I Traded My Rentals for “Passive” Real Estate (Worth It?)

0:00This investor found a strategy to make his real estate portfolio almost completely passive. Now he can sit back, reap the benefits, and enjoy the lifestyle of financial freedom that he wanted to achieve when he first got into real estate. Let's hear exactly how he did it.

0:20Hey everyone, I'm Dave Meyer, head of real estate investing at BiggerPockets. I've been buying rental properties for more than 15 years, and on this show, we teach you how to achieve financial freedom through real estate investing. Today's guest on the show is investor Chris Lopez. Chris was last on the show on episode 662 in 2022, so I wanted to catch up with him and hear how his real estate journey has progressed. And what I learned is that Chris has moved more of his portfolio into passive investing during the last few years. Almost a decade into his real estate career, he realized that the return he was getting on the time it took him to actually acquire and manage his properties was as low as$20 per hour.

1:06So Chris made big changes and redeployed his capital into passive investments that allowed him to maintain all the benefits of real estate, like cash flow, tax advantages, appreciation, without all the hands-on work. I was really interested to hear how he did this, and he get some great advice for how you can make a similar transition in your own portfolio if you're in a similar situation. So let's bring on Chris. Chris, welcome back to the BiggerPockets podcast. Thanks for being here again. Dude, I'm glad to be back on the podcast and talk shop with you today, Dave. Yeah, this is going to be a great time.

1:39If you guys don't know Chris, he's been a friend and contributor to BiggerPockets for a long time. You were on episode 662. So if you want to know more about him, go back and check that out. But for people who haven't listened to that episode, maybe let's just start at the beginning here, Chris. Tell us a little bit about why you got invested, where you were at that point in your life when you started on this journey. I went to college at Virginia Tech, so go Hokies, and went there for engineering and military and realized both of those were not the calling for me in life. And like a lot of people, I read the purple book, Rich Dad, Poor Dad, and that opened my eyes to entrepreneurship and investing.

2:17And so I got extremely interested in real estate back then. And that was like 2002, 2003 timeframe. So all these amazing resources went around. So I tried to get into real estate back then, just no traction. So I went down to the entrepreneur. I was going to make money first and I'll learn how to invest it. And so I built a great business through the internet marketing. I thought I had achieved financial freedom because I actually graduated college not needing a job. I was making probably like$35 ,000,$40 ,000 back then. Right out of college. Yeah. And I could live anywhere I wanted to. I worked from my Skype and Vonage phones back then, if any listeners remember those things.

2:52I do. Yes. Okay. There you go. I could still hear the Skype noise that it made when you would call people. It was very distinct. Well, business income is not investment income like real estate or stock market income. It eventually, unless you're an Apple or something, eventually it fades away. This was 2010 timeframe. The real estate market was just coming out of the great financial crisis. I'd always wanted to get real estate. And I was like, dude, get back into real estate. That's the long-term wealth. That's not this quick day trade that's hard to do real estate. If I do for 20 years, I feel like I can become financially free.

3:25I tried wholesaling, hated that. And then I got into brokerage. And I realized that's where I really hit my groove. I was in the Denver market and I started doing like one to four unit residential brokerage. And this really mapped with me because I'm all about how can I build wealth in the long run in real estate? I don't care about a quick buck in flipping or quick buck here. I need to make my money today, but I want to build that long-term wealth. And I think rental properties are about the best way, one of the best ways to build wealth in real estate. I was like, man, five, seven, 10 years, I can keep buying properties.

3:56The market does its thing and I'll get rich over 10, 20 years. And so that really set me off on my career and as well as my building a rental property portfolio as well. So let's talk about what you did, because it sounds like you don't want to be reactive. So you turned to rental properties. I was investing in Denver around the same time. What year was this, by the way, when you were starting to buy? 2015. Okay. And what'd you start buying? I really started focusing then, since I'm more of like a finance mindset, is when I bought my first property, I bought my very first house hack in 2011. I didn't know it was a house hack.

