The Active Real Estate Investor vs The Passive Real Estate Investor

Posted on August 9, 2016 by

Robyn ThompsonAre you an active or passive real estate investor? This is the MAGIC question that all real estate investors should ask themselves on a regular basis, rather they know it or not.  Let me explain.

 Many beginning investors want to focus 100% on wholesaling and rehabbing so they can make the fast cash and big checks.  They don’t want the headaches of toilets, trash and tenants. After all it feels good to take a rundown house and flip it to a rehabber and make a quick $5000 or $10,000 in a few hours or better yet tear it apart, fix it up and sell it to a first time buyer who will call it home for many years to come and you can make $25,000 or $30,000 plus in just a few short months.  

Active investing can be addicting and a real adrenaline rush.  Ask me how I know that.  My nickname is the Rehab Queen and I have been rehabbing and flipping as an active income producing investor for over 17 years.  I have done over 350 properties and those quick one time paydays have been great.  But… 

This one sided thinking is FLAWED.   I missed the boat for the first decade and a half of my career. What you really want to be is not a wholesaler, rehabber or a landlord.  The best choice is to become a transaction engineer.

A transaction engineer is a savvy investor who can create deals that no other real estate investor can do.  A transaction engineer knows that some properties are more profitable to keep than to flip. 

A transaction engineer can make multiple offers to the seller not just low cash offers at MAO (Maximum Allowable Offer:  After Repaired Value x 70% – Repairs).  A transaction engineer can make offers at market value and still make huge profits.  The transaction engineer understands the power of getting terms, amortization schedules, discounts for early pay off and maximizing appreciation.

A transaction engineer will focus on creating a wealth plan that will incorporate both active and passive investing because the older you get the more passive you want to become.  Let me give you a real life example.  We will use me as the example.

At the beginning of 2013 I noticed the US economy starting to improve.  Real estate prices were at the absolute bottom in many parts of the US.  I had been watching prices tank for nearly 7 years and as Warren Buffets says “Buy Low and Sell Higher.” 

I was bound and determined to not miss the next appreciation run up.  After all I had moved to Florida in 2007 at the height of the market. Prices were climbing as much as $1000 per week in some neighborhoods and I wanted to ride the wave upwards.  I no sooner got settled in Orlando, Fl and was ready to jump into the hottest market in the US when it sank like the Titanic. 

As prices hit rock bottom in 2013 and then stabilized as low as $27 per ft, I was ready to jump in and create some massive passive wealth.  I was approaching my 50th birthday and realized that retirement was approaching quicker and quicker. 

I wanted to make money even if I couldn’t get out of bed. I wanted to buy and hold some really nice homes in golf course gated communities, in great school districts where tenants could afford to pay premium rents.  I wanted the type of properties that would appreciate the fastest.

I had enough of the low end section 8 nightmares in my younger years.  I had my share of bad tenants wrecking my houses, not paying rent, having to hire attorneys and evicting tenants, being at the mercy of the courts to get the dead beats out. I promised myself never again.

So I jumped in full force and started marketing for desperate sellers with beautiful homes in beautiful neighborhoods so I could purchase enough real estate for the rents to take care of me, my farm and my horses for the rest of my days.

I bought over $3 million in properties during 2013. All of the properties were purchased with seller financing as low as 0% to as high as 3% interest.  Yes that is right, many were at ZERO PERCENT INTEREST!  The entire payment all goes to principal. 

Here is an example of one property: I bought an estate sale on Hugh St in Port Orange that was listed for 4 months in the MLS at $139,900. No other real estate investor saw the deal.  They are not transaction engineers.

The house needed paint and carpet which was $5,000 in repairs.  I gave the seller three offers.  She picked the third offer which was $130,000 purchase price with $30,000 down (this came from another flip) and I would pay the remaining $100,000 at $1000 per month for 100 months.  

I rented the house out for $1250 per month which covers the taxes, insurance and the $1000 per month I owe the seller.  Every month I make her a payment, the loan reduces by $1000. It all goes to my net worth and none to a bank.   You do realize that the house will be paid for in just 8 1/3 years, not 30 years! 

I have owned this house now for just 34 months and my loan is down to $66,000.  The house has appreciated and the current value is $155,000.  I have made $59,000 in principal reduction and appreciation in just 34 months.  The great news is that the numbers get better every month! This house will continue to pay me for the rest of my life whether I get up and go to work or not.

So let me ask you a serious question.  How many of these do you need before your golden years would truly be golden? Is it 5, 10 or 15?

My plan is $25,000 per month after property taxes, insurance and maintenance.  The $25,000 will cover me, my ranch and all 30 horses in a life style that is more than comfortable.  All my properties will be free and clear within the next 5 years by the time I am 55. The best news is that this income is all passive.

So the moral of the story is you wholesale/rehab to keep. You flip to keep. You flip to keep and you flip a few more to keep.

You are both an active investor and a passive investor.  This process will make your golden years truly golden.  

I look forward to coming to Tampa REIA on August 11th and 13th and teaching you how to evaluate deals so you will know with absolute certainty which properties are the best to rehab to flip and which properties are the best properties to keep and build massive passive wealth so you and your family will have golden years.

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