Whether you’re just beginning your journey toward financial freedom or you’ve been investing for years, it remains important to simultaneously save and invest, always keeping an eye out for opportunity AND potential pitfalls.

Beginning investors sometimes need a little nudge toward the savings vs investing balance, and if that’s you, you’re in the right place!

Meanwhile, experienced investors with gobs of cash reserves often need to be reminded that although they may have the basic money market account, online savings account, checking accounts, and even retirement account established, it’s important to step back and evaluate how much money is going toward each bucket and why.

Every decision carries risk and while it is great to be planning for your future and building your portfolio, you never know what will happen. Let’s keep our fingers crossed, but chances are you may need to dip into your saving account or emergency fund at some point!

There is an ongoing, challenging balance between your income amount and the value you need to reach your investing, expense, and savings goals. While typically more difficult toward the beginning of your investing journey, these important saving tips and tricks will help you get a handle on your finances and allow you access to different investment options.

Here are 5 tips for saving money when you are investing.

 

Pay Yourself First With A Savings Account

Have you ever said to yourself, “where did that paycheck go?!”

For most people, as soon as a paycheck is deposited into their account, it’s spent on expenses like rent, groceries, and utilities. So, the vast majority keep saying “I’ll save my next paycheck,” with no real plan in place as to how, because the truth is, no matter when or how much you get paid, there’s always an expense in the waiting.

To alleviate the push-pull relationship between earning more versus accumulating higher expenses, you’ve got to implement “pay yourself first” anytime you receive income. Prioritize your savings goal and take it out right away!

Take a small percentage of your paycheck (maybe just 5% to start) and place it directly into your emergency savings account. This has to be done immediately as your paycheck hits your account before any other bills or expenses get paid.

Moving a nominal value to a different account creates a beneficial barrier, protecting you from spending those savings. Rest assured that once you’ve paid yourself first, you can spend what’s in your checking account without feeling guilty.

If you are in a position where your job offers direct deposit. You can easily split your deposit by amount or percentage. This allows you to allocate, for example, 5% to your emergency fund and 95% to your checking account. This way, you don’t risk forgetting to transfer it or spending it accidentally, and it’s done automatically every single time.

 

Get Your Side Hustle Funding Your Investment Accounts

Everyone seems to have a side hustle now. Whether you are trying to boost your credit score, reach an income goal, or afford a big purchase, a part-time job or side hustle can really help accelerate your progress!

With so many opportunities, both in-person and virtually, that encourage connection, collaboration, and providing services as solutions, this is one of the easiest ways to get going in the right direction.

You’ve heard of the gig economy, right? Join the bustling online community of entrepreneurs making money and you’ll be saving and investing in no time!

The trick is to take whatever amount you earn from your side hustle and put it toward savings. Choose whether you want that extra income in your retirement savings account, high-yield savings account, emergency fund savings, or another investment account/financial opportunity.

If you feel like a part-time job is not for you. There are many opportunities to make money selling things you no longer want. Mercari, Poshmark, and Facebook Marketplace are all great options!

Look through your things and decide what is worth selling. Clothing, handbags, and accessories are popular on a lot of resale sites. You may want to sell bigger items like decor, kids’ toys, or furniture locally.

 

Create A Plan For The Unexpected: Emergency Savings Accounts

Life inevitably carries risks and unexpected twists and turns. The saying “plan for the unexpected” is perfect in this section. You may not plan for a specific amount of money, but you can always save a general amount or a percentage of money to create a little safety net. You never know when an unplanned expense like a car repair, job loss, or some type of financial hardship might pop up.

When you do experience a sudden financial crisis, you may be tempted to stop investing, under the impression you’ll have immediate access to would-be invested cash. But, if you already have an emergency fund prepared, you wouldn’t need to interrupt your investing goals or wealth-building progress.

An emergency fund exists to help you afford home repairs, emergencies, and other unexpected costs in a time of financial crisis. Then, when the repairs are done, the insurance pays out, or you’re on your way to your new job, you can rebuild the emergency fund, all while your investment strategy remained uninterrupted.

As you build your emergency fund, you can adjust the amount saved based on your expenses and obligations, your employment status or fears around such, and re-evaluate your savings account goals once or twice a year. Financial experts agree you should aim to save three-to-six months of expenses in your emergency fund.

Maintaining a hefty emergency fund is a great way to keep your retirement funds, investment accounts, and other savings accounts intact. Remember, whether we’re talking about building your emergency fund, stuffing other savings accounts, or funneling cash toward investments automatic recurring transfers are your friend!

 

Pay Off Your Loans With Aggression

I’m guessing you probably stare angrily at your phone or computer whenever you see the total balance on your loans and credit cards. You aren’t alone.

But you aren’t defined by those numbers. If you have credit card debt, a student loan or personal loan, or high-interest debt, those obligations are going to make it quite difficult to build an emergency fund or invest in your future.

As they suck up the majority of your paycheck, they limit the amount of money you have available for savings and investing. If you find it difficult to make progress toward your savings account and investing goals, it may be time to start prioritizing certain pieces of debt toward payoff.