4:31I didn't know anything. I just knew it was way cheaper than renting. So I bought a property then. And I was like, wow, I bought this place for so cheap,$67 ,000. And during the bubble before, I was trading for like$230 ,000,$240 ,000 price range. So I got a foreclosure, huge discount. I was like, I'm going to just pay this thing off and I'll have the cashflow forever. Well, for people who are investing in Denver like you and me or other markets, we would hit this phenomenon where we'd have so much appreciation that cap rates would compress. And it's like, okay, great. I'm worth$400 ,000 on paper on this property, but it's cash flowing$400 a month now, or it's paid off.

5:11It'll cash flow$1 ,500 a month, which is really good, but I'm going to need 10 or 20 of those properties to retire where I want to. Yeah. And that's not a particularly efficient use of$400 ,000. Yeah. And that's where you run into, and this is one of my mentors out here. He started explaining to me the concept on return on equity. He was like, look, when you buy a property, everyone talks about return on investment. Hey, you put$10 ,000 down,$100 ,000 down, whatever it is. And in year one, you make this cash on cash or your cash on cash and appreciation. You make all this here. But he's after a couple of years, you have to look at not what money you put into there, but what equity you have in the deal because that's your real opportunity cost.

5:54That's your real estate piggy bank. I remember he walked me through this on my house hack I bought, which was actually I bought for 0 % down. So I was actually getting an infinite return, which was really cool to brag to my friends, really cool to talk about on a podcast. Yes, you should brag to your friends about that. That's awesome. But here's the economy of it. When I was looking, when my mentor started teaching this, I had an infinite return on here. But I looked at return on equity, which is the four ways to make money in real estate, appreciation, cash flow debt pay down, and principal reduction, divided by equity.

6:23I had$200 ,000 in equity. I was making like a 7 % or 8 % return on my equity. So I had an infinite return over here, but I also had an 8 % return over here. And he was like, hey, the 8 % returns the accurate one because that$200 ,000 is real money if you cash out, refi, or sell it. And then here was the kicker. He was like, here's another way to look at it, Chris. What's the historic stock market return of the S &P 500? I was like, yeah, 9%, 10%, 11%. He goes, yeah. He goes, that property is making you less in the stock market and you have personal liability and you're self-managing. And you're working on it.

6:57Yeah, exactly. I was like, oh, that hit me hard. Yeah, totally. Right? And so that was just a powerful mindset shift for me that I went through in my journey of building rental properties and then realizing, oh, if we're in an appreciating market like Denver versus a Midwest market like Ohio, where their cashflow, we're appreciation, I have to extract that equity and then go buy another the property. So I started doing cash out refis. I started doing sell on 1031 exchanges to go out there and redeploy the equity. And that was how I really juiced my rental portfolio. And I got really focused on optimizing equity in my portfolio and for all my clients in Denver back then.

7:35Chris, I think we have a lot of similarities in our real estate investing story. I learned the same lesson. And I want to be clear, it is a good problem to have. If you have too much equity in a property, that means you've probably built your net worth pretty significantly. It's just that if you think about your rate of return, which as investors, we should be thinking about how efficiently is our capital earning us more money? That's your rate of return, right? And when you figure that out, you, like anything, there's a numerator and there's a denominator. So when you start and you think your cash flow is, let's just use easy numbers here,$10 ,000 a year, you put$100 ,000 into that property.

8:18Well, your rate of return, your cash on cash return, and your return on equity at that point are all the same, right? It's 10%. But over time, that denominator, that$100 ,000 grows not from$100 ,000 to$150 ,000 to$200 ,000 to$300 ,000. And I'm not saying you actually put more money into that deal, but because you bought in a great place and you're in a market like Denver, that value that you have in there is growing and growing and growing. So you have to shift your mindset and not think, oh man, I'm still making a 10 % cash on cash return. Now you're maybe, let's just say you're making$15 ,000 a year in cash flow, but your equity is$300 ,000 a year.

