Education

What Is Passive Investing?

By Matt Picheny

Introduction

Most of us learn in school that we make our way in life by studying hard, getting a good job, buying a house, and saving enough money so we can last into retirement. Meanwhile, we pay to put our kids through college so that they can repeat the cycle. This approach worked to some degree in the past. If you picked the right line of work, you might have a job for life. If you put your money in the bank, you might earn a decent rate of interest. But even then, working like this always put limits on how much you could make. If you wanted to make more, you’d have to work more hours—and pay more tax!

Did you ever notice that people who we think of as wealthy don’t simply work more hours than everyone else? Think about the person who works three jobs and barely sees their kids long enough to put them to bed at night, while they earn barely enough to make rent and avoid eviction for another month. Even if your situation isn’t that stressful, your work probably puts a ceiling on how much you can earn. And if you’re working for someone else, they’re getting rich before you are. This is where a passive investment strategy comes into play. Those who are able to learn and understand passive investing don’t have to continuously sacrifice time for money.

A Different Approach

There is another way of thinking and acting so that you don’t just trade your time for money. Something that most wealthy people seem to know. The rest of us don’t know this because most schools don’t teach anything important about how to deal with money.

The secret—the thing it took me years to learn—is that instead of working for money, make money work for you.

That might just sound like a nice soundbite that you can throw away, but I promise you it’s much more. We can’t rely on job security and bank interest rates if we want to have any degree of financial freedom. This is where I’d like to introduce you to something life changing and it’s called a passive investment.

What is Passive Investing?

Passive investing is an investment strategy that operates without major hands-on participation from the investor. It’s often aimed at building wealth gradually and maximizing returns over the long term while minimizing fast cycles of buying and selling. Passive investing is perfect for long-term thinkers (and wealthy people think in the long term), it works great with investments in sectors that have a proven track record. Even though every market can have its blips, if it tends to post positive returns over time, that’s a place where passive investments are likely to become significant assets for their investors.

Becoming a passive investor is the fastest way to earn money while you sleep. At least, that’s what everyone is always saying. While there’s a lot of false promises associated with that, there is some truth as well. When your money is properly put to work for you, it will do so around the clock—the message can also send the wrong signal to some people. It can feel like an easy fix that requires no effort at all. as ways to make money in your sleep. Although there’s undoubtedly some truth in this—when your money is properly put to work for you, it will do so around the clock—the message can also send the wrong signal to some people. It can feel like an easy fix that requires no effort at all.

The truth is that good passive investing:

  • Does require some research.
  • Does not come with risk-free guarantees.
  • Does not offer a “get rich quick” button.

I pause when telling you that this isn’t a “get rich quick” thing because that’s exactly what the “get rich quick” merchants will also tell you. “Trust me—I used to be an actor” probably doesn’t help much either.

Think of passive investment as a handy second income rather than being your main gig. It has the potential to become the principal way your wealth grows over time, but let’s walk before we try to run. More than just earning you money, passive investment is a route to give you the greatest non-renewable resource: time. What you do with it is up to you, but having the choice of what to do with your time is much more rewarding than spending it all working.

Passive Investing vs Active Investing

When you buy a house to rent or flip, that’s an example of active investing. It’s your responsibility to take care of the house and every aspect of managing the property is up to you. You’re at the wheel, fully in charge of what happens next. So, what is passive investing?

Passive investing is the opposite of active investing. Or at least kind of. You still need to do your homework upfront, vet the deals you get into and the people who operate them. When you’ve done your checks, you can relax and let the investment generate returns for you while you get on with something more fun.

For medium- and long-term investments, passive investment portfolios require virtually no maintenance and often produce more tax-efficient returns.

Passive Real Estate Investing

My area of interest is passive investment in real estate. Why not Bitcoin, other cryptocurrencies, or NFTs? They’re all blowing up on social media right now. Yes, you could make a lot of money from them. But remember: they’re all new and operate in untested markets. I may try to swing for the fences once in a while (I’ve got a little Bitcoin and have even invested in Broadway shows) but I prefer base hits.  Something steady and predictable. There is a fine line between Investing and Speculating.