There is a tremendous benefit to working with financial advisors who can review your credit report, compare it to your personal financial budget, and help create a debt payoff plan. They’ll know how to consider interest rates, minimum payment requirements, and work with you to prioritize which debts should be paid off first.

Simply put, even if your income doesn’t increase, by deleting your high-interest debt, you will free up more money for your investing and savings account goals.

 

Learn About Your Investments (Stock Market, Money Market Accounts, and Real Estate Deals too!)

Every CD, broker service, transaction, securities deal, and mutual fund has a cost. So, as you walk your financial journey toward building wealth by saving and investing simultaneously, you’ll want to pay special attention to the fees required by each opportunity.

If you are looking at the mutual funds inside your retirement or brokerage accounts, for example, it is a great idea to look at how much they cost compared to the projected returns. The more you know about fee and transaction information, the better, more profitable financial decisions you can make for yourself.

Employers typically offer retirement accounts as part of your benefits package. However, keep an eye on the fees and minimum balance requirements because they can be very expensive. If you discover steep fees inside your employer-offered plan, but still want the match (because hey, I wouldn’t pass up “free money” either), just contribute to earn the match and establish a separate brokerage account of your own outside of your employers’ offers.

As long as you’re following an overall financial plan toward building and generating wealth, whether you invest inside an employer offered plan or on your own is irrelevant. Do your due diligence, examine fees, tweak your budget, and do what is in alignment with your financial goals.

 

Ready to Master Your Savings vs Investment Ratio?

No matter where you are along the path toward financial freedom, the key takeaways here are to take the time to set up and review your financial goals. Having a periodic “money date” to allow rebalancing, evaluate your risk tolerance, make adjustments to your budget, explore new financial products, or tip your wealth management strategy toward stronger diversification is key.

Here at 23^rd Street Investors we’re experienced in working with investors at all experience levels, and truly believe that when you watch out for and respect your money, it takes care of you back.

As you check in with your expenses, emergency fund savings levels, and investment returns, we invite you to join The Street Smart Investor Club, because we love talking about this stuff! A fully informed investor (like you!) is more likely to make the right investment decisions and easily hit your financial milestones (maybe even faster than expected).

 

You take your financial security seriously. You listen to industry-leading podcasts and follow the financial gurus’ advice. You dream of financial freedom, yearn for cash flow confidence, and you know passive income is the key to getting there.

But you know that to build wealth, you’ve got to start saving money first.  Sounds easy enough, right? Unfortunately, underlying bad money habits can impact your bottom line more than you think.

Working toward better money habits is one thing, but, likely, you aren’t even aware of the bad money habits that already exist in your life.  Meanwhile, they’re lurking in the shadows, tricking you into wasteful spending, racking up your credit card debt, and preventing you from investing.

The first step in ditching these bad money habits is recognizing what financial changes need to be made. Taking an honest look at your money habits is essential in making a positive impact on your financial behavior, bank account, and investing potential.

Let’s break down the 7 most common bad money habits that are costing you money and hindering your investing potential.

 

1. Your spending habits exceed your income

You know the cycle. You spend a little more than you earn, then to cover ongoing expenses, you use your credit card to make ends meet. Unfortunately, this quick fix becomes more of a problem than a solution.

By relying too much on credit, you face fees and a high-interest-rate credit card balance that will seem impossible to pay off. This bad money behavior creates a vicious cycle that costs your financial future, the comfortable retirement you dream of, and hinders your ability to save money.

The best way to navigate spending more than you earn is to take an honest look at your spending habits and your long-term financial goals. Compare your annual spending to what’s in your bank account. Here are a few ways to reduce bad spending habits and start hitting your financial goals.

• Cut costs on essential items and reduce impulse purchases as the primary ways to stop overspending.
• Review your subscriptions. Subscriptions to retailers are often out of sight out of mind. Be intentional about reviewing and canceling any subscriptions that aren’t necessary.
• Keep credit card debt to a minimum. Late fees and interest charges on consumer debt can cost you more money than if you’d just saved up for the purchase.
• Tighten your budget and look for coupons and discounts as a way to make all your money count. Find all the “free money” you can in this sense.
• Find ways to make more money. Consider a part-time job or side hustle, especially if you can use that extra money to pay off credit card bills faster.

Making short-term sacrifices now will positively impact your long-term financial security. Eventually, you’ll find yourself practicing good money habits rather than allowing bad habits to cost you money.

 

2. You don’t have an emergency fund

Most folks have a checking account, are aware of their credit score, and shoot to make the minimum payment on all their bills on time. Many of them even have a savings account too!

But did you know you should have a separate account just for emergency savings?

Nothing can derail a financial plan quicker than an unexpected expense and no way to cover it. Cue the emergency fund to the rescue!

Most financial experts recommend an emergency fund as the first, most important step to stop living paycheck to paycheck. They also say to pack your emergency fund with at least three months of expenses. This way, you’ll be ready when life throws you a curveball or something goes wrong.

Once established, there’s no need to regularly contribute to your emergency fund. Just be sure to review it at regular intervals and adjust the balance and your spending habits accordingly.

