Is your “passive cash flow” really that passive?

Mar 28, 2019 | Wildhorn Insights

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If you’re familiar with the Wildhorn story, you know our real estate journey all started with a search for passive cash flow and an initial investment in a duplex 10 years ago.  It’s an oft-repeated story we hear all the time in the industry–once you start looking for passive income you start to question what is really passive, and how you can seek better returns.

At Wildhorn HQ, we were recently having this conversation internally between Jeff Tamaru and Andrew.  Jeff helps us out with a lot of behind the scenes activities and is one of the voices behind our social media channels.  He’s sitting right where Andrew was nearly 10 years ago. He and his wife own a couple duplexes, and he started working with Wildhorn after investing in some of our syndications.  They plan to continue investing in real estate as an asset class, but are evaluating whether that should be through more smaller multifamily properties or more passive investments.

The following article is a guest post from Jeff, who has agreed to publish his internal dialog and thinking about the pros and cons of passive investing–and what that term really means.

With Gratitude,

Passive cash flow: Always desired and rarely realized

For those of us seeking financial freedom, we are repeatedly told; “Make your money work for you,” “Find investments that make money while you sleep,” and most importantly “Cashflow is king.” The shared holy grail of financial freedom seekers is to have enough mailbox money hitting your bank every month that you can walk out of your day job Office Space style (so long Lumbergh) and not bat an eye about upcoming payments for your credit cards, mortgage, kid’s tuition, etc.

If you’re like me, you’ve probably explored and put money into a variety of investment vehicles trying to find the one that can provide the highest returns (I’m looking at you 2017 Bitcoin). However what I have been terrible at calculating until recently was what non-capital requirements each of those investment types also demanded from me to see success. What requirements are these? In my case it’s mainly time. If two investments both provide tax adjusted cash-on-cash annual returns of 10%, but one required 40 hours of research and operational work while the other only took 10 hours which one is a better value? While both of these investments could be considered “passive” and provide an investor with passive cash flow, it’s easy to see that they are not truly equal.

For example, let’s look at two real estate assets and the time requirements to secure a year’s worth of passive cash flow and rental income

In this case, these are two real estate investments that I have personal experience with. Both of these investments have the same amount of capital deployed and are in the same city (less than 3 miles away from each other). One investment is a 1,500 sq ft duplex that I manage through a property management company. The other investment is a position that I hold as a limited partner in a larger multifamily syndication deal. I spent an afternoon digging through my email, notes and Google Drive to audit what time I had invested into each deal in the year prior. The following is my attempt to deconstruct all the activities and corresponding hours I spend tending to each of these investments:

Duplex Activity Breakdown

  • Weekly Activities
    • Email correspondence with Property Manager (1 hr/wk):
      These are usually questions around repairs, fees, quotes on projects or releasing topics. Despite having a full team managing my duplex, all decisions still require my input, my approval, and my time.
  • Monthly Activities
    • Reconciling Bank Accounts (0.5 hr/mnth):
      This is cross referencing bank accounts to confirm mortgages have been paid, remitted amounts line up with what our PM has said, and issuing checks for any trades we’re putting to wor.k
    • Review Investment Performance (1 hr/mnth):
      This is something that may or may not apply, but I keep very detailed month-by-month notes on how each individual asset is performing, tracking cash flow, and writing up a quarterly profit and loss.
    • Email correspondence with Insurance (0.5 hr/mnth):
      Whether it’s generated from me, the bank, or somewhere else, there is always some insurance related question or request I’m sending to my agent. Then again, that’s the biggest reason I choose to have an agent.
  • Annual Activities
    • Site Visits (18 hr/yr):
      We make sure we visit our property at least once a year. Since it’s only about a 90 minute drive, we’ll end up going three to four times.
    • Property Tax Protest (10 hr/yr):
      This is a big one in Texas. Preparing a case and presenting your protest to the county over their dramatically higher appraisals is a time consuming and soul-sucking process. Many folks use a protest service company, but even then I believe you’ll dedicate a few hours for document preparation and communication, and it comes with a price.
    • Tax Filings (5hr/yr):
      It’s important to note that I use a CPA for all of my taxes. He does the heavy lifting here. However, even with his help I’m responsible for collecting relevant documents and developing more complex estimates like itemized depreciation schedules.
    • Reletting Activities (0-16 hr/yr):
      This depends on if we have vacancy or not, which for me has been about every other year. Our PM does market the listing and screen tenants, but I still insist on creating my own listings that direct applicants to our PM’s office. Once we have potential tenants, I need to do a final screen and give approval.
    • Project Management Activities (0-144/yr):
      Another item that is completely dependent on what year it is. If we have smaller projects I’m usually happy letting our PM bid and manage the renovations themselves. When it’s something larger, I always get my own quotes and take a more involved position in making sure things go to plan.

In Total= 109 hours in a normal year, up to 269 hr in a heavy year

Apartment Syndication Activity Breakdown

  • Weekly
    • None
  • Monthly
    • Email correspondence with General Partnership (1 hr/month):
      I receive a monthly email from the operator that explains what’s new. Because I’m pretty involved, I’ll usually follow-up with more specific questions.
    • Review Investment Performance (1 hr/ month):
      The same as above, I’m a stickler for tracking and review.
  • Annually
    • Tax Filings (1 hr/yr):
      Receiving and reviewing K1 statements and working with my accountant to make sense of it all

In Total= 25 hours in a normal year

The result? My duplex is 4 to 10 times the amount of work in order to generate “passive” cash flow. Note this is not including the many, many hours it took for me to source, negotiate, finance, close, and put this property under management. Am I saying that my duplex is not a worthwhile investment? Absolutely not! I believe it is and it provides diversified benefits that I’m not getting with a more passive LP position. However, for the amount of extra time I spend on it, you better believe I receive some extra percentage points of ROI that provide worthwhile compensation.

I’d be curious to know, how does this compare to any of your similar investments? Have you ever built a time audit like this? Do you want to take a second look at any passive income you have coming in? Feel free to reach out here or directly on my LinkedIn

Andrew Campbell

Written by Andrew Campbell

Andrew Campbell is a native Austinite and Managing Partner at Wildhorn. He is a real estate entrepreneur who first broke into the business in 2008 as a passive investor. In 2010 he transitioned into active investing and management of a personal portfolio that grew to 76 units across Austin and San Antonio. He earned his stripes building and managing his personal portfolio before founding Wildhorn Capital and focusing on larger multifamily buildings. At Wildhorn, he is focused on Acquisitions and maintaining Investor Relations, utilizing his marketing and communications background to build long-term relationships.

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