Real estate, on the other hand, is about as old a market as it gets, and passive investments are ideal for mature markets that yield a return in the long term. Until we’re all uploaded to The Matrix, we’ll need places to live. Fulfilling such a basic human need is always of value, and that means passive investing in real property makes sense.

I’ve found that passive investing works best when you have a sizeable amount to invest. Most investment offerings begin at $50,000 in return for a passive second stream of income to boost their main earnings.

Types Of Passive Investment

In real estate, passive investment boils down to two main categories: funds and individual syndications.

With funds, your money is invested in a package of multiple properties. You don’t get to scrutinize the individual components of this pool, so you must trust the fund managers to make the right choices. (“Trust” is the minimum table stakes here. If you don’t trust the people who are dealing on your behalf, you shouldn’t give them a dime.)

With individual syndications, your money is invested through a private group that is raising equity together to go after a property. Pooling financial strength in this way means you can think way beyond a single-family home. Syndication could get you a stake in an entire apartment complex, a hotel, or even a Broadway show. Try doing that on your own—it would be pretty much impossible unless you were already super-wealthy.

The Finer Details

There’s plenty of fine detail you need to know before picking an option and diving into this stuff yourself. But that’s the beauty of passive investment because someone else is doing the brainwork of understanding Securities and Exchange Commission (SEC) requirements, financing, operations, and navigating all the complex details that make up these investments. If you find the right person to trust with your money, you can skip to the good part and let them handle the rest.

Of course, there will be plenty of people out there begging you to trust them with your money. It should take a while for you to build that trust with them. Let’s be honest: that’s why I write my articles and put everything I’ve learned into my book. It’s my way of showing that I know how this field works, while helping people get smarter and avoid the mistakes that I made in the early days. Anyway, who you pick is up to you—just be sure it’s a good one!

My Approach

You might wonder what a former actor could know about passive investment. The answer is long enough to fill a book, so that’s what I’ve done in Backstage Guide To Real Estate. What follows is a little about how I see this field.

I’ve learned that successful passive investing comes from assessing the sponsor, the market, and the deal. Of these, it’s most important to choose the right sponsor—that’s the person or people leading the syndication or partnership. It’s so important that I only work with people I truly know, like and trust. People whose investment philosophies align with my core values and beliefs.

I analyze deals in forensic detail and don’t make assumptions without data. You need evidence and benchmarks if anyone’s going to trust you in this field, especially when dealing with large sums of money. Not all deals are made equal, and if you’re picky like me, you’ll want to choose deals that give you a good return with very low risk.

Do Well By Doing Good

I believe in doing deals that work for everyone. Not just helping people make money but giving them the opportunity to make a difference for the people and communities they want to serve.

It sounds a bit grand, but it feels as though I’m supporting a new kind of activism by helping both investors and the residents of our communities. The deals lead to properties being improved and made more green, so this stuff is good for the environment too. My hope is this spreads ripples of positivity and that together we make this world a better place to live. If all you care about is the cold, hard cash and buying that Lambo, I might not be your guy.

Start Passive Investing Today

I know you’ll have lots of more questions about how to make passive investments work for you. What’s certain is that doing this alone can be hard and that some early mistakes are inevitable—they were for me until I figured out what really works.

Reach out to me if you’re ready to get started with passive investing. I love helping good people to do good things with their money.

P.S. I’m not a financial advisor but everything I write about on this blog and in my book, Backstage Guide To Real Estate, is based on what I’ve learned on my own journey to financial freedom.


The information provided on this website is not advice and does not purport to be a substitute for professional adviceYou should seek out the services of professionals who are experts in the fields of investment, legal, and accounting concerning your specific situation. The author disclaims any responsibility or any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any contents of this website.