Create a Foundation of Passive Income

There are several benefits of investing in private real estate syndications but my personal favorite is recurring, passive income.  The passive income is especially good because it can also be tax-advantaged. So, although the various benefits are closely connected, I will focus specifically on the income component in this post. 

I would suggest that when approached in a certain way you can use private real estate to create a foundation of passive income in your financial life over time.  In fact, this is the strategy that I am using in my own portfolio. The income that is created through can be used in many ways; to cover basic living expenses, for regular re-investment or used to fund future experiences or one-off purchases. In my case, I am choosing to steadily increase my passive income year by year until it is sufficient to cover my basic living expenses. In the interim, I am reinvesting it while I continue to work. As passive income grows, I will have more flexibility in my financial and professional life.  I will have more options and choices about what my life looks like because I will have several independent sources of income.

Let’s look at an example scenario to illustrate how this might work.   Assume that an investor can allocate $75,000 annually to private real estate and that she can expect to receive an average yield of 6% annually from each investment.  That would provide $4,500 of passive income from each investment per year. By the end of year 5, our investor could expect $22,500 of passive income annually and by the tenth year, $45,000.  Keep in mind that due to the depreciation offset effect it is entirely possible that this income is shielded from taxation. That sounds pretty good, but let’s take it a step further and see what happens if she decides to keep that capital invested in real estate for the long-term.

Let’s assume that the initial investment made in year 1 has now doubled in value, which is reasonably probable.  The equity in property #1 is now $150,000 less the capital received as income ($45,000), or $105,000. If that property is sold and the equity is rolled into another asset through a 1031 like-kind exchange, then our investor avoids paying taxes on her capital gains and can continue to receive income on a larger equity interest.  An annual yield of 6% will provide passive income of $6,300. Our investor can then repeat this process with each of her properties as they are sold and effectively increase her cashflow without allocating any additional capital.  According to our assumptions, in another 10 years she will have $63,000 of passive income annually and her equity will have grown from $750K to $1.05M. 

A strategic, recurring allocation to real estate can, over time, result in multiple streams of passive income. The best thing about that is that it can provide more flexibility and a greater margin of safety in your financial life.

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