Passive Real Estate Investing

Passive Real Estate Investing could mean the difference between achieving generational wealth—where your accumulated wealth gets passed down from generation to generation—and leaving no legacy at all.

I spent the last decade working out how to make my high tech-employee salary and equity work for me. My conclusion is that passive real estate investing is the only real place to get regular cash into your pocket in the form of 7%, 8%, or even as high as 10% in steady payouts, while still protecting your original hard-earned capital.

If you're new to passive investment, know that these kinds of earnings and distribution payouts are not the norm. 

Many investors go to a wealth manager to find out what to invest in. A wealth manager will typically recommend an investment strategy aimed at growing your capital in line with the market giving you a 4% distribution in your Golden Years.

There are a few pink elephants in the room regarding that advice:

Firstly, the 4% “return” is a misnomer. That investment model is not based on “returns” but on distributions. What’s the difference? Well, a return means that your money made more money for you and you are now reaping the rewards. The investment “strategy” of building up a large enough nest egg to withdraw 4% is based on you getting that 4% whether your investment made money or not. 

In other words, let’s say you have $1 million stashed away. An annual return of 4% would mean that, every year, that $1 million would generate at least $40,000, leaving with an untouched $1 million even after you withdraw the return

That’s not how the 4% “strategy” works. You will get a distribution of 4% whether your money has generated more wealth or not. So you will get the $40,000 and now have $960,000 in your investment. In a down-market (or just a slow-rising market), your initial capital is eventually going to run out. 

That isn’t an investment strategy. It’s a prayer. 

The other pink elephants with this model are: 

  • 4% is a worthless “return,” either way. It's worthless in itself, worthless because of inflation, worthless after a lifetime of toil and hard labor where you had to sacrifice your quality of life (and time with your kids) to build a nest egg that was large enough to make 4% worthwhile.
  • 4% won't give you the life you are dreaming of in the long term.
  • 4% certainly doesn't give you any generational wealth.
  • What should you do in the meantime? Work like a dog and miss all your kids' soccer games and recitals? As a father and husband myself, I can tell you that strategy sucks.

I built Wealthward Capital to help tech employees invest their money successfully. I was working for a company that had just gone public and needed to figure out what to do with my newly acquired wealth, and how to make it work for me. I did figure it out, and then I wanted to help others do the same. 

I built a strategy and system predicated on making your money work for you. There was no guide in place to do this, so I had to hunt around and find the information.

You sweat hard as a tech employee. Your investment money should do the same. It should be sending you checks in the mail every month or quarter without cutting into your base capital. A proper investment plan must protect the equity you have invested, not spend it under the term “return.”

That's where passive real estate investing comes in. 

Passive Real Estate investing is arguably the most lucrative investment on the market today, regularly providing returns of between 6% and 10%. Such consistent returns are unheard of in any other asset class, and it is why America’s wealthiest families and individuals are waist-deep into real estate investments.

In this article, I'm going to tell you everything you need to know about passive real estate investing, real estate assets, the necessary capital required for these types of investments, and how to make your tech-employee money work for you.

Just a quick heads-up: I'm not a financial advisor and this isn't financial advice. (But my money does sweat for me, and it can for you, too.)

FAQs about Passive Real Estate Investing

What is the difference between active and passive real estate investing?

The primary difference, as per the IRS's definition of passive income, is that the real estate investor is not materially involved in the investment's day-to-day activities. Active real estate investing means the investor is hands-on regarding property management and the upkeep and maintenance of the property.

Examples of active real estate investing include:

  • Flipping houses—the real estate investor manages contractors or works on the homes themselves, actively increasing the property value before reselling the investment.
  • Investing in a property directly—the investor actively participates in sourcing the property, viewing it, buying it, signing the agreements, etc. In passive real estate investing, the investor simply puts money into the applicable fund, and someone else handles the property management completely.

Examples of passive real estate investing include: 

  • Real Estate Syndications
  • Private Real Estate Funds
  • Joint Ventures

Can you grow wealth with passive investing?

The whole point of passive investments is to steadily grow your wealth without having to do any material work. Passive real estate investments are a great way to achieve this goal if they are done properly.

At Wealthward Capital, our philosophy is that passive real estate investments need to bring regular cash returns or income. Having your investments pay you income while your original principal grows is the ultimate goal of these investments. That return income is in addition to any large payout at the end of the real estate investments' life cycle, when the property is resold at a profit.   

There are 4 ways to generate returns through passive real estate investment. These are:

  1. Leveraging depreciation factors for reduced tax burdens
  2. Cash flow from rental income
  3. Appreciation or Increasing a property’s value
  4. Equity paydown—when the rent payments of others give you more equity in the property

Wealthward Capital achieves the above benefits by providing you with access to institutional-grade passive real estate investments in apartment buildings, mobile home parks, and ATMs (Automated Teller Machines). Our main focus is to provide income-producing assets that distribute rental income to a passive real estate investor.

Is real estate investment considered passive income?

It depends on the nature and structure of the real estate investment, and also the type of gain. Capital gains are not technically passive but have many passive attributes. 

Distributions paid to a passive real estate investor are usually always passive, provided the initial capital was invested by a Limited Partner who plays no active role in the investment.

The way Wealthward Capital has structured its Real Estate Syndications, Limited Partners (passive investors) typically earn a regular distribution payout which is considered passive income by the IRS.

Wealthward Capital also offers Private Equity Real Estate Funds. These are a type of fund that invests in commercial real estate. Our Limited Partners in the fund have shares in those assets. Because the core asset underneath it is real estate, the returns will be classified as passive income according to the IRS, not as dividends. This provides enormous tax advantages for Limited Partners.

How do you get into passive real estate? 