9:00Your return on equity dropped from 10 % to 5%. And again, this is a good problem to have, but it means that if you redeploy your capital, you could probably be making more money more efficiently. And Chris, I did this for the first six years of my investing career too. I had this one property built so much equity and I was like, this is it. I'm good. I am rock solid. Nothing can touch this property. And then my sixth year of investing, I joined working at BiggerPockets full-time and I was like, oh, I messed this up. Or you live and you learn. I could have done this more in a more optimized way.

9:38So I think this is a very common thing. And I love that theme. I know you talk a lot in your content about this idea of return on equity, and I totally agree. It's a much better and more important metric than cash on cash return, because it really allows you to just measure efficiency, not just in real estate too, but across asset classes, like you said, and see if you're actually finding deals that are worth not just your money, but also your time to put into it as well. All right. Well, I want to hear what you've been up to recently, Chris, but we do have to take a quick break. We'll be right back.

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14:30Welcome back to the BiggerPockets podcast. I'm here with Chris Lopez. We've heard, Chris, a little bit about your story going back in time. And if you want to hear Chris's full story, again, you can check out episode 662 where he shares the full thing. But I want to talk a little bit more about how your portfolio has evolved. So you were doing these residential properties, it sounds like, in the late 2010s. What's been going on since then? So I was cranking with my rental portfolio, cranking with the brokerage. And then in 2019, I actually made my very first passive investment. And this was with one of my buddies.

15:07I kind of call him like, you know, the equivalent of like a gym buddy. We both kind of like grew up in real estate together. He was a very successful fix and flip, you know, 30, 40, 50 deals a year, scaled a really good business on there. And we did a lot of collaboration. We would, you know, trade back and forth on properties and deals and clients. And then he started getting into multifamily, like a lot of fix and flippers do, because it's really hard to scale a fix and flip business. Hey, rather than buying 10 single family homes, go out there and buy a 10 unit apartment building and you get a lot more efficiency from operations, especially from adding value.

15:40And hey, they're all 10 units are the same, a lot more efficiency. So I saw him doing that. And then he started raising a little bit of money from friends and family. And I was like, oh, I know you. I know the market. I know the steel. This is amazing. And I did my first like$25 ,000 investment back then. And the reason I did that was for a couple reasons. I mean, you may remember this, Dave, you know, 2019, we started seeing interest rates tick up. Yep. You know, this is all pre-COVID. And then cash flow was really getting like almost non-existent Denver back then. Yes. It was like, okay, well, you know, I want to buy a property for a 1 % cash on cash.

16:15Not too exciting. So the market had changed. And then I had my second kid coming on the way, my second daughter, my business was taking a lot of time. And so a lot of my time was spent on my business, was spent on my family, with my children. And then for my return on hassle or my return on sweat equity for actively managing rentals, I was no longer getting this$100,$200,$300 an hour type return on my time. I was getting a$20 an hour return on my time. Well, if I'm making$20 an hour, I'm going to stop doing it or I'm going to outsource it because that's valuable to my family or I can make way more than$20 an hour at my profession.

16:53So I had these things changing on here. The market was shifting. I was shifting. So I was getting more into it. I was like, wow, I invested in here and I was making the same, if not maybe a little bit more money in a couple of these deals than I was in buying new rental properties. So I really stopped kind of like buying rentals over the next year or two and started taking the down payment money, doing more LP syndication investments. And a couple of years into that, I actually started selling some of my rental properties to then move the equity from Denver rental markets, where I was having a low ROE, over towards passive investments, where I was just getting a better rate of return.

17:30So tell us a little bit about the kinds of passive deals that you've done in the last few years. I dabble a lot, obviously. So I did a lot of small investments and a few very big investments. So a lot of like, you know,$25 ,000 type investments, you know, for perspective on there. And just to call out everyone,$25 ,000 is still a lot, but for a lot of passive investments, for like a big deal, if you're investing in a big, massive deal, sometimes the minimum requirement is$100 ,000. So like, I just want to put this in perspective that when Chris says a small deal. Still a lot of money, but for a passive investment, that is a small amount of money, whereas a lot of them require much more than that.