 

3. You know to save money, but how much money?

A rough guideline is to save 20% of your income; nevertheless, this might be too much or too little depending on your current financial situation.

Before you can willy-nilly decide to save 20%, you might have to make some adjustments to your bad money habits. Stary by comparing your income amount against your living expenses and working to widen that gap.

It’s tempting to cut dining expenses, for example, and declare, “I’ll save 20% of my income by only spending $200 out-to-eat per month.” You’ve got to experience what it’s like to only spend $200 a month on dining and see if that’s reasonable or sustainable. Only then can you determine whether or not that’s a new habit you can maintain.

When you have an idea of how much money you need each month, it’s time to make a budget. You calculate a reasonable savings percentage or value based on your income and essential expenses, then reduce expenditures while increasing income until you reach your goal.

Another good money habit is to set up automatic savings deposits so that as soon as your paycheck hits, money is pulled into savings and you never have a chance to spend it. Setting up automation is a great trick to making progress with your finances.

 

4. You’re overlooking money-saving tax breaks

An experienced financial professional can help you maximize your tax break opportunities and make certain you’re using the right financial products for your taxable income.

Find a tax expert who can help hone your deductions and exemptions so that your tax withholdings aren’t too high or too low.  They should also be able to suggest investment opportunities that will assist in building wealth.

Check out tax-advantaged account options offered by the government, such as IRA (individual retirement account) and 410(k). Ensuring your current retirement savings and taxable brokerage account is helping build your wealth should be your top priority.

Investing in real estate syndications as a passive investor is a great way to create passive income and become eligible for the tax benefits that only the ultra-wealthy qualify for.  Learn more about this inside the Street Smart Investor Club. It’s free to join and quite helpful as you start investing.

 

5. You’re unsure how to evaluate risk

Investing is indeed risky, but it’s also a sure way to grow your money.  There’s a method for investing money that will be beneficial to your financial health, no matter where you are on your road to establishing good money habits.

Stocks are a gamble, so don’t put all of your eggs in one basket. Exchange-traded funds and mutual funds are better alternatives since they’re less risky than individual stocks. ETFs can cost as little as $15, while mutual funds might require investments as low as $2,500. Plus, big firms like Fidelity and Vanguard provide fee-free trading alternatives with an investment account (which are simple to establish and maintain, by the way).

If you have some cash to invest and wish to grow your financial stability by investing in real assets, a modest rental property or real estate syndication might be a smart option for you.

Real estate syndications, for example, entail risk.  But they also carry the potential for cash flow, appreciation, and tax advantages, not to mention the opportunity to positively impact entire communities with one transaction. In this instance, the risk/reward ratio is in your favor.

 

6. You’re taking early withdrawals from retirement savings

To put it simply, there’s too much volatility involved when tapping into your retirement savings accounts early. Although tempting, it’s best practice to leave your money invested unless you absolutely have to withdraw it. Your retirement accounts should never be treated like a regular savings account or payday advance option.

The costs of prematurely withdrawing far outweigh the benefits. In addition to paying hefty penalties, you’ll miss out on potential financial growth from those investments and it may take a long time to rebuild your balance.

When you take out 401k loans or early withdrawals, you’re almost guaranteeing you’ll never get to retire early. Compounding interest rates are complicated and it’s easy to get a false sense of security in the decades you have before retirement, but do everything you can NOT to fall prey to this bad money habit.

If you’re facing hardship and have no other option, consider discussing your early withdrawal options with a financial professional.

 

7. You need to exercise patience with diversification

Even when you’re watching a low-cost index fund or a Roth IRA underperform, don’t make any sudden moves. While it’s tempting to react by adjusting your portfolio, your financial goals will benefit you the most if you stay patient.

Those with good money habits know the market bounces around like crazy in the short term, but steadily rises over the long haul. Avoid the temptation to react and exemplify your bad habits. Staying the course can be difficult, but your diligence will pay off in the future.

If you’re ready to learn more about how to manage your finances while you’re investing, the first step is to join the Street Smart Investor Club. With helpful insights on anything involving U.S. investing, from equity to ETFs, the 23^rd Street Investors team can help you ditch your bad financial habits and start practicing good habits.

How To Ditch Bad Money Habits and Create The Financial Future You Deserve

Now that you’ve learned about these seven bad habits, take some time to examine your financial behaviors.

Do you have any bad spending habits?

Are any of them contributing to your financial stress?

What good could you do in the world with more money?

How differently would you feel about your finances without credit card debt, student loans, excessive online shopping, and due dates trying to drown you?

Just imagine how confident you’ll feel when you’ve got cash set aside, a working budget in place, well-funded retirement accounts, and additional funds to invest.

It’s time to start implementing sound financial habits and working toward your goals. The Street Smart Investor Club is here to help you achieve your financial goals by providing the resources you need to build wealth for your family and live the life you’ve been dreaming of.

 

Your life-long personal financial management and investing journey can feel like a roller coaster.

You get a raise, yeay!

The stock market crashes, boo.

You find a quadplex at a steal, score!

Foreign transaction fees hit your credit card, thumbs down.