There are several options available for investors who want to earn extra money in passive real estate investing. These include crowdfunding, REITs (Real Estate Investment Trusts), Real Estate Funds, and Real Estate Syndications.

REITs, unfortunately, do not give investors any ownership rights to the underlying property. You buy stock in a REIT (which is a business, not a property), and so are a shareholder, not a specific property owner. One of the primary benefits of REITs is that you don't need a lot of capital to invest in one, so they are more suited to people who are not accredited investors yet and can’t participate in this type of offering. 

The biggest risk with Real Estate Crowdfunding is that there is an additional layer between you and the deal sponsor. This makes it difficult for you to do due diligence on the crowdfunding project, which is Rule #1 of any investment. By not being able to properly vet the deal sponsor and get to know them and their experience thoroughly, you open up the door to some of the largest risks in investment.

Real Estate Syndications give you direct access to the deal sponsor—the active property manager that sources, performs due diligence on, buys, and manages the underlying real estate investments. The real estate portfolios usually include prime commercial real estate that has been structured to bring in the maximum cash-on-cash return possible.

Because of their professional status and ability to bring in high yield, most real estate syndications are only available to accredited investors. These are investors who have at least $1 million in assets (excluding your primary residence), or earn $200,000 or more a year or $300,000 or more in conjunction with their spouse. There are some syndications that allow non-accredited investors to participate but these are rare.

Does passive income get taxed?

Yes, passive income is taxed just like any other type of income. One of the benefits of passive income from real estate is that you can claim paper losses against it such as property depreciation, and so reduce the overall taxable income.

In commercial property, it is possible to have accelerated depreciation by carrying out refurbishments on the property. This depreciation is considered a passive loss and can be deducted from your passive income tax bill at the end of the year. 

The depreciation can also be carried over. So, if you had a net depreciation of $100,000 in Year One but only netted $50,000 in passive gains, then you have a loss of $50,000 for the year. You can carry over that loss to the following year. So, in Year Two, if you earn $50,000 in passive gains, that money is essentially tax-free because you can claim the -$50,000 in depreciation (passive losses) from the previous year. 

This is a simplified example, but the concepts are entirely accurate. By teaming up with the right tax specialist, you can effectively pay zero tax on these types of investments.

This is why America's wealthiest have their fingers in so many real estate pies.

How do I start investing passively, and what are the minimum investments?

There are many opportunities for investing in property with little money. REITs and real estate crowdfunding are popular options. Buying a duplex and renting out the second unit is another.

The return on these types of investments can be lower than other passive investing opportunities and require more time. Wealthward Capital’s high-yield real estate investment opportunities require a minimum of $25,000 in capital.  

You can get started by booking some time here:

Does passive real estate investing offer high returns?

Income returns are unmatched presently in passive real estate investing—returns of as much as 10% on a regular basis. Passive real estate investing is today what treasury bonds were in the 1990s.

A recent survey found that America's wealthiest were investing 50% of their portfolio in alternative investments.

Alternative investments are investments that do not fit easily within one of the conventional investment categories. Examples of alternative investments are hedge funds, art, antiques, and real estate.

Real estate is an incentivized investment that offers numerous tax breaks for those financing the investment.

What is a REIT?

REIT stands for Real Estate Investment Trust. It is a company (not a fund or actual real estate) that manages property on behalf of multiple investors. The IRS has strict regulations about what a REIT must do to qualify as a REIT. These requirements include how much of its taxable earnings it must disburse to investors each year, the types of investments it is allowed to engage in, how many shareholders it must have, and other requirements.

It's important to understand that investing in a REIT is not the same as investing in real estate. When you invest in a REIT, you are buying shares in a company, not a brick in a house.

When investing in a real estate syndication, you actually own real property.

What rental income is considered passive?

Generally speaking, all rental income is considered passive income even when the landlord is actively involved in the upkeep of the property.

There are a few special circumstances where rental income would not be considered passive but these are unlikely to be the case for passive investors involved in a Real Estate Syndication or a Private Equity Real Estate Fund.

Do passive losses offset capital gains?

Because capital gains are not considered passive income by the IRS, it is not possible to use passive losses to offset them.

However, from a practical perspective, you will have lost nothing if the gains came from a passive investment because you would not have participated materially in achieving that gain. In essence, you made your money work for you and then reaped the benefits.

Is passive income better than ordinary income?

The largest benefit of passive income is that you don't need to break a sweat to earn it. Also, using passive losses and paper losses, you could offset passive gains to such a degree that you could end up paying no tax at all.

Depreciation is one type of passive loss. And passive losses can be carried over from year to year endlessly.  

Passive income is also an excellent way to earn a pension because your money can continue to work for you when you're retired. It can also be used to reduce debt without you having to work additional hours or get a second job.

Does passive real estate income affect Social Security benefits?

So long as the income really is passive per the IRS's definition, then receiving passive income should not have any effect on your Social Security benefits.

The IRS's definition states clearly that passive income is income you receive from any activity in which you are not materially involved. It also generally always includes rental income.

Are there any risks to passive real estate investment?

Both passive and active real estate investments are always subject to the risk of vacancies and unexpected depreciation. Even a low-risk investment can suddenly turn bad due to unexpected market fluctuations.

There are more capital gains tax breaks in the U.S. for active investors than passive investors, but there is also more work involved for active investors. The beauty of passive income is that you don't need to have your finger on the pulse all the time.

As a passive investor, you are putting your money in the hands of someone else. It's important to do your due diligence on any company you intend to invest with, and to check their history on the FINRA or SEC websites for any disciplinary actions they or their representatives might have undergone.

At Wealthward Capital, we are more than happy to talk with you about what we offer and what we do, and to answer any questions you have while you perform the necessary due diligence regarding where to invest your money. We are bound by a code of ethics to answer your questions fully and transparently.