Why would you want lessons on how to ruin your retirement from the co-host of the How to Lose Money podcast?
Most of us aren’t interested in retirement failure or losing money, but fortunately, both the podcast and this article dive into what can go wrong and how you can avoid those traps.
I achieved financial independence at 39 by working as a physician and investing in the stock market. Paul Moore, the author of this post, achieved financial independence at 33 when he sold his staffing agency to a publicly traded company, and he’s grown his wealth largely through real estate and continued entrepreneurship.
Paul is also a book author, blogger, podcaster, and more. A more complete bio can be found below after we learn how to best ruin our retirements (and a better alternative).
Sun. Sand. Boats and leisure. Ski slopes and long walks. Time to put away Osler and dust off that stack of Tom Clancy novels.
A time to relish the fruits of your labor, enjoy your family, and acquire that sports car.
So why are you planning to ruin it by investing in real estate?
DISCLAIMER: I love real estate. I invest heavily in real estate. I manage a real estate fund. But I’m telling you from decades of experience that most people do it wrong. I’m writing to help you avoid the mistakes I’ve made and sidestep the common pitfalls that plague many medical professionals.
“He set my apartment on fire!”
I was talking with my friend Tony this week. Tony is a medical professional with 43 apartment units. He manages them himself. He has been in a long transition from medicine to real estate investing. He started down this path years ago to create passive income to replace his W-2 income from medicine.
Tony found that owning and managing his own apartments is anything but passive. He has drastically reduced his hours practicing medicine… but his hours managing real estate have gobbled up his free time. And then some.
Tony just leased one of his units to a new tenant last Tuesday. He screened him well and was sure he was a good fit. He got a deposit and his first month’s rent.
On Wednesday, he set Tony’s apartment on fire.
(At least he waited a whole day to do it.) Tony got a call from the fire department informing him of the incident. He’s working through the insurance issues now and assumed the guy would be charged with arson.
Then he learned the guy may be taking the insanity route and could walk away without getting in any real trouble. Tony wonders how his insurance company will respond. Will they really cover this incident?
Tony could have outsourced property management to a 3rd party (I sure would). But a property manager would not have shielded Tony from this hassle and potential expense. This will take months to fix, and it could cost a lot of money, as well. And it will result in a good bit of lost revenue at a bare minimum.
Is Income from Real Estate Really Passive?
After selling my firm to a public company in 1997, I began investing in real estate. I flipped houses, managed rental homes, built a handful of houses, and developed a small subdivision. I fell in love with real estate.
But I learned that real estate is not a passive investment.
At least owning and operating it yourself isn’t. (There are other options.)
Directly owning and managing real estate, with or without a property manager, is an excellent path to growing wealth, creating income, and saving on taxes. But the income isn’t usually passive, and it often becomes a second job. And it can become an albatross around your neck.
I should know. I called my podcast How to Lose Money. We interviewed over 230 entrepreneurs and investors during four years of weekly shows. I heard stories that would make you sick.
Like Brian, the investor who got a call from his property manager six states away who informed him: “Your rental house has become a crack house!”
And Rod, the real estate investor who amassed a portfolio of hundreds of highly leveraged single family homes in Florida. He saw his net worth go up by $30 million in 2006. And then plummet by $50 million by 2008 before he lost everything.
“…And I’m only on my third house!”
I got a call from an oral surgeon in the Pacific Northwest. His wife was an orthodontist, and he was working to create a passive income stream as his exit strategy. Real estate was his vehicle of choice, and he was buying single family rentals. He sounded excited as he described his plan to acquire 20 rental homes before exiting his practice.
Then he sighed deeply. His voice shifted. He sounded tired as he described his phone calls with painters between surgeries. And his tenant meetings after hours. It didn’t help that he was spending his free time… lunch hours, evenings, weekends, and even some vacations… looking for the elusive next house for his portfolio.
“I have to admit it. I’m exhausted with this treadmill.” He paused. “And I’m only on my third house.”
Direct real estate investing is not passive. It’s more like another part-time job. And it’s not a great plan for most medical professionals who are developing multiple streams of income.
But there’s a way to do it right…
Real estate is one of the greatest [passive] wealth generators in history. And it provides almost unparalleled tax avoidance opportunities. There’s a reason most of the Forbes 400 wealthiest Americans either created or sustain their family’s wealth by investing in (typically commercial) real estate.
So how do they do it? And how can you and I join them? Here are six options.
Option 1 – Inherit or Buy a Company.
