Do you all have day jobs, not associated with real estate??? I have a full time job and I’m looking for the best passive approach to real estate, bc my day job is so hectic. That’s why I’m looking into commercial NNN. Gotta admit though, you guys seem extremely knowledgable and it’s pretty intimidating.
So, is it “common” for people to have day jobs but yet be heavily involved in RE still? Thanks for your time.
Day job? Most all of us have had a day job when we were starting out.
I think you will find few had enough cash looking for a home so we had to trade time for money to get started. Even if you do have a bit of cash it rarely will be enough to replace the day job given how little real estate throws off as income. Over time, as you build equity your assets can produce enough income.
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Unless you have a lot of cash, NNN is going to provide low returns as there is next to no hassle. It is a great way to protect wealth long term. Not such a great way to build wealth as you have no real influence over the growth of he value.
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If you have a hectic schedule, you might be better off avoiding real estate. If that does not feel right, think about finding a partner or doing Joint Ventures (JV) where you contribute what you have and backfill what you do not have. If you have cash and someone else has a more flexible schedule, it can work just fine. As you would be dependent on them, choose your JV partner carefully. Something that can be tested with a small, simple project.
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When you are new to the field, there is a lot to learn. That said, recognize that many others who have a busy schedule have made the leap. It takes discipline and a sense of reality. Break it down and focus on what you can do until you ‘level up’ and have the skills to take on more. Patients but do not get trapped in the ‘rat race’ where you keep delaying your investing until the schedule is more flexible.
Thanks for your advice John. I have worked very hard and went through alot of schooling for my day job, so I wouldn’t be too inclined to leave it. I’m confused how you say that NNN is not a good way to “build” wealth?
This comment may sound naive and basic, but if I purchase a commercial property (say worth one million) with a 10% cap rate, and it’s paid off by the tenants after 10 years, how is that not building wealth? Considering when I sell it, it will be worth more than a million, and I will keep all proceeds because the loan is paid off.
I am leaning towards something where it’s very very low maintenance (bc of my job) where I can build wealth with the hopes of selling them someday paying for my retirement. Thanks again.
Too much to do right now but Ill say this…the value of NNN property, for the most part, is highly dependent on the quality of the tenant. If you sell it empty it could be worth far less than what you paid for it.
[QUOTE=hckyplyr;885990]Thanks for your advice John. I have worked very hard and went through alot of schooling for my day job, so I wouldn’t be too inclined to leave it. I’m confused how you say that NNN is not a good way to “build” wealth?
This comment may sound naive and basic, but if I purchase a commercial property (say worth one million) with a 10% cap rate, and it’s paid off by the tenants after 10 years, how is that not building wealth? Considering when I sell it, it will be worth more than a million, and I will keep all proceeds because the loan is paid off.
I am leaning towards something where it’s very very low maintenance (bc of my job) where I can build wealth with the hopes of selling them someday paying for my retirement. Thanks again.[/QUOTE]
Brandon touched on the key issue.
The property’s value is based on the income stream. With limited risk (NNN) the correct value tends to be driven up so the yield is limited.
I agree that if you were able to borrow a lot of money (higher LTV) and the tenant paid off the debt over the life of the tenancy, having a free and clear asset is pretty good. As Brandon mentioned, the property’s value at the end of the tenancy might be limited as NNN are normally tailored to a specific tenant. It will have some value though there could be a lot of costs to convert the property before the next tenant is interested.
So, at the highest level, what you are suggesting is a pretty safe bet as long as you really understand the way the investment will behave. If you are mostly looking to preserve wealth rather than create wealth, even better. A NNN property is a bit like a bond that pays steady returns as long as you hold for the entire period. If you find you have to sell before the end AND the yield the market demands has risen, you will need to discount the asset to get it sold. With a NNN lease, similar to a corporate bond, the credit of the entity paying out could slip so the value of the asset is reduced. More chance of a default rather than full payout to term so a reduction in the value of the future income stream.
