Passive income = the best

[97guns]

Sept 2016 post by 97guns on another forum:

"i had a very good property manager that i trusted 100%, this morning he suffered a massive heart attack and passed away this afternoon. now i need to make some decisions.... whether to find another property manager or liquidate everything, ive had the experience of using many property managers over the course of my RE investing, 5 others before this one and every one of them became totally untrustworthy over time, nickel and diming me to no end.

if i liquidate i will clear around 950K and would dump it all into trust deed loans that pay 11-13%, netting me around $114K a year, a nice jump in income from my current $66K through the rents. im undecided and have only given it a few hours thought but im leaning towards selling because im pretty sure an honest property manager does not exist."

I let his wife take over my management duties, she was helping him before he passed and knew exactly what he was doing, the transition was seamless for me with no change in the passiveness of the investment

 

[gstillson]

So today I spent 1 hour going over some trade ideas, picked my trades, set a limit sell order, then went out for lunch.

Came back and found order had filled, $974.23 gain after commissions.

It isn't passive but nice to have a up day on a down market.

Year to date, our $200,000 account, of which around $80,000 is always in cash, has generated over $66,000 in realized gain (the reason I had to send some loot to the IRS for estimated tax payment).

I have paid a fair penny in commissions though. Cost of doing business I guess.

 

[97guns]

So today I spent 1 hour going over some trade ideas, picked my trades, set a limit sell order, then went out for lunch.

Came back and found order had filled, $974.23 gain after commissions.

It isn't passive but nice to have a up day on a down market.

Year to date, our $200,000 account, of which around $80,000 is always in cash, has generated over $66,000 in realized gain (the reason I had to send some loot to the IRS for estimated tax payment).

I have paid a fair penny in commissions though. Cost of doing business I guess.

If it’s something your interested in and something your passionate about its more like a hobby and I view it as passive, it’s not like your unplugging a toilet at 2:00 am

 

[Amethyst]

No doubt about that, since I'll wager that is the one thing 99% of the landlords on the forum have never done.

it’s not like your unplugging a toilet at 2:00 am

 

[Bruceski44]

I completely agree with you. I had ONE clogged toilet during the 20 years I managed my rentals. And it didn't occur at 2am. In fact, the tenant never complained about it at all.

After she moved out, I noticed the toilet was draining very slowly after a flush. Drain cleaner did nothing. I called the plumber who couldn't snake it. There was something hard which wouldn't move one way or the other. We pulled the toilet (it was just getting interesting now...) and still couldn't fish the blockage out. We tapped the side of the toilet with a hammer until it broke whereupon out fell a Secret deodorant bar. It must have fell in as the tenant was packing and she just tried to flush it away. It got stuck in the toilet's trap but good.

Guess who bought me a brand new, top of the line toilet and paid for the plumber?

 

[calmloki]

Don't remember unplugging a toilet at 2 AM, but did do an emergency trip around midnight or later. Somehow the valve with the flex line to the toilet just broke off the hard plumbing. Strangest thing, as it was on the wall behind the toilet and protected on the side by a shower wall. When I got there the tenant's boyfriend was trying to catch the 60psi stream of water shooting out of the 1/2" line with a kitchen pot. Not that I was happy, but emergency response is kinda invigorating. We've had multiple instances of things falling off the toilet tanks and getting flushed. part way. Little kids love to see if their toys will disappear in a whirlpool. They do, but don't go far.
Then there was the WW2 vet who flushed his blue plastic Q-tips, which, in time, made a basket weave across the outlet horn of the toilet. A snake would move the Q-tips, then they would reweave. Pulled the toilet, then fought with a drain line that was plugging up for the next few months - that was mostly from his flushed dental floss. Hell of a guy though.
Several decades ago I started renting all places with new rolls of TP installed. That after a healthy young college man drove across the country, got into his newly rented apartment and finally had a chance to relax. Unfortunately, all he had was a roll of Brawny paper towels, which he folded neatly. They also didn't exit the horn.
Lots of fun stories - I am a watertight unit and soap is my friend.

 

[kevdude]

We currently have 24 units that provide our sole source of income. We manage them ourselves so they are not passive in any sense. However, I only put in approximately 10-15 hours per month. Including appreciation and cash flow, our returns are well over 10% annually. We’ve certainly had our share of issues, with both tenants and the properties. But they also provided the opportunity for us to semi-retire at 49 5+ years ago. We travel as much as we can given our kids school schedules, and rarely have to deal with issues while away. Even if we have to, we can easily do it by phone/Internet if need be. And we did it investing in properties in a fairly HCOL area - Seattle.

