How We Made $1,922/hr Investing In Real Estate Without Lifting A Finger​ - The Art of FI (2024)

• S.A. FI
• August 3, 2022

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Hands down, the best position you can take in investing in real estate is that of the passive investor. Not only is there great cash flow and tax benefits, but the fact you don’t have to do anything once you invest your money is a huge benefit.

Learn more about passive real estate investing

On the other hand, being a sponsor or active investor, there is a large time commitment needed if you want to be successful. You are expected to do everything including but not limited to finding deals, negotiating, conducting due diligence, finding lenders, submitting required documents to lenders, finding and hiring inspectors, finding and hiring attorneys, and raising money from investors. This is just to close the deal. After closing, there is asset management and rehab/maintenance which are its own beasts.

When we first started investing in real estate, we thought this was going to be a career for us. While our first couple of investment properties turned out to be pretty good cash cows for us, it took a lot of work to get them to this cash flowing state. We sat down often and ran through the numbers to figure out how many properties we needed to own to replace our income. The number was 60 units with monthly cash flow of $150/unit.

While the first couple properties went smoothly, the following few were not so great. We ended up selling our entire small multifamily portfolio in 2023 so we can focus on passive real estate investing.

When we got into larger multifamily properties, we found the dirty little secret is the sponsor/operator makes very little income until the property is refinanced or sold. This was not feasible as a career unless you are involved in a lot of deals collecting acquisition fees. It’s about quantity.

Once we started on the passive side of investing in real estate, this is when we saw our passive income grow exponentially. We were paid right after the banks were paid and didn’t need to do any work. When we did the math on the number of hours we’d have to put on the active versus the passive side when investing in real estate, it was a no-brainer where we wanted to invest.

Hourly Breakdown Comparison

The amount of time a sponsor has to put into the investment versus the limited partner is a huge difference. The example below is from an actual deal we participated in as a sponsor/operator and as a limited partner (yes, sponsors can invest passively in their own deals). This example shows the number of hours we spent as a sponsor/operator and an limited partner, and how it would break down if we paid ourselves an hourly wage. This helped us clearly see the value of our time.

The chart below is the itemized breakdown of all the tasks completed by the sponsor/operator and the number of hours spent on each task:

By comparison, let’s look at the hourly breakdown as a passive investor:

Learn more about passive real estate investing

From the hourly breakdown as a passive investor, this requires a lot less time than the sponsor when investing in real estate.

The hourly breakdown above only included the acquisition of the property and the time spent for asset management is not included in the calculation.

We can safely say that on average we spent 10 hours a week on asset management and investor relations even when we hired a property manager and general contractor to handle the day-to-day tasks. This came out to another 520 hours a year.

On the other hand, as a limited partner, we spent 30 minutes a month to read the monthly update and another 30 minutes to review the quarterly financials. In one year, we spent 8 hours a year to review the reports and financials.

As mentioned earlier, the dirty little secret in the active real estate world is the sponsor makes most of their income at the sale or refinance of the property. They do earn some minimal fees during the hold period of the property. However, it is worth noting, this is not income for them, but is used to keep the lights on for the business.

For a five year hold, this is what we earned as sponsor and limited partner from the investment including a refinance: (Note: Limited Partner investment = $100,000)

When we include the hourly breakdown with the 10 hours per week of asset management with the acquisition hours, the average earnings per hour was $172 as a sponsor.

When comparing this to the passive investment, we spent an average of 8 hours per year reviewing this investment with an average earnings per hour of $1,922 for a $100,000 investment.

During the hold period of the investment, we averaged 9.86% annual cash flow returns and an overall return on investment of 187.4% in 5 years or 17.4% annually as a limited partner. For the stock investor, if we convert this into a compounded return, then this is the equivalent of a 13.3% compounded annual return.

From this example, it shows the best position in investing in real estate is that of the passive investor. We spend the least amount of time on the investment, hence the passive title, and we have the potential for significantly higher earnings per hour rates. This extra time freedom allows us to do other things while our money is working for us.

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As the sponsor, we have the opportunity to earn good income by being active, but it does come with additional sweat equity and is also dependent on the number of other sponsors involved in the deal.

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