Most of us missed the workshop on designing our own inheritance. (I know, it sounds like a lame dad joke, but there’s one difference: it’s not that funny.) But many wealthy investors can buy a company that owns and manages assets.
These are typically commercial (including large multifamily) assets since they scale far better than residential. When acquiring a company, these moguls acquire the experienced talent, systems, and assets to generate income and build wealth.
This is not really a passive endeavor and not one that is practical for most of us.
Option 2 – Invest in a REIT.
Investing in REITs gives investors a passive piece of the real estate world. But like other publicly traded stocks, traded REITs can be subject to the mood on Wall Street, a war in the Middle East, or a CEO scandal. And REITs don’t always create a meaningful connection between the rents on Main Street and the returns from Wall Street. And many of the tax advantages (like 1031 exchanges) aren’t available to these investors.
Additionally, since REITs are often sold through brokers (with fees), you have no meaningful chance to get to know the syndicator and their team. You must trust the broker and/or the data. The flip side is higher scrutiny from audits and SEC regulations, which should provide a significant level of comfort to investors.
Private REITs are a decent way to get a piece of the real estate market. Their liquidity gives investors great flexibility (for better or worse), and I recommend that investors consider adding some well-vetted REIT shares to their portfolios.
Option 3 – Family Office.
A family office is a management and administration firm built around a family’s wealth. Its goal is to protect, maintain, and grow wealth while throwing off cash flow to sustain a family’s lifestyle. The family office also provides legal and accounting services, manages home maintenance, vacation properties, taxes, and other services.
Family offices (aka “Single-Family Offices”) are most practical for those who have tens or hundreds of millions to invest. That is some of you. For some of these super-wealthy, and others with a few million in investable capital, it can make sense to join other wealthy investors to create a “Multi-Family Office.” This entity serves the same function I described above but serves multiple (perhaps dozens of) families at the same time.
Many wealthy folks utilize their family office to hire experts to manage commercial and residential real estate assets. Some have an acquisition person on staff or on contract and have an asset management team that oversees property management, accounting, legal matters, and more.
If you’re in this place financially, I think a family office could be a great option for you. And I believe a multi-family office could provide the shared resources required to hire better talent and source higher quality assets.
Option 4: Invest in a Real Estate Syndication.
A syndication is a group of investors who pool their capital together to build or buy and manage property.
A strong syndication is managed by an experienced asset manager/operator/syndicator who locates the property, performs extensive due diligence, and obtains the debt (in their name). The syndicator hires and oversees the property management team, and eventually refinances and/or sells the property to maximize investors’ income and appreciation.
The best syndications are typically limited to accredited investors and have minimums in the range of $50,000 to $100,000. Syndications typically have limited (or no) secondary market, so they are quite limited in liquidity. You should only sign up if you want to hold for quite a few years.
Syndications allow investors to effectively own a share of real property, so the depreciation from the property passes through to investors and can create significant paper losses, which result in lower (or no; or delayed) taxes for years.
Syndications have been regulated for almost 90 years but have exploded in popularity in the past decade. If you decide to invest through this route, it is critical that you take the time to carefully get to know and vet the person/company with whom you’re about to invest your hard-earned capital. Thankfully, the web has created a context where a lot of information is available. But you should take the time to do your own research.
Consider teaming up with a few others to share the due diligence load. Unlike liquid REITs, you’ll have a higher minimum and be partnering with a syndicator for years and will need to ask yourself how much you really trust this individual and team.
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Option 5: Invest in a Real Estate Fund.
Though there are finer points of differentiation, for the purpose of this article, a fund is a diversified portfolio of syndicated real estate deals. Like a syndication, a robust fund gives investors access to a third-party expert management team and pools capital together from hundreds of individual (typically accredited) investors. Unlike a syndication, the portfolio effect of a fund may provide diversification across a few asset types, operators, geographies, and strategies.
A fund can give investors access to more deals through a single due diligence effort. It can also provide more safety if an individual deal or operator experiences losses.
The due diligence performed by the fund manager should be quite meaningful to busy professionals, but you should follow the money to be certain their interests truly align with yours. The downsides can include an extra layer of fees, and an extra slice out of the profit pie. Some fund investors also dislike the potential of delayed tax returns and the possibility of filing in multiple states.
Option 6: Invest in a Syndication or Fund through a Crowdfunding Portal.
A crowdfunding portal is a vehicle to give investors information and easy access to a variety of syndicators and funds. There may be lower minimums than you typically see when investing directly with syndicators and funds, but there may be additional fees as well.