Occasionally, the extreme highs, lows, and multiple medium-intensity moments occur all in the same day. Luckily, when you invest in commercial real estate, that roller coaster experience is a bit less volatile when compared to the stock market, but the highs and lows still exist.

Every investment requires you to take on risk in exchange for the potential upside. You can (and should) do your research, vet the markets, and interview operators, in an effort to make an informed decision about the risk you’re taking on. But you really have no idea what might happen.

To wade through these waters over the long haul, it takes a bit of grit, the ability to talk yourself back up the hill after tumbling downward, absolute determination, and sometimes, some thick skin.

Your mindset is responsible for 80% – 90% of your success

Shocking, right? Yes, only 10%-20% of your success hinges on your knowledge, tactics, and the mechanical details you implement. Mindset has become quite the hot topic lately, but how do you cultivate a grit-oriented growth mindset that fosters investing success?

This article will share several mindfulness practices, the power of vision boarding, and a few other exercises that some may consider to be woo-woo. I can’t keep these from you in good conscience, because they’ve positively impacted my financial life.

 

Make Your Dreams and Wishes Physically Visible

I heard a story recently about a real estate investor and how he made millions, lost it all, and then rebuilt it. His strong conviction in the power of a physical vision board really got my wheels turning. I can only imagine what it must have been like to have $50 million to lose in the first place!

I, too, have made vision boards and pasted pictures of objects and locations that I thought were far-fetched at best. Some of you practical, analytical folks may be questioning my sanity right now, but I’m telling you: vision boards work.

Ready for a science fact? The reticular activating system in your brain recognizes the goals you make physically apparent (by cutting and pasting pictures onto a poster board) and subconsciously draws you toward those individuals, locations, and things in real life.

When you have an on-paper visual depiction of your greatest objectives and aspirations, you’re less likely to forget why you’re striving and more inclined to take tiny steps in the direction of achieving those goals.

Maybe those hopes and dreams will come true after years of hard effort, or perhaps you take baby steps toward your major objectives and achieve them in five or ten years. Nonetheless, gazing at your goals every day has scientific, yet seemingly magical power.

 

Use Your (Potential) Pain As A Tool

Intentional journaling may help you achieve a major objective-setting endeavor. I’m not talking about waking up and jotting down your feelings, disappointments, and daydreams over a cup of coffee every morning. Instead, this is a very focused 30-minute goal setting exercise.

Here we go!

Get a 10-minute timer, two sheets of paper, and a pencil. Within the next ten minutes, you’ll brain dump all of your greatest wishes and aspirations on one piece of paper. Write as quickly as possible without analyzing what you’re writing. Fill the paper with the most amazing places you want to visit, the most expensive items you wish to own, and the most prestigious events you want to attend. Hold nothing back, even if it feels completely out of your league, crazy or even impossible at this time.

When your 10-minute timer is up, underline your number one over-arching goal and circle your top three one-year objectives. On another sheet of paper, write each of those four items with plenty of space between them.

Set your 10-minute timer for another go, and this time, write a short paragraph under each objective about why you must accomplish it. Perhaps you want to show your kids what’s possible, break a family trend, or that one of those objectives has been a life-long ambition of yours. Use emotionally charged phrases to convey feelings and emotion as you write.

When the timer dings, set it for the final 10 minutes. This time, write beneath each goal what horrible agony you’ll suffer if you don’t achieve it. Will you let someone (or yourself) down? Will you be trapped in a cycle of failure? Will you allow yourself to be proven inferior by the world? Detail the immensely painful assumptions and feelings you’ll experience around failure.

People don’t make daily choices out of comfort, they do things to solve a pain point. Customers purchase items, participate in events, and undertake journeys in order to alleviate their problems. This technique works because, by using pain as motivation,  you’ll react eagerly to alleviate perceived suffering.  So don’t just read this through; Stop right now and complete the exercise; these next 30 minutes may alter your trajectory.

 

Make Your Dreams a Reality by Verbalizing Them

Claiming your goals aloud is one approach to developing a positive mental attitude toward money. Whether your friends or family think you’re nuts doesn’t matter. If you speak your objectives verbally, in full confidence that they will come true, you’re more likely to achieve them.

This is where a daily writing practice might be useful, or you may use affirmations every morning to boost your confidence in yourself as someone who can achieve the goals you’ve set. Many celebrities, including Oprah Winfrey, have utilized similar measures, whereas others, such as Demi Lovato or Jim Carey, have taken more action-oriented approaches by writing themselves a large check or posting on social media that they’ll sing the National Anthem at the Superbowl.

Another method to make progress using verbal power is to replace negative phrases in your everyday speech with ones that convey confidence, hope, and possibility. As an illustration, replace “I just can’t seem to get over this issue” with “I’m grateful for the chance to learn something new and develop.”

I’m not telling you to be a happiness robot, but rather, that you be aware of your thoughts and the language you use internally and externally. Start speaking as if your goals are attainable and have already been fulfilled.

 

Implement A Gratitude Practice

Gratitude is at the core of every achievement. Practice expressing gratitude for where you are in life, what you’ve learned from your experiences, and for the accomplishments that lie ahead.