18:08Yes. And it was a small relative to a Denver down payment as well. Yeah, at that point, for sure. So I did a lot of investments like that, a lot of multifamily value add, you know, typical things a lot of people did. And that's like, basically people buying an apartment building and doing a burr on there. Buy the apartment building, burr it, and a year, year and a half. It's renovated, rents are increased by 30, 40, 50%. And you start getting some really good cash flow distributions. A lot of those investments invest in some development deals for residential development, apartment development, a lot of debt funds.

18:41So a lot of people from with hard money lenders. Same. Hard money lenders get their money from private investors. They're not getting it from Wall Street. They get it from people like me and Dave and our 401ks a lot of times. They're not IRAs. And so they take the money and then they're lending it out to fix and flippers and people who need bridge debt. And then a lot of other just deals, but those are like the main asset classes I focus on because I had relative knowledge on there. And I also had a really good network of people that I could like find deals from that way as well. And I did some other smaller deals to just kind of like test the water and, you know, learn about it.

19:14That's great. Again, man, dude, we gotta, we gotta hang out next time I'm endeavor. We've sort of done the same exact stuff. I think it makes so much sense. Like I'm not taking down a 20 unit multifamily property to renovate. Like I don't have the skill set to do that. But I know it's an awesome way to make money, right? Like you see people doing this successfully all the time. And you want to participate. And this is an awesome way to participate with very little time. And I mean, we could talk a little bit about this. But in my experience, Chris, like, passive investing is awesome, because you do a lot of upfront due diligence.

19:52You got to figure out what's good about the deal. You got to really concentrate on the operator and make sure they know what they're doing. But after that, you kind of do nothing. You just look at quarterly financial statements and make sure that you're on track. And of course, that comes with trade-offs. You don't have the same liquidity in a multifamily deal. Sometimes in debt funds, you still have liquidity, or in funds, you have some liquidity. But that's very appealing to someone who's still doing other stuff and has other interests outside of operating a deal. So maybe Chris, just give us an example of one deal you did that you really like.

20:27And maybe tell us, have there been any deals that have gone wrong? I got lots to talk about both. So a deal that I, a couple of things I really liked, I like investing in funds, which is, you know, a syndication is usually like a single investment to an apartment building. Hey, here's a hundred unit apartment building. We need to raise$5 million for it. You invest in that. A fund will be multiple apartment buildings or multiple houses or multiple loans you lend out. So I'm a big fan of investing in funds. I'll give you two quick examples because it creates diversification. Because, hey, some individual deals will do really well.

21:02A lot will do kind of towards a pro forma. And one or two usually don't go the way as planned, right? That's just investing and that's life. So I sold some Denver rentals a few years ago and invested in a value-add multifamily fund with, I mean, I think they have like 800, 900 doors in the portfolio on there. And of course, I'm a very small owner of that, but heavy concentration in the Midwest. Yeah. So I got geographic diversification. I'm getting cashflow. And then really seeing how the Denver multifamily market is just going through its 2008 right now. Yeah. It's tough out there. Yeah. The Midwest is, they're performing a lot better.

21:40So that fund has performed really well while a lot of Denver deals have gone south and a lot of other multifamily deals have gone sideways. And I did a lot of investing into debt funds as well. Again, a lot into like a Midwest debt fund because I wanted geographic diversification. And then they just pay out a higher... Debt funds are like pure cashflow. They're great. There's no principal reduction. I love it. No tax benefits. A lot of times a double digit cashflow. Yeah. And so they were paying on the higher end a lot of debt funds. And that was just because they're in the Midwest where there's less competition.

22:12The Midwest is more of a rental market. And so those were two deals that I invested extremely well on, and they performed extremely well as well up to this point. And that kind of was my thesis of diversify away from Denver, but really leverage my knowledge as an investor to go out there and find the right investments, the right operators. Well, I mean, that makes a lot of sense for me. That is one of the major things about doing passive investing that I really like, too, is the diversification, not just in asset class, but geographically. I have syndications in places I've actually never been to, which is rare for me.