Whenever I hop on a conference call, someone asks, “Where are you located?” And then their eyes widen when I respond, “Lima, Peru.”
But back when I invested in rental properties, I did so in my hometown of Baltimore. It was only after I moved abroad that I discovered just how much I had subsidized those properties with my own labor.
When people ask me today what I would do differently if I were to start investing in real estate all over again, I have an answer ready—because I did start over again.
My “Landlord Era”
I bought my first rental property in 2005, and I had no idea what I was doing. Then I bought another dozen properties over the next three years, and I still didn’t know what I was doing.
To begin with, I didn’t understand how cash flow worked. It proved a costly and embarrassing mistake.
Worse, I bought in unforgiving, low-end neighborhoods in Baltimore City. I didn’t understand that low-end properties come with countless hidden costs that don’t show up on paper—costs like crime and vandalism, high turnover rates, heavy tenant wear and tear, and constant eviction filings to chase down delinquent tenants for rent.
Oh, and there’s the fact that skilled property managers avoid them, because they pay half as well and come with twice as much work. That leaves you with the dregs of property management.
I also didn’t realize just how much harder life is when you invest in anti-landlord jurisdictions like Baltimore City. It took me 11 months to get a “professional tenant” out of a property once.
I did this for a decade. And I hated it.
Moving Abroad Kicked the Crutch Away
When I moved overseas in 2015, suddenly, I couldn’t spend my nights and weekends driving to properties, coordinating with handymen, and staying on top of ineffectual property managers.
I reluctantly had to admit to myself that as bad as my returns had looked on paper, they were actually worse than I’d thought.
I’d been supplementing these investments with my own labor—which isn’t required by passive investments like stocks, bonds, notes, or real estate syndications. Even under good conditions, landlording comes with more labor than people realize. And my challenging properties were harder to oversee than most.
When I could no longer bounce around putting out fire after proverbial fire, my properties showed their true worth—or lack thereof.
For a decade, I had served as the crutch that kept the portfolio standing upright. Take away the crutch, and the whole portfolio collapsed.
Pivoting to Passive Investments
As an expat halfway across the world in Abu Dhabi at the time, and a busy entrepreneur working 50-60 hours a week trying to get SparkRental off the ground, I hit The Wall. I divested all my rental properties, even the good ones I’d bought later in my rental investing career.
But that left me feeling out of touch with what I was teaching. I had learned every lesson the hard way and had eventually become an expert on every mistake to avoid and every easier path to success with rental investing. At SparkRental, we taught rental investing—but I no longer bought new properties myself.
Meanwhile, our students kept asking, “Can I just invest in a deal with you guys?” We kept saying no until one day, I looked at my partner Deni and asked, “What if we said ‘Yes’?”
This, by the way, is a crucial lesson for entrepreneurs: Sometimes the business you think you’re in isn’t actually the one the market wants or needs. But I digress.
Around the same time, I started experimenting with passive real estate investing. I began with small amounts in most of the major real estate crowdfunding platforms and wrote about my experiences. Then, I started testing out private equity real estate syndications (fancy words for “group investments”).
I didn’t love the high minimum investment real estate syndications required. I wanted to diversify and spread smaller amounts across more properties and markets.
Then it hit me: I had people clamoring to go in on real estate investments with me. What if we all went in on a syndication deal together?
So we did. And we liked it so much, we started going in on deals together every month as a form of dollar-cost averaging. Later, we opened it up to the public as an investment club.
Deferring Taxes Without a 1031 Exchange
Many people get into real estate investing for the tax advantages, at least in part.
As I gained more experience investing in real estate syndications, I was pleasantly surprised to discover the “lazy 1031 exchange.”
Active investors can defer capital gains taxes on income properties with a 1031 exchange. But they come with a lot of hoops to jump through—hiring a qualified intermediary to hold your money and file your paperwork, declaring a replacement property within 45 days of selling your old property, closing on the new property within 180 days, and so forth.
Even when I lived in the States, that struck me as too much work, so I never did it.
With passive investments in syndications, all you have to do is reinvest your proceeds from an old deal into a new one. Hard stop.
The depreciation from the new deal shows up as a loss on your tax return, which you then use to offset your capital gains from the property that sold. It’s that easy.
This fits my new hands-off investing strategy perfectly as an expat.
We’re All Busy—Who Wants Another Job?
In my 20s and 30s, I put up with all the nights and weekends wasted, futzing with rental properties. But becoming a dad, an expat, and a busy entrepreneur put my priorities in perspective. Why would I want to spend my precious little free time hassling with contractors, tenants, property managers, or city inspectors?
I’d rather be hiking the Andes with my daughter. Or visiting Chilean wine country with my wife. Or, for that matter, investing the time in growing my business.
There’s no wrong way to invest in real estate. I have nothing but respect for rental investing. I just don’t want to do it anymore myself when I can get all the upsides (cash flow, appreciation, tax benefits) without the hassles (financing, contractors, repairs, permits, inspections, tenant management, ad nauseam).
When investors complain that they’re busy and, within the same conversation, say they’re planning on buying another active property, nowadays, I keep my mouth shut about the contradiction. They’re on their own journey to find financial freedom. I’ll keep enjoying mine.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