A gratitude practice may be done through meditation, where you take 5-10 minutes each day to close your eyes and think about all the wonderful things you have. Journaling your appreciation is another excellent method to express your thanks.

Have you ever heard of a gratitude vision board? You can create this powerful tool by pasting pictures of your children, accomplishments you’re proud of, and experiences you enjoyed onto a posterboard. This is just like a vision board, except it’s full of things you already have and are thankful for. Each day, allow yourself to be emotionally engrossed in thanks when you see this board – for the individuals, places, and things who have added value to your life.

A gratitude exercise can be done at any time throughout the day, during a morning or evening routine, or even while exercising! Make a strategy to be grateful for all that has happened and all that will come your way, and put it into practice in your daily life.

 

Allow the Universe to Return The Favor

Now, you’re probably wondering what this has to do with money, financial freedom, or real estate. When your mindset is in a good place, you’re clear on your objectives, and have implemented gratitude exercises, energy (typically in the form of money) flows to assist you in achieving your goals.

So, no matter how silly you feel, start employing mindset work to build the life you desire. Create a personal regimen that leaves you feeling like your lofty ambitions are now real and feasible. You’ll be more likely to conduct research, spot possibilities, seize opportunities, and build relationships if your objectives are in view.

Perhaps you’ve decided to invest a million dollars in real estate one day, and you come across a strategy that encourages you to put $50,000 at a time into various stable commercial assets. WINK WINK

Then you come up with a brilliant idea to save (or earn $50,000 more) each year, specifically  and strategically toward your big goal.

Practice gratefulness, go through the 30-minute goal-setting session, state your objectives verbally with the universe, and make a vision board; if you don’t, you’ll never know what might have occurred if you did.

 

It’s okay if you haven’t heard of “house hacking” before or don’t know what it is. Anyone can do it, and you might already be doing it without realizing it!

If you’ve felt the desire to reduce your living expenses or if you’ve been trying to figure out how to have renters pay down your mortgage for you, you may be a great candidate for house hacking.

In this article, you’ll learn what house hacking is, find out how to decide if a property is a house-hack-worthy purchase, discover how to get started, and learn how to stockpile your earnings from one property to buy the next and continue to build your wealth.

House Hacking Defined

If you live in one portion of a property and rent out another room, unit, or space on the same property, you’re essentially house hacking. You can become a house-hacker with any small multifamily unit like a duplex, triplex, or quad, and, surprisingly, you can even do it with a single-family home!

Basically, your renters pay a monthly equivalent close to, equaling, or greater than your mortgage payment on the property, rendering your housing expenses near or at zero. This way, you’re earning equity and paying down the mortgage without actually having to pay it yourself!

This frees up your budget, reduces the likelihood you’ll remain in a job you hate and decreases your stress. When you can have good, paying tenants in your units and live with $0 housing expenses, you free up your finances to accomplish more, grow your wealth faster, and earn passive income to fund the lifestyle you want.

How Do You Know If A Property Is A Good Purchase For House Hacking?

If you want to get started house hacking, first, you need the “perfect” house-hacking property.

That doesn’t mean you’re in search of a fully renovated, adorable property or even one that has excellent curb appeal. Perfect, in this case, means that the rental rates you could theoretically charge a tenant will cover or come close to covering the mortgage payment on the entire property.

To get to that point, you must first consider how much rent each unit of the property is likely to provide and compare that with your expected mortgage payment. Look at the price of duplexes, for example, and see if the overall cost of the property would render a mortgage payment that could be covered by the rental income from one unit alone.

An Example:   If you find a duplex for $400,000, you’ll likely apply a down payment of $80,000 in cash (20%). That leaves you with a $320,000 mortgage. At about 5% interest on a 30-year mortgage, your payments will be about $2,000 each month.

With this knowledge, you’ll scope out the rental market and see what renters generally pay for units comparable in size to one you anticipate having for lease. This is as simple as looking at Craigslist or any other online hub where people share and shop for a place to live. Don’t overcomplicate the research process!

If the rental rates you see in the market are at or near $2,000 per month, then it’s likely you’ll be able to get a paying tenant in one side of your duplex for that amount. Then, you can live “for free” in the other side while your tenant’s rent payments build your equity in the home by covering the mortgage payment.

If the rent rates in the area are a little less, say $1,800 per month, then you’ll have to pitch in $200 a month to cover the mortgage on the property. But, hey, I’ve never found rent for $200 a month before, so I’d still say you worked yourself a great deal!

On the other hand, if you find out rental rates in the area are $2,200 per month, your renters will be paying more than your mortgage payment, leaving you a little cash flow right away!

Either way, you’ve reduced your living expenses to essentially zero and gained a significant advantage toward being able to save for your next real estate endeavor.

What Else Does It Take To Get Started House Hacking?

Getting started house hacking is easy! All you need is your down payment in cash (20% of the market price of the property is required) and some basic knowledge of the area and types of property you’re searching for.

You may want to stash a little extra cash in a reserve account for things like anticipated renovations, lawn services, and pest control. Some unanticipated costs of becoming a landlord may be repairs, tenant damage (intentional or not), and notary or attorney fees.

