safely in knowledge For years, that note paid out like clockwork every month.
Yes, heirs also inherit long-term rental property records. But these require more work to manage and are less mobile. it Spend tens of thousands Rental property for saleas well as the hassle of hiring a real estate agent and waiting months for settlement.
final thoughts
When I speak out, my wife and daughter will inherit cash, paper assets, and passive real estate investments. They can keep their investment if they want, no work required as far as they are concerned. They don’t have to deal with a real estate agent or sell to a cash buyer at a deep discount.
Meanwhile, my passive real estate investments will hope Pay double-digit returns as expected. When syndication ends I will decide where I think Reinvest based on current market conditions. For example, if the federal government does push through National Rent Stabilization Act,I can eliminate Multifamily My portfolio is entirely dedicated to investing in less regulated real estate types.
I plan on leaving stage left with seven or eight digits left. None of this requires my daughter to become a landlord and inherit trouble with tenants, property managers, inspectors, contractors or real estate agents.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