It is important to note that a syndicator’s presence on a crowdfunding portal provides limited value to investors. It means the syndicator met their publication standards, but it doesn’t mean they are vetted at the level you’ll want to vet them when handing them a large check. You should still plan to go through all the due diligence you would for any investment.
Concluding Thoughts on Ruining Your Retirement
How can real estate investing ruin your retirement? Let me count the ways!
If you’re like me, a retirement clouded by toilets, tenants, and trash carries no appeal.
But if you are like me, you also see the significant appeal of investing in real estate to build multi-generational wealth. I utilize real estate, more than any other investment, to grow multiple passive income streams, build long-term appreciation, hedge against inflation, and slash my taxes.
Without ruining my life or retirement.
[PoF: If you’re interested in hands-off real estate investing, you’ll want to take advantage of these upcoming resources.
PIMDCon, officially the Financial Freedom through Real Estate Virtual Conference, is just days away, and Dr. Peter Kim has lined up 20+ excellent speakers including both physicians and non-physicians real estate experts. Create your login and prepare to be inspired and educated next weekend!
Shortly thereafter, he’ll be offering the fall version of his signature course, Passive Real Estate Academy. In this, you’ll learn how to interpret and properly vet private real estate investment offerings, including syndications and real estate funds.]
About the Author
After a stint at Ford Motor Company, Paul co-founded a staffing firm where he was finalist for Michigan Entrepreneur of the Year. After selling to a publicly traded firm, Paul began investing in real estate. He founded multiple investment and development companies, appeared on HGTV, and completed over 100 commercial and residential investments and exits.
He has contributed to Fox Business and The Real Estate Guys Radio and is a regular contributor to BiggerPockets, producing regular live video and blog content. Paul also co-hosted a wealth-building podcast called How to Lose Money and he’s been a featured guest on over 200 podcasts. Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing as well as the forthcoming Storing Up Profits – Capitalize on America’s Obsession with Stuff by Investing in Self-Storage.
Paul is the Founder and Managing Partner of Wellings Capital, a real estate private equity firm. Wellings Capital designates a portion of its profits to thwart human trafficking and rescue its victims.
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Have you joined the real estate investing community? Has it ruined your retirement? Would you recommend it to a friend?
22 thoughts on “How to Ruin Your Retirement by Investing in Real Estate”
My spouse and I own 3 commercial buildings and plan to buy a 4th one in the near future. We have owned single family homes in the past and based on our experience, we are not going down that path again. I agree that investing in commercial real estate is totally worth it. We manage our own properties, as they are smaller buildings, and we don’t spend much time on them. Mostly bookkeeping, which is a breeze. Our tenants are responsible for most of the maintenance and repairs.
Real estate is really good. I retired at 37 with direct ownership of several commercial buildings.
It has to be run as a business; as it is.
It can be a lot of work if not done right.
Its better than stocks or REITS any given day.
Jump in. Its totally worth it.
Commercial real estate is much different than residential. More stable tenants, reliable income, much less maintenance.
My commercial building generates $140,000 year mostly tax free income with only a few hours work each month.
Managing your own real estate rentals is a bog headache. I have done it for short periods of time and it is not fun.
Dividend Power, That was my experience exactly. I did 60+ flip properties and some rentals along the way. Very tough.
Funny, four rental mobile homes were among the most disastrous investments of my life. But my passive investments in mobile home parks were among the best investments of my career.
I am on the fence on Real Estate investments. There was certainly a bit of FOMO going on. And having real assets seemed very attractive. But I also don’t want to be over leveraged and take that risk – that seemed to be how many people get in big trouble. Even right now with the eviction moratorium. I’m also not a big fan of becoming a landlord – I like medicine instead. So I’m deferring the decision for a bit. I like the WCI advice to have 2X the qualification for accredited investor to start these ventures.
I like that rule of thumb, although you can get started with investments for non-accredited investors with minimums ranging from $10 (Fundrise, Groundfloor) to a few hundred dollars (DiversfyFund, Republic Real Estate).
That’s a good way to get a feel for how things work while putting very little money at risk, and it’s exactly how I got started.
That makes a lot of sense. This is one reason I seek investments that are recession-resistant, however, recession-resistant doesn’t = recession-proof! Who would have predicted COVID? And even more surprising, who would have predicted the strong economy we have in the wake of COVID while much of the world is suffering so badly? Thank you.
My wife and I own five duplexes worth $2.2 million. They represent about half of our net worth. They enabled me to retire at 52. They generate $125,000 of net pretax income.