You can easily find templates for tenant applications, leasing forms, and even contractor agreements online. Take advantage of services like Angie’s list or similar to find reliable handymen for repairs.

Once you have your savings goals met, simply expand your property search to include small multifamily units like duplexes or triplexes in the area. You can easily do this on any home listing site like realtor.com or by asking your agent.

How To “Snowball” Your Real Estate Purchases And Keep Living For Free While Investing More

Once you see the magic in having your tenants pay your mortgage while you live for free, you’ll probably want to do it again and again, accumulating real estate properties, growing the number of units you have rented out, and building your equity and passive income as you go.

The primary way to accomplish this is, as your tenant is covering your mortgage with their rent payments, continuing to “pay rent” to yourself. Set aside at least $1,000 per month into a separate savings account as if you were still paying a mortgage payment or rent. In time, this account will accumulate enough savings to cover a down payment on your next rental property.

As you move out of your first duplex, for example, and get another tenant to rent your old space, you’ll suddenly have two people paying $1,600 per month, effectively doubling your rental income. Meanwhile, you’ll be moving into a new triplex, for example, living in one unit and finding paying tenants to live in the other two.

With House Hacking, Who Knows What Your Future Contains!?

I’m sure you can continue to project a growing number of units and the passive income that goes with them by repeating this formula every few years. The good news is, you’d be on your way to ever-increasing net worth, tax benefits, and a diverse portfolio of recession-resistant assets too!

If you’ve been wanting to quit your job and travel full time, creating passive income through real estate investments could be the key to making that happen. Of course, it all starts with your first small multifamily property purchase.

I have to share this caveat now – being a great landlord is hard work and requires your time and attention to daily decisions about what’s best for the property and your tenants. Even if you choose to use a property management company, you’re still responsible (and liable) for every repair, tenant complaint, rent raise, and eviction.

If passive income and real estate investments sound great, but you’d rather not move every few years or deal with tenants and other landlord responsibilities, you might be more inclined toward group investments called syndications. When you invest as a limited partner in a real estate syndication, you reap all the benefits of real estate like tax deductions, passive income, and property value appreciation without dealing with any landlord-type headaches.

Real estate syndications have become my favorite way to passively invest in stable, tangible assets, earn passive income, and limit my liability so I can live the life I’ve always dreamed of with and for my family.

Neither house hacking nor real estate syndication investing requires any experience, degrees, or certifications. You don’t have to be experienced in one to do the other. Start by identifying your lifestyle and investment goals first, then decide if you’re willing to try to manage a property as a landlord.

For other ideas about investing in real estate with little or no money, check out my e-book No Money? No Time? No Problem!

 

 

Real estate investments are often referred to as one way the wealthy stay that way.

Why is this?

While you may have read about tax benefits, passive income, and how real estate investments are separate from wall street, there’s a twist for high-income earning families.

High incomes typically come with high tax liabilities, especially if you don’t know the ins and outs of tax law, which few of us do. Even if, as a high-income earner, you’re maxing out your retirement contributions, donating thousands to charity, and being creative about write-offs, it’s likely your income continues to push you into a higher tax bracket.

As your household income increases, tax deductions phase out, leaving you with an ever-increasing tax bill and a lot of frustration. This is tough because as you or your spouse achieves promotions and climbs the ranks, you want to be excited, but that looming tax bill might dampen the party.

It used to be that high-income earners were generally self-employed and could take advantage of deductions available to business owners. However, these days, large companies increasingly employ high-profile positions like physicians, attorneys, engineers, and tech professionals in-house. This shift from being self-employed with your own practice to become a W2 employee means a reduction in opportunities for deductions available to you.

That is until you discover REPS – real estate professional status.

In this article, I’ll share all about what REPS is, how achieving real estate professional status can positively impact your tax liability, and why, in this case, it’s beneficial to have one spouse manage the family’s real estate investments full-time while the other focuses on their prestigious career. If you or your spouse is a high-income earner, and you’ve been looking for a way to reduce your tax liabilities even though deductions are phasing out, you’re in the right place!

How Does REPS Help High-Income Earning Families?

Cost segregation studies, accelerated depreciation, and other fancy real estate occurrences often produce on-paper losses for investors, which result in reduced tax liability. Cool, right?

Well, suppose you’re a married couple filing jointly, and you make over $150,000. In that case, you can’t use passive real estate losses to reduce your taxable income because there are no “special allowances” according to the IRS for these high-income families. Those suspended passive losses carry forward until you have a year of passive gains from your real estate investments since passive losses can never offset active income like that from a W2.

(whomp whomp)

Now suppose one of the spouses in this theoretical $150K + earning family designates themselves as a real estate professional and meets the qualifications – then the entire equation flips!

As an example, let’s look at Melissa and her family. Her husband is an in-house attorney for one of the well-known dating apps, and she manages the household, raises their three-year-old, and oversees the couple’s investment strategy. Her husband, Drew, makes $250,000 plus bonuses while Melissa manages the day-to-day activities of their real estate investments, which has quickly turned into her full-time job. 

