Today, we’re going to look at three alternative approaches to passively invest in real estate.
Most people want exposure to real estate, but don’t have the time to find and manage their own properties.
And those who do often start with actively managing their single-family rental.
This approach is difficult to scale and a huge time suck.
The old way of buying a single property and self managing is dead. Far too time consuming. There are better ways to access real estate and build passive income.
In today’s newsletter I’ll cover two of those better ways:
- Private Commercial Syndications
- Hands-off Short-term Rental Investing
1. Private Commercial Syndications
Most Americans have all of their wealth tied up in their home or in public stocks and bonds.
By contrast, high net worth individuals, endowment funds and other sophisticated investors allocate a significant portion of their holdings to alternative assets, like commercial real estate.
Commercial real estate syndications offer 100% passive, tax-advantaged, current income.
As a Limited Partner in a syndication, you have no operational responsibilities whatsoever. The only work for you is finding excellent Sponsors you can trust with your hard earned money.
Real estate syndications vary tremendously, but on average you can expect a 6-8% cash yield distributed annually from the property’s operating income. Thanks to the powerful effects of depreciation, you will likely pay little to no tax on this income.
Overall returns can be in the low to mid teens (or much higher), far outpacing the S&P's 7% return.
For the busy professional with more money than time, there is no better way to generate 100% passive income.
The key is finding the right Sponsors.
However, I’ve found this approach to be sub-optimal. These platforms are more concerned with scaling their AUM (assets under management) than generating outsized returns for their investors.
I recommend working a bit harder to find private Sponsors with a proven track record. Sponsors that don’t publicly market to find new investors and who have been around for at least 20 years.
Send me a quick email and I’ll share my 3 favorite.
2. Hands-off Short-term Rental Investing
STRs have proven to be extremely lucrative, consistently outperforming long-term rentals by a wide margin. Here are a few of the benefits:
But finding, setting up and managing an STR is a huge time suck.
Let’s look at 3 alternative strategies to invest in STRs without the headache of managing them:
Strategy #1: Invest in a Portfolio of STRs
Funds like Techvestor are institutionalizing short term rental investing.
From their website: “Passively invest in short-term rentals with as little as $25,000. We’ll do all the work and send you a check every quarter.”
They act as the General Partner (Sponsor), raise money from you, the Limited Partner (investor), and use those funds to consolidate a portfolio of short term rental properties.
Their portfolio has scaled quickly - check it out here.
I have not personally invested in the fund, but have spoken with their cofounders and were impressed by their unique, portfolio-based approach. I think you will continue to see more and more STR funds emerge over the coming years.
There is clear benefit in scaling within a specific market, which Techvestor is following. They are also building a huge repository of proprietary demand data (think occupancy, pricing, etc.) that they can leverage to outperform their competition.
If you'd like a warm intro to their team, let me know.
Strategy #2: Invest in a Specific STR Through an Online Marketplace
reAlpha is an online marketplace where you can invest in specific STRs, rather than a full portfolio.
They use a fractional ownership model where you buy equity in specific properties kind of like you would buy shares of companies on your favorite investing app.
The process is done entirely online and requires almost no effort from you after making the investment. The company was founded in 2020 and has already raised over $200M in venture capital.
Strategy #3: Hire a Full-Service Property Manager Like Rabbu
For those who want to be slightly more hands on with finding the property, but don’t have the time or desire to manage it, check out Rabbu.
Rabbu has an excellent software platform that allows you to easily see the revenue potential of a specific property.
Their Airbnb revenue estimator is completely free to use and relatively accurate.
Once you acquire the right property, Rabbu is a full-service property manager. They can get everything set up for you and manage the day-to-day activity.
However, I’d recommend shopping around for the right property manager.
You want someone who is familiar with your specific market and home size. Someone who is hungry to build their portfolio and willing to go over and beyond to make your property successful.
Expect to pay 10-20% of your gross income to your property manager.
As with all investing, you should diversify.
I allocate ~35% of my networth to alternative real estate investments.
Within that, I’ve spread my investments across 6 different Sponsors, 10 different deals and 20+ unique properties.
These properties include short-term rentals, multi-family apartment buildings, industrial warehouses in Texas and new development projects in Opportunity Zones.
Overtime, my goal is to concentrate my wealth with the Sponsors that perform best.
I’ll cover more specifics on my investment allocation in future newsletters.
Today’s issue was a short one, but I hope you found it valuable.
If anything resonates with you, don’t hesitate to send me an email.
Until next week,