I am not advocating for real estate as a better form of investment than any other, only saying that it has worked for us.

We do have money in the market as well, but that totals only about 20% of our net worth.

 

[Offgrid Organic Farmer]

I have a COLA govt pension...you can't get any more passive than that. Every single month they give me 120%+ of what I need to live on and the only actions I've taken since retirement is to log on to my bank account to verify the monthly deposit.

According to the IRS, a 'non-passive' activity can be used as a tax-shelter.

My 'non-passive' activities [rentals] shelter my other income streams from being taxed.

 

[pb4uski]

According to the IRS, a 'non-passive' activity can be used as a tax-shelter.

My 'non-passive' activities [rentals] shelter my other income streams from being taxed.

On the first part, I would love to see the citation where the IRS states that a non-passive activity can be used as a tax shelter... put up or shut up.

On the second part, the only way your rentals can shelter other income is if the rental shows a loss ... in which case the rental isn't a good investment.

Ignorance is bliss.

 

[marko]

My 'non-passive' activities [rentals] shelter my other income streams from being taxed.

Your posts generally tend to obsess on avoiding taxes. I wonder how much money that costs you.

 

[street]

I have not had rental property but have rented land etc.. I can say one advantage in the rental business is that when the markets tank or go down your business is a steady income percent which I see a big deal. Passive or not passive income rentals make sense to me and I wish I had some at times.

 

[pb4uski]

I was thinking about that as this debate evolved the other day. Our withdrawals are $x per month rain or shine so what we have to spend isn't affected by market gyrations... similarly, I don't think that our interest or dividends vary much either... of course, the total balance does but we expect it to and as total return investors don't care so much.

 

[Luck_Club]

Page 4 bottom corner

On the first part, I would love to see the citation where the IRS states that a non-passive activity can be used as a tax shelter... put up or shut up.

On the second part, the only way your rentals can shelter other income is if the rental shows a loss ... in which case the rental isn't a good investment.

Ignorance is bliss.

Sure is.

https://www.irs.gov/pub/irs-pdf/p925.pdf

 

[pb4uski]

Where in the document does it say "tax shelter"? I did a search and can't find where it is mentioned.

 

[Gumby]

Seems unlikely that an IRS document would use the words "tax shelter". But I do note something in there about a $25,000 exemption that would let you deduct rental losses (which I suppose could come from depreciation, even if the properties were cash flow positive) against other sources of income. Maybe that's what Organic Farmer is referencing.

In any event, I think this group ought to be able to straighten all this out without getting rude and combative with each other.

 

[pb4uski]

I agree and that was my point. If OOF had explained it the way that you just did then that is sensible and there would be nothing to dispute but it is hard to know without being a mind reader.

 

[ExFlyBoy5]

I have a COLA govt pension...you can't get any more passive than that.

I call my monthly pension deposit "wake up pay" As long as I wake up on the 1st of every month, then it keeps rolling in. Actually, I can sleep all day and it still hits the bank. Can you get ANY MORE passive than that?

 

[ExFlyBoy5]

Speaking of being "passive" as a land lord...I forgot about something until my DW reminded me.

My DW's family own two apartment complexes. They aren't very large, and they have a manager and maintenance man, so it's *usually* a pretty passive operation. Nonetheless, 3 years ago, they got a call that one of the tenants had died in the unit. On Christmas Day. I am pretty sure they would have wanted to deal with a clogged toilet. Or, most recently the idiot who drove their car though the wall of one of the buildings. They have been battling the insurance companies for 6 months now...so not my idea of passive.

 

[Joylush]

We currently have 24 units that provide our sole source of income. We manage them ourselves so they are not passive in any sense. However, I only put in approximately 10-15 hours per month. Including appreciation and cash flow, our returns are well over 10% annually. We’ve certainly had our share of issues, with both tenants and the properties. But they also provided the opportunity for us to semi-retire at 49 5+ years ago. We travel as much as we can given our kids school schedules, and rarely have to deal with issues while away. Even if we have to, we can easily do it by phone/Internet if need be. And we did it investing in properties in a fairly HCOL area - Seattle.