Even though her properties are cash flow positive, Melissa generated $150,000 in losses from her real estate business. Here’s where it gets interesting…

Suppose Melissa has designated herself as qualifying for real estate professional status. In that case, they can deduct all $150,000 in (passive) losses from Drew’s $250,000 (active) income, leaving only $100,000 reflected as taxable income and dropping them into a lower tax bracket. 

However, if Melissa does not qualify or doesn’t designate as a REPS, the couple is taxed on all $250,000 of income, approximately doubling the value owed to their taxes. 

Without a REPS designation, Melissa’s $150,000 in passive losses must be carried forward until she has passive gains against which she can apply them. Meanwhile, the couple is taxed on Drew’s total income, likely for several years. 

If you’re making all the right moves – earning, donating, contributing to retirement, and investing in real estate, why pay more in taxes than you should? REPS helps high-income earning families reduce their tax liability by allowing their real estate deductions to count when they need them.

What Is Real Estate Professional Status?

REPS allows couples to divide and conquer – one high-income earning spouse gets to lean into their profession while the other claims the REPS designation and assumes responsibility for managing all real estate investments’ day-to-day activities, qualifying the couple for significant tax benefits.

Amazing, right? Another cool tidbit about REPS is that there’s no test to pass, formal certification to achieve, or degree you need to earn.

Anyone can claim real estate professional status (REPS) as long as

1. More than half the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
2. You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

This is, of course, lined out in detail in IRS Publication 925, but basically, real estate has to be one person’s primary job. There’s not much time in a year beyond the 750 hours required for anything besides maybe a part-time job.

How To Achieve REPS

Now that you can see the benefit of one spouse being the designated real estate professional in the family, you’re probably thinking, “Why have I never heard of this?” or “ How come I’m just finding out about this?” and I couldn’t agree with you more!

Now, you need a plan to put this into action in your own family.

First, you’ll need to decide which spouse will become the real estate professional. You’ve got to divide and conquer if you really want to do this. Neither spouse can be 100% present at work plus manage real estate full time.

For some families, this is easy because one spouse is already the primary breadwinner and the other is a homemaker, but in other families where both spouses are working, the choice may be a little more challenging.

Beyond each spouse’s current income, consider things like career trajectory, passion for career, passion for real estate, other assumed roles as the real estate professional (child care/homemaker?), and each spouse’s ability to single-handedly organize and execute ideas. Consider the trust you have in each other and this renewed commitment each person is making to execute their role to the best of their ability.

No matter which spouse chooses to become the real estate professional, they need to be serious about treating real estate investment management activities as a business.

Discuss REPS and your decision to designate yourself as so with your CPA so that you can coordinate timing, real estate purchases, tax filings, and more. From there, set aside funds to invest, start shopping for your first several investment properties, and track your real estate business activities closely.

Treat your real estate management endeavors like a business by using business bank accounts (separate from your personal finances), an accounting program, and a separate email address for real estate-related communications. Anything you can do to separate your real estate investment management activities from any personal activities and have a provable trail of your 750 hours spent is a good thing!

Making REPS Work For Your Family

Successfully operating real estate investments and achieving REPS status may look different for every family, so let’s look at two different scenarios for clarity:

Scenario 1: Two working spouses, one working full time and leaning into their high-income earning profession, and the other working part-time while materially participating (actively involved) in managing the couple’s real estate investments.

Scenario 2: One working spouse and one homemaker who decides to make managing real estate investments their primary job.

In each scenario, the spouse managing real estate needs to commit to (and be able to prove) their material participation in the day-to-day decisions regarding their real estate properties, accumulating 750 hours or more of tracked time and activities over the taxable year.

For most, it would be challenging to spend 750 hours on just a few properties. So if you accumulate several properties quickly, track your time and business activities managing them, and treat your investment properties as a business, you’re more likely to attain all the documentation required to claim REPS.

Investment management activities that add up to your 750 hours per year may mean establishing business-like formalities and systems, deciding when to raise rents, renew leases, buy, sell, renovate, and more. Approach every day intending to maximize profit while simultaneously improving your tenants’ experience, tracking your time and activities (a Google Calendar is an excellent tool for this!), and coordinating with contractors toward successful renovations, and your investment business and REPS status will be booming in no time!

Usually, the 750-hour requirement is per real estate property, but you can combine all of your real estate management activities from several properties into one by including the following language in your tax returns:

Under IRC Regulation 1.469-9(g)(3), the taxpayer hereby states that they are a qualifying real estate professional under Code Sec. 469(c)(7), and elect under Code Sec. 469(c)(7)(A) to treat all interests in rental real estate as a single rental real estate activity.

That phrase “taxpayer hereby states that they are a qualifying real estate professional” is critical.

If one spouse (doesn’t matter which one) can consistently hit these requirements, coordinate with tax professionals, and find joy in managing real estate investment assets for the family, REPS can be a huge advantage!

Is Real Estate Professional Status For You Or Your Spouse?

If you’re part of a married-filing-jointly relationship and have an income over $150,000, you may have been feeling increasingly frustrated by your high tax liability. In fact, it’s highly likely that you’re thinking about investing or you’re already invested in real estate because of the tax benefits rumors, even if you don’t really know how to use them yet.