Continue to look into the opportunities. Just be careful about assuming that it will be hassle free and a steady earner with no risk. If the risk is understood, it might be right for you. NNN is NNN for a reason and in the majority of cases I suspect they pay out just fine.
[QUOTE=hckyplyr;885990]I am leaning towards something where it’s very very low maintenance (bc of my job) where I can build wealth with the hopes of selling them someday paying for my retirement. Thanks again.[/QUOTE]
A tangent or change of direction.
If you want a low hassle situation you could hire someone else to deal with the hassle. Either as a joint venture (JV) partner (not really just a hired gun) or in the form of a property management company.
Most of the really successful investors who have a large portfolio have people who do most of the work for them.
A NNN is like hiring the tenant to do all the work. A JV deal would be similar if structured correctly. I am not saying to avoid a NNN. Just pointing out that your requirements might be satisfied by some alternative structures.
If you really want to play the hands-free commercial game look for a well-located multi tenant office or retail property that you can make work well for you with a management agreement in place. This way youre not dependent on a single tenant. You could also do this with a decent apartment complex as well.
Managing the manager has made many a fortune!
Day Job
I’m glad you are looking at real estate as an option. Most of the working crowd are so busy shoveling money into a 401K. They don’t realize that there are better investments out there. Yes I too have a day job, so I know where you are coming from on passive investing. Another option you can consider that is a little less intimidating is a Private REIT. These are privately owned real estate companies that pay investors a good dividend for their investment. The only down side is you have to hold for a long time, and there is a commission charge to get in. Hines is one example. They invest in large fortune 500 type office buildings in major cities. You don’t have to go to closing or worry about a tenant going bankrupt, just pick up the check. Sometimes these private reits can go public and you could get a payout bonus if that happens. This is probably the most passive form of real estate there is without the volatility of the market.
MidLifeMan,
How are you locating private REITs? I know that some are sold through financial planners. What are you finding?
Private REITS
Yes its true that a lot of advisors will sell these. If you call Hines they will probably defer you to someone. Some of the smaller outfits will sell directly to you though. All of them will probably require a minimum investment and maybe ask you if you are an “accredited” investor.
Got to Hines.com and give them a call.
Thanks to those who’ve responded. Midlifeman, I have a few different REITS in my stock fund, such as NLY. It pays a 14% dividend each year. I’ve had it for a few years, and it’s been great for me. I will have to sell it when the fed starts raising interest rates again, because then it will most likely take a hit. Are you talking a different type of REIT investment?
Is it really possible to own a commercial apartment complex while having a passive investment approach? I’m assuming you guys are talking about having a property management company run it, and I manage the property management company?
I’m 29, and want to learn as much as possible. Thanks for all the help so far.
This is a great thread. A few comments…
First, be aware that investing in REITs is apples and oranges to direct ownership. I have zero REIT investments, mainly because they generate a 1099 at the end of the year that I have no control over and no advance warning. Shadow income is always a possibility depending on management decisions regarding the assets, and you give up one of the four benefits of owning investment real estate, tax benefits (i.e. the four are: cash flow, appreciation, equity growth, and tax benefits).
Direct ownership (via LLC and syndicated investments) generates a K-1, and the income is calculated after depreciation expenses. This is where your question about having a career job is relevant. Full time real estate professionals get more favorable tax treatment, but it isn’t a reason to abandon a career. It’s just something that must be factored into your investment strategy.
Basically, a non- real estate professional (as defined in the IRC) cannot apply passive losses against ordinary income. However, in most cases (AMT calculations play into this) the income you receive is sheltered to the extent of the depreciation deduction. (Note: I am not a tax professional and do not play one on the internet. Seek advice from a competent professional applicable to your individual circumstances.)