I am not advocating for real estate as a better form of investment than any other, only saying that it has worked for us.

We do have money in the market as well, but that totals only about 20% of our net worth.

Ditto that! In this market it's pretty darned easy. I have 30 and have no issues traveling. Do things come up? Sure. Last time I was away for two months.
Had 2 AC calls, 2 plumbing calls, one down refrigerator, two stove issues. All solved with a couple of phone calls.

The key is to have trustworthy long term relationships with quality tradesmen and quality long-term reliable tents. I'm fortunate to have both. If ever it becomes less than easy I will simply sell. Although I dread the taxes that will come with that option. But you can't have everything.

 

[haha]

I call my monthly pension deposit "wake up pay" As long as I wake up on the 1st of every month, then it keeps rolling in. Actually, I can sleep all day and it still hits the bank. Can you get ANY MORE passive than that?

I don't think anyone would dispute this.

 

[Amethyst]

Sometimes, it even hits the credit union a day or two early! As when the 1st is a holiday, or a Sunday.

Just like getting SS (which I won't get), except you can start younger!

I call my monthly pension deposit "wake up pay" As long as I wake up on the 1st of every month, then it keeps rolling in. Actually, I can sleep all day and it still hits the bank.

 

[flintnational]

I can think of only one entirely passive activity and most of us are trying to avoid/delay it!

 

[Joylush]

I call my monthly pension deposit "wake up pay" As long as I wake up on the 1st of every month, then it keeps rolling in. Actually, I can sleep all day and it still hits the bank. Can you get ANY MORE passive than that?

I think of my monthly rental income the same way. The thing is you worked a very lot of non-passive hours to earn your pension. My rental income is generated working 40-60 hours a year. I'd consider it for the most part quite passive. If nothing else I'm paid a significant amount for the actual work it takes if calculated by hourly wage.

I could work full time for a year and not generate the income I do through the rentals only working 40-60 hours a year. I view it more as a lucrative paid volunteer work.

 

[Bruceski44]

I just did all the math so I could present a current summary here.

My passive real estate portfolio consists of DST and LLC investments which are comprised of:
31 necessity-based retail properties throughout the country
4 multi-family projects in NC and AZ
4 hotels in AZ
other properties held via short-term notes or diversified direct ownership in funds. (too many details to list here)

I own small percentages of these properties, so the total stake isn't as large as you might think.

The real estate portion of my portfolio is 37% of my net worth and returns 9.35% cash-on-cash which pays 65% of my monthly spending. I never could have RE if not for this income stream. Considering that two of the properties (about 14%) aren't even paying distributions yet, I feel pretty good about not having to return to work.

My combined effort in managing this portfolio consists of reading quarterly reports and listening to the occasional conference call. A few months ago, one of the DSTs was sold, so I stepped up my engagement to select a rollover property and managed the 1031 exchange. It took about 20 hours in a month with most of it being paperwork. Vetting multiple properties and picking the best replacement property was the most intense effort, but I enjoyed it. This DST rollover may occur every 7-10 years per property.


My active dividend-paying stock and bond portfolio is 40% of my net worth and returns 4.88% (dividends only) which pays 35% of my monthly spending.

This is definitely an active pursuit as I continually adjust its makeup for reliable long-term performance.

You'll note that the stock&bond portfolio is larger than the real estate portfolio, but provides only half the income.


So if one were to grade the EFFICIENCY of these two portfolios, the real estate would vastly outperform the stock&bonds.


ANY well-diversified portfolio REQUIRES exposure to alternative assets, with real estate being one of these. I am overweight in real estate, because I find it easy to understand and it pays high returns. You may be able to get similar exposure to this asset class by buying REITs, and I do too, for areas where I'm underexposed, but the post-tax returns of direct ownership are hard to beat. And it's efficient, which is as close to passive as one can get when discussing any investment.

 

[scrabbler1]

I think of my monthly rental income the same way. The thing is you worked a very lot of non-passive hours to earn your pension. My rental income is generated working 40-60 hours a year. I'd consider it for the most part quite passive. If nothing else I'm paid a significant amount for the actual work it takes if calculated by hourly wage.

I could work full time for a year and not generate the income I do through the rentals only working 40-60 hours a year. I view it more as a lucrative paid volunteer work.

But didn't you have to work to earn the money to buy your rental properties, the same way a pensioner had to work all those hours to earn his pension?