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Common mistakes with passive real estate investment

Investing in your own product can give you passive income.

You would think that all real estate agents who are deep in the trenches of real estate sales and marketing would be professional investors, right? If so, you might be surprised to learn that very few agents actually transition away from sales and into the passive investing world, specifically passive real estate investment.

Why? It usually comes down to time. Agents are so busy hustling for their clients that they often forget to build wealth —through passive real estate investment— for themselves.

The time crunch that many agents find themselves in typically drives busier agents towards more passive income solutions. If you’re an agent looking to become more like your wealthy investor clients, then keep reading as we shine a light on some of the tips, benefits, and common mistakes of passive real estate investing. Here are some tips for passive investing.

Educate Yourself

Success in life is predicated on a foundation of education, action, and excellence. If you want to become an investor or even replace your commissionable income with passive income from real estate assets, you must educate yourself. Whether that means listening to podcasts, reading books, attending local meetups, or networking with others over coffee, lunches, and dinners, your dedication to education will define you.

Find Your Niche

There are so many ways to make money in real estate besides earning a commission on a sale. You can run a wholesaling business, fix and flip homes, become a property manager, invest in large commercial properties, etc. The world really is your oyster in this business. The best thing you can do for yourself is to learn a little bit about a lot of different strategies, pick one that speaks to you and your strengths, and hyperfocus on it until you find consistent success. Then and only then, you should consider branching out into new strategies and ventures.

Run the Numbers

As an agent, you’re pretty good at understanding the real estate transaction process and finding value in a property for a first-time homeowner. As important as those skills are, they don’t necessarily translate into success as a passive real estate investor. It’s important that you learn how to run the numbers, or underwrite a deal from an investors’ perspective. As an investor, you are a business owner and entrepreneur. And if what you’re looking at doesn’t make dollars, then it doesn’t make sense — plain and simple.

Look to Scale

I will always advocate that agents begin their investing journey with multifamily real estate. Why? Because, unlike single-family homes, multifamily real estate assets— like duplexes, triplexes, quadplexes, or even large commercial multifamily— hedge risk through scale. Put another way, if you have a tenant renting your single-family home move out, you’re stuck paying the full mortgage. But if you have one tenant move out of a quadplex, the other three tenants can still support your mortgage while you and your team find someone else to occupy the unit.

Benefits of Passive Real Estate Investing

There are many benefits to passive real estate investing. Of course, the most obvious benefit is owning cash-flowing real estate that puts money in your pocket month after month. However, there are other benefits to consider when choosing a more passive approach to investing.

Cash Flow

Cash flow, or net income, is realized from the rental income after paying down your mortgage and operational expenses on a property. Having a deep understanding of all the expenses you could face as a property owner is critical to calculating and realizing your cash flow projections. Many agents think that investors just worry about tenants paying down their mortgage. This couldn’t be further from the truth. Professional investors also take into account the variable expenses of real estate. Things like property management, vacancy, maintenance, and capital expenses. In order to avoid any surprises, your goal should be to find a deal that positively cash flows after taking your mortgage and your variable expenses into consideration.

Tax Benefits

Real estate offers investors and owners alike some incredible tax benefits. Make sure you speak to a professional tax advisor to learn how things like depreciation, cost segregation, and bonus depreciation can work for you from a tax liability standpoint. Also, be sure to ask your tax advisor if you – as a real estate agent and investor – qualify as a real estate professional in the eyes of the IRS. This little designation could save you tens of thousands of dollars each year on your federal and state income taxes!

Appreciation

As an active real estate agent, you understand home appreciation more than most. As an investor, it’s important that you take appreciation for what it is: a bonus. Never invest strictly for appreciation. If you do, you may end up like one of those folks who lost it all in 2009-2011 when the bubble popped. As an investor-agent, you should always invest for cash flow and use your advanced knowledge of your local market to project appreciation in your deals. In this game, cash flow is king. Own the cash flow and force appreciation by making your property better than the rest and the appreciation will follow.

Remember there’s no such thing as a get-rich-quick scheme in life. Everything worth doing will take time, education, and effort. If you’re willing to learn the lingo, expand your horizons, and grow as a passive real estate investor (and agent), you’ll find that you may open yourself up to a whole new client base.

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