In regards to NNN investments, they are an excellent way to invest in real estate for those who have a career position as their primary focus. In fact this is the fastest growing segment of real estate investors. You are young, in a profession that should generate high income over your career, and perfectly suited to acquiring a portfolio of properties over time with no day-to-day management. Be aware that you will have to be involved with the acquisition, sale (and/or exchange) and finance stages of the investment. You’re doing the right thing by educating yourself about the commercial property. Never rely solely on the advice of brokers or advisors (including me!).
You probably have already read my article on NNN properties. If not, it is available here.
Best of dealmaking,
ray
401k CAN be used for REI
The advice you’ve already got here from John C & Ray is terrific.
Just one thing I’d add…a 401k CAN be used for REI and only requires its owner to do transfer $ from his 401k plan to a SDiRA opened with one of the several SDIRA Custodian Cos (Viking Bank Seattle, etc.) and then directing that custodian to invest in any comm’l RE desired.
My book “How to Use IRA, 401k etc to invest in RE” tells all about this.
Public REITS vs Private REITS
Just to clarify there are two kinds of REITs. The one I am talking about you will not find in your 401k. Most people don’t know about these as these are private. Go to Hines.com and research it for yourself. It’s the most passive, risk adverse asset you will ever own.
I am in Ray’s camp that I would rather own my own properties outright. This is more risky, and more responsibility (although not much more if it’s nnn), but the upside is control and more profit.
Have to differ here… Hines runs private REITs. So does Wells and WL Ross. Passive? Yes. Risk-averse? Not so much.
From 2007-2010 REITs have become highly correlated to the market (i.e. S&P 500 Index), at .80 (1 being perfectly correlated) and it increased with volatility going into the recession. This is a disconnect from the long-term (1982-2010) average correlation of .51. It started rising in 2001 as investors searched for yield in a low interest rate environment (similar to now). There is a brief whitepaper on the topic here.
As Sam Zell said, “If Wall Street knew how to value real estate I wouldn’t be a billionaire.”
For me the downsides of a REIT, public or private, e.g. the 1099, no control over taxable income, possible phantom income, outweigh the benefits of passivity and liquidity.
I am not saying REITs are bad investments… for some people they are a great way to get above average yield. Just don’t fool yourself into thinking there is no market risk.
ray
Nicely said Ray.
To all,
From what I know private REITs might even be higher risk than a public one. In many situations they have higher load or commission charges compared to a company already listed. The owners of the shares have less ability to sell the shares given the lack of a public listing.
John makes a good point about the load (commission) on private REIT offerings. Wells in particular has marketed exclusively through financial advisers with a lucrative commission structure for high volume producers.
Get the facts–all the facts–before making any investment decision. As the old adage goes, “The large print giveth, and the fine print taketh away.”
ray
[QUOTE=John_Corey;885976]Day job? Most all of us have had a day job when we were starting out.
I think you will find few had enough cash looking for a home so we had to trade time for money to get started. Even if you do have a bit of cash it rarely will be enough to replace the day job given how little real estate throws off as income. Over time, as you build equity your assets can produce enough income.
-
Unless you have a lot of cash, NNN is going to provide low returns as there is next to no hassle. It is a great way to protect wealth long term. Not such a great way to build wealth as you have no real influence over the growth of he value.
-
If you have a hectic schedule, you might be better off avoiding real estate. If that does not feel right, think about finding a partner or doing Joint Ventures (JV) where you contribute what you have and backfill what you do not have. If you have cash and someone else has a more flexible schedule, it can work just fine. As you would be dependent on them, choose your JV partner carefully. Something that can be tested with a small, simple project.
-
When you are new to the field, there is a lot to learn. That said, recognize that many others who have a busy schedule have made the leap. It takes discipline and a sense of reality. Break it down and focus on what you can do until you ‘level up’ and have the skills to take on more. Patients but do not get trapped in the ‘rat race’ where you keep delaying your investing until the schedule is more flexible.[/QUOTE]
totally agreed…!
Thanks for this beautiful post or thread
will really implement this in my business