The Myth of the Passive Single Family Housing Investment

There was a time I thought I wanted to own hundreds of rental property units. Jsut my wife and me. We got up to 17 units and realized owning that many units would be a horrible way to live! We sold all but two of those properties – a fourplex in Killeen managed by the best property management company I’ve ever worked with, and a triplex in San Antonio managed by a trusted partner. Even in those best case third-party management scenarios, large issues still float up to me and require time and brain space.


Like most people that get into real estate investing we started with rentals. It’s an easy concept and one we’re all familiar with. And like most landlords I had a goal of how much “passive” cash flow I wanted each month. From there, all I did was take an average monthly cash flow per unit and divide it into that monthly goal to determine how units we needed. For example, if the magic passive cash flow number is $10,000 net per month, and each unit produces an average of $200 net cash flow each month, we need 50 units. No big deal right? But, ugh. At this point in life I’d rather be forced to take an AP calculus test.


What we learned was that even with a property manager in place we still have to deal with the bigger issues that inevitably happen – HVAC systems, roof damage, tenant complaints, and of course the dreaded evictions. Then there was all the nonsense created by the pandemic and associated eviction moratoriums. The property manager has to come to the owner with those larger concerns, and it’s just junk that takes away time from your family, and occupies brain space that could be used to pursue more lucrative opportunities.


And that’s the best case scenario with good management in place. We also experienced what can happen with poor management. Admittedly we let these scenarios go on too long before making a change, and that’s on me. We had one manager that would go months without sending a report, the distributions were sporadic and varied widely, and the tenant selection was horrible. At another property we had a manager that literally disappeared for six months. We had to file a small claims court suit just to get her to respond. These were not passive investments by any stretch of the imagination. Those were stressful situations.


Any of those large ticket repair items takes your calculated $200 average cash flow per door and tosses it out the window. If you planned to make $2400 on one unit this year, and all the sudden a hail storm forces you to replace a roof where you have a $2500 insurance deductible, there goes your entire cash flow for the year in one shot. 


(This is another reason why I take issue with the landlords that say they’re investing for cash flow versus appreciation. Those large capital expenditures will happen sooner than later. And even if they didn’t, $2400 a year isn’t life changing. What saved us on these deals and was much more meaningful than even the full potential cash flow was really strong appreciation.)


During the eviction moratorium related to covid we got sucked into a bunch of tenant drama. At a fourplex in San Antonio, one month after the pandemic started one tenant chose not to pay. The next month, two tenants more wouldn’t pay. And the following month, as word of mouth spread, none of the tenants paid. Because they knew we couldn’t touch them. Knowing they were all on fixed social security benefits, their income didn’t change because of covid. They just decided to take advantage of the situation.


During that time we had reports of fights between the tenants, reported drug and prostitution use, and significant water leak issues that we couldn’t repair because the tenants would chase off our plumbers. We recovered some money from the Texas rent relief program. But for six months I was paying thousands of dollars in water bills from the water leak, was hounded by code enforcement for the water spilling into neighbors’ yards with no chance of being able to fix it, and hassled by a reporter who wanted a story about a horrible mean landlord evicting [non-performing] tenants during a pandemic. My property manager tried to evict these tenants for cause but got stuck when faced with an overly tenant friendly judge. 


We eventually hired an eviction attorney who was successful in helping us remove the tenants. But on top of every other expense we were incurring, we spent another $15,000 in attorney fees, plus $2000 paid to one tenant just to get him to not pursue another appeal. And now try to picture what condition the tenants left the property in. Here are a few photos for your viewing pleasure…

No, there was no cash flow to speak of. And yes, tons of time and attention was demanded from me, pulling me away from my family time and other projects I would have much rather been focusing on.

We were thrilled to get that property sold shortly after having all the tenants out. It was a major weight off our shoulders. At the end of it all, we made a little bit of money off it. What saved us was having bought well, and a highly appreciating market. Now we have just two rental properties left with good management in place. But again, I have to make decisions about major repairs, rental increases at renewals, and other items that take my attention. There’s just nothing passive about it.

This contrasts significantly with what we experience with our syndications. With these investments we literally sign paperwork, wire our funds, and then do nothing. There’s literally nothing for us to do. We’re not even allowed to do anything. And as hard to believe as it may sound, we’re making more money on these deals than we did with our rentals, with both cash flow and appreciation considered. We receive monthly distributions, great equity exits, with no time involved in the management of the property whatsoever. The truly passive investment. For us it has been a no brainer.

At this point we’re partial owners of hundreds of rental units. So I suppose you can say I accomplished my goal in a way. No, we don’t have full control. And I for one am ecstatic about that.

If you value your personal time, your goal is to secure the benefits of real estate ownership without the hassle of management, with truly passive returns, participating in a commercial real estate syndication may be an ideal fit within your plans.


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