I was sitting at my desk catching up on paperwork I received a call from a local farmer who shared with me that they have their farm under contract and wanted to invest in real estate. They had learned that I was the go to person for real estate investing and they wanted to schedule a meeting. Obviously interested to assist them with their objectives, we scheduled the meeting.
Establishing congruency with goals and outcome
At the meeting I quickly identified that these investors were astute and had done their diligence before contacting me. They had a farm on the outskirts of town and a local developer came and offered to buy their land since he had a development he wanted to expand (I know, the perfect buyer right?)
With the sale of this farm they would have a clear million dollars in cash and wanted to be purposeful with the money. After much collaboration they agreed that it was in their best interest to do a 1031 tax deferred exchange into other real
Their goal was to exchange the value of the land into other real estate with comparable values and to replace the revenue they were getting from farming the land into income from a real estate investment. They were excited to replace the income from having to actively perform the day-to-day workload of farming into passive income from real estate investments.
It was actually possible for them to maintain their same income and lifestyle by ending the “working for a living mentality” and replacing it with working smart through passive investments. While they were excited about not having to go to work every day on the farm, they were still in need of things to do. As with any farmers, they were accustomed to having projects to work on so occasionally doing some fix ups or renovations seemed like a great fit for them.
Their investment options
They liked the concept of investing in office buildings as the returns were indeed favorable. The turnover did not look so appealing to them however, as often when a new tenant moves in they have different space requirements making for longer vacancies. Additionally, there is often a need to move walls and re-allocate space which can be costly and time consuming creating a longer vacancy window.
This investment seemed like a great fit for them. An apartment complex would provide little projects for him to work on and the returns were great, providing for positive monthly income. Upon viewing some potential properties however they saw the domestic side of the investment.
They witnessed many people from many different walks of life living together under one roof. They would find tenants complaining about the conduct of other tenants or disagreeing on whose parking space is whose. This was starting to feel more like a people management business than a property management business so they wanted to explore something else.
(T.I.C) Tenants in common:
This looked interesting they thought TICS are basically groups of people who jointly put funds into an account and the funds invest in commercial real estate such as strip malls, office buildings and drug stores, etc. This is very much a passive investment. All you do is put your funds in and the management of everything is done by the fund managers. As an investor you simply collect your checks.
The bad side for these investors however is that the exit strategy is very difficult. It is easy to get into the investment and not so easy to get out. It is sold as an easy exit, all you do is sell your interest. However the demand for this type of investment is quite limited. Knowing that you make your money going in by having a perfect exit strategy in place was not looking so appealing for these investors.
Single family homes:
Looking at some nice single family homes, they quickly identified they could purchase what is considered the most liquid of all real estate. The 3 bedroom, 2 bath, 2 car garage single family home. As cash buyers they could generate an average of almost $1000 per month in positive cash flow. This was looking positive for them. As these were single family homes, they would not have domestic challenges with neighboring tenants. As owners, they would have the most amount of controls to the investment, tenants of single family homes pretty much pay all their own utility and expenses and tend to have less turnover.
They decided that buying six to 10 homes would give them nice monthly revenue and enough to clearly replace their lost income from the farm.
They were excited about the easy exit strategy of being able to sell to the retail buyer when the time was ripe for them to reposition into a better investment. Best of all, if they decided to expand, they could easily put some mortgages on some of these properties and leverage then into more properties.
Indeed of all the investment they researched the simplicity of the single family home made the most sense, This was interesting to them since with a large sum of money they felt they were privileged to be able to tap into other investments when the best investment for them was also the easiest to acquire.
They executed their plan
Now that it was clear to them what they wanted to do they purchased 8 single family homes which afforded them a nice $8,000 a month in easy passive income. As they acclimate to the new lifestyle, they plan to leverage a few properties and acquire more homes, building both their monthly positive cash flow as well as combined equity build up.
Want to learn how you can invest in this manner? Contact me to find out more!