10 Tips from the Real Estate Passive Income Playbook

I have an embarrassing confession to make: I’ve been a great entrepreneurial earner but a not-so-great investor. As a high-risk angel investor with long-term payouts of 10 to 15 years, I’ve invested in dozens of startups, and very few of my investments have produced the passive income or immediate cash flow I was hoping for. Unfortunately, that’s the norm.

I hesitated for a long time to get on the real estate train. I imagined real estate investments would be one giant property management headache. I feared the unforeseen sagging foundation of a fixer-upper and the phone calls in the middle of the night from a tenant complaining about a malfunctioning HVAC or bad plumbing. Ewwww.

Most of all, I feared real estate investments would turn into another full-time job — and as someone who values family life and freedom above everything, that was something I did not want.

Today, however, I am embracing real estate. My wife and I are involved in development projects in Mexico, and through our friends Jim and Jamie Sheils, I have learned about the concept of build-to-rent investment. For a real estate-hesitant investor like me, this is one of the smartest and safest long-term plans, especially given the current demand for residential real estate.

You may have heard that there’s a housing shortage in the United States. According to an article on PewTrusts.org, a Freddie Mac report from 2021 revealed that the nation was short some 3.8 million housing units and that it could take up to a decade to ease this housing shortage. Large funds and private equity firms are moving into the realm of build-to-rent investment, but there is room for small investors and entrepreneurs in this market as well.

For smaller investors, the end goal with build-to-rent investment is simple: to create enough passive income to have an amazing family life. Having more resources for family togetherness resonates with me deeply, inspiring me to learn more about their investment processes and strategies.

Here is some of what I have learned about build-to-rent real estate investments.

Related: This Is the Most Expensive Rental Zip Code in the U.S. — And It’s Not in New York or San Francisco

10 Build-to-Rent Investment Principles

1. Invest for the long term: The build-to-rent mindset focuses on steady cash flow and equity growth rather than flipping. It’s about building a solid portfolio to lean on. Smart investors start with three to five new properties. After three to five years of renting those, the investor refinances and uses the built equity to invest in new properties and continues the cycle.
2. Focus on aspects other than cash flow: Cash flow is important, but the added value comes from property value increases, rent increases, tax benefits, cost segregation, principal reduction and refinancing to put money into other properties.
3. Invest in good areas and neighborhoods: Invest in median-income price markets so there will be less renter turnover, better saleability down the road and better value growth overall.
4. Stick with new construction: Fixer uppers are simply deferred maintenance nightmares. It’s better to own fewer properties of better quality than many properties with potential maintenance issues.
5. Let experts manage your properties: Your goal is passive income so that you can create more time for family life. Sub out property management to a third party. You’re not looking for a second or third job.
6. Rental properties are for cash flow, not for charity: This is another reason to use a property management company. It sounds harsh, but it’s easy to get emotionally hooked with tenants, some of whom will tell you a story of woe. You can separate your rentals and charity giving with a property manager as your go-between.
7. Invest in landlord-friendly states: Some states protect landlord rights more than others. In states that don’t safeguard landlords, there may be instances in which you can’t collect rent.
8. Plug into a support team: There’s much more to building to rent than meets the eye: credit readings, criminal background checks, verifying income, pulling building permits and building inspections. If you can plug into an existing build-to-rent investment company, the odds will be in your favor.
9. Choose a vetted build-to-rent company: Make sure you invest in a company with a profitable track record that has built at least 1,000 properties and survived down cycles. Don’t be the first investor in a company.
10. Never stop learning: Keep learning even after you’ve invested your money. Attend masterminds, read everything you can on investing and trends, and plug into support teams that provide learning opportunities.
11. BONUS: Involve your family in your investments. There’s more to family time than playing. Teach your kids about intelligent investing. Let your kids sit in on accounting meetings, and if they have money, teach them investment skills.

Related: 4 New Year’s Resolutions Every Landlord Should Consider

I wish I had understood these principles earlier, but now it seems much less daunting than I imagined. With these strategies and mindsets, it appears that having the ideal family life is attainable with less effort.