I manage them directly myself. I get kind of tired of articles like this. They’re usually written by people who don’t know much about real estate. Often they’re written by people who don’t know anything, or even worse, who make their money by convincing people to let them manage their money in the stock market.
It takes me about 40-60 hours per *year* to manage these myself. That’s pretty passive income, and it is the equivalent of drawing about 6% off these assets (as opposed to the conventional wisdom of 3-4% maximum).
We paid almost nothing for these properties since our tenants paid for about 99% of them.
It’s obviously not for everyone. But it’s also not nearly as difficult as most bloggers make it out to be.
I agree with you. Posts like this are either written by people who
1. either do not even own real estate themselves or
2. who have not taken the time to learn to efficiently manage a rental portfolio and then come and whine about how bad it is. or even worse
3. people who tell you its horrible owning directly and you should give them all your money so they manage it for you.
I’m a doc. I own rentals directly and have no horror stories to tell. It can be done if you do it right
Hi Real Estate Guy and Marimel Homes.
Thanks for your comments. I appreciate hearing about your experience and I’m genuinely very happy to hear this has gone well for you. I must say, however, that your experience is in the minority of those I’ve spoken to. And I’ve spoken to hundreds. Investors with a half dozen up to dozens of properties generally tell me their tales of woe.
I’m happy for your success and wish you the best!
Thanks for your thoughts and comments. It encourages me to venture out.
Thanks for this post that balances against the many exuberant pro real estate posts (e.g., semi-retired MD ongoing real estate investing summit). I debated (and still am to some degree) whether to dive into primary real estate investing. All I have to base it on is my own home ownership where it seems something is breaking all the time and is a constant headache. I fully acknowledge and respect it can be done and done well, but I don’t think I have the drive and patience for it so I am going to stick with passive investing.
Thanks for what you do!
Thanks. Funny, I feel the same way. I outsource home maintenance just like I outsource my investments to expert operators. Most of us can only be great at one or two things and I’ve hit my limit. Becoming an expert on home maintenance, self storage investing, mobile home parks etc are more than I could be great at. And there’s just to much at stake to make mistakes. And there’s that issue of free time, too!
Thanks for weighing in with your experiences. I agree that quality commercial assets can certainly be easier and more passive than many types of real estate. Good luck!
sling painters between cases is not passive income , i am in one of those medical building syndications and have a nice check deposited in my bank at the end of every month !. The medical offices are those really nice glass office buildings that will always retain a decent amount of value and not become worthless , like medical offices on old converted 7-11’s stores . Also doctors tend to pay their rent no matter how the economy is going .
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I’ve invested directly in real estate. I’ve outsourced the rentals to property managers. I retired at 37, traveled abroad for 17 months, and spent less than an hour per week on 110 rental units (and that hour is bookkeeping/checking in virtually, which can be done anywhere in the world).
My mother (a dentist) and my father invested directly in dozens of properties for years before retiring off a very healthy, free and clear, passive cash flow while managers handled the day-to-day affairs.
I know of MANY stories similar to ours. No retirements ruined. Directly owning real estate, but treating it like a business, creating systems, and outsourcing the labor-intensive parts.
I get the point of emphasizing syndications, funds, crowdfunding, etc. And for those who want to try those routes, go for it. But I’ll respectfully disagree with the premise that direct ownership “isn’t usually passive, and it often becomes a second job. And it can become an albatross around your neck.” That happens when people run it the wrong way. Acquiring and owning a few properties directly can be just as passive as those options, without the hassle and risk that sometimes comes with dozens or hundreds of partners and depending on a general partner who controls your entire investment.
Thanks for your comments. If anyone can do this right, you certainly can. I’m a fan of your coaching and I can imagine that many of your students can pull this off successfully. For those who want to go it alone, shooting from the hip (most of the wounded investors I hear about), I’ll say this: I recommend joining a great mentoring/coaching group. Don’t try this on your own! Thanks Chad.
Thanks for the comment, Paul. I appreciate the work you do too educating people about different ways to invest. I hope the comment didn’t come across the wrong way. I just wanted to let people know there are different views and approaches on this topic.
Absolutely! I didn’t take it wrong. I see it as another opinion from someone with expertise I will never have. Thank you.
Thank you Chad!! I appreciate your comment. After reading the article, I was a bit concern about direct investing in RE for retirement. But after reading your reply, it makes a lot of sense when you indicated ( and seeing it from a different perspective) that If I managed my portfolio the right way, I’ll be just fine and enjoy my passive income in retirement. Thanks 👍👏