However, if you want to apply your on-paper losses to your household’s active (W2) income, achieving real estate professional status may be the answer. Otherwise, you may be stuck carrying passive losses for years to come.

Remember, take the things you’ve learned here as inspiration for more research, an open discussion with your spouse, and food for thought as you further examine the most efficient way to move toward your lifestyle and investment goals.

 

Think back to the last time you bought a home or a car and you can quickly recall the mind-boggling amount of fine print and fee disclosures you waded through and agreed to. Well, when it comes to investments, there are fees too – that’s how those who research and manage the investment are compensated and an integral part of why and how the opportunity is available to you.

Knowing that there are fees associated with any big transaction is one thing, but understanding what they’re for and how they affect you and your investment partners is another. Having the fees in a commercial real estate syndication decoded alters the dynamic from feeling like the fees or those responsible for them are “out to get you,” and rather that they are important to the success of all involved.

In this article I’ll walk you through the most common fees typically seen in a commercial real estate syndication and, together, we can walk through what each one means and what passive investors should watch out for when examining an investment opportunity.

Deflating Investors’ Myths Around Real Estate Syndication Deals

As with any misunderstanding, therein lies some false beliefs and assumptions. So, let’s take it from the top in our comprehensive fee explanation journey, and debunk the top myths investors believe when it comes to real estate syndications.

Myth #1 – Investors Have No Control

You may believe that when you invest in a commercial real estate syndication, all control over your capital is relinquished. This is far from the truth because, while you may not be selecting paint colors or problem-solving for trash pick up, you have 100% say in what type of asset you invest, the asset class, the capital amount, which deal with which sponsor, whether you choose a value-add deal or not, and so much more.

When you invest in a syndication, your control is exerted up front, during the selection and research process so that once you’ve selected a deal and wired your funds, you can use the precious time you have to do what you want with those you love.

Myth #2 – Investors Earn Lower Returns

Maybe you’ve heard a rumor that syndications yield lower returns, but this is confusing because real estate historically outperforms the stock market. No matter what type of investment you’re exploring, make sure you’re comparing “apples to apples.”

Many investors (even experienced ones!) can make the mistake of comparing gross returns to net returns. Since gross returns are the profits or earnings before any fees are taken out while net returns are reflective of what you’ll actually take home, this could be quite misleading.

When exploring and comparing commercial real estate syndication deals, yes, there are always fees, but there are 3 things to consider as you sort through them:

• Are the fees creating alignment between the investment and asset goals of the general and limited partners and driving performance?
• Can you still make a reasonable (projected) return on your capital that propels you toward your goals?
• Are the sponsors being transparent about the fees being charged and what they’re for?

No one likes hidden or surprise fees, so when the general partnership is being transparent, the fees listed are reasonable, and you still make money, that’s a win!

If you’re like me, you don’t have the time or mental energy for fee gymnastics. Instead, ensure that your investment choice is based on the projected net returns across the board. That is, you want to be comparing investment opportunities’ returns after fees have already been removed so you have clarity on how that passive income might affect your budget and your goals.

The Most Common Fees In A Real Estate Syndication Investment

To further deflate myth #2, it’s imperative to understand why the fees on a deal exist and their purpose. With that knowledge, you can more deeply understand how a real estate syndication works and more confidently peruse through the business plan, PPM (private placement memorandum), and decide definitively if a deal aligns with your goals or not.

Ready to learn about each type of fee? Don’t worry, it’s not that complicated.

Acquisition Fee – This is typically 1-3% of the purchase price of the asset and covers costs associated with the resources and due diligence performed by the sponsor to acquire the asset. Sometimes sponsors spend weeks or even months researching and underwriting deal after deal to no avail. The acquisition fee is what keeps the lights on, so to speak, and helps afford all that effort during and between deals.

Asset Management Fee – At about 1-2% of either the projected gross income or the capital invested (sponsor’s preference), this money pays for the ongoing bookkeeping, coordination, and communication that’s required to properly manage the asset and execute on the business plan.

Construction Management Fee – On value-add or development deals, a construction management fee of about 5-10% of the expected construction budget is necessary for managing the renovations on the property. Attentive, thorough oversight is required to ensure construction projects finish on time and within budget.

Equity Placement Fee – A fee charged upfront by the broker that covers the cost of obtaining investors, limited partners (like you!) and the marketing, coordination, and behind-the-scenes communication and paperwork. Also sometimes called the equity origination fee, this is usually around 1-2% of the capital invested.

Loan Fee – This fee compensates the sponsor for their work toward obtaining financing because getting a loan of this size takes immense effort. A loan fee is typically 1% of the total loan amount.

Guarantor Fee – Occasionally, loans require a key partner to personally pledge assets to guarantee the loan. Typically between 1-2% of the loan amount compensates the guarantor for their pledge and support.

Refinance Fee – At about 1-2% of the refinanced loan amount, this fee, also called a capital event, compensates key parties for the time and energy it takes to refinance the property. If you’ve ever received a portion of your investment capital back and experienced the joy of cash-on-cash returns as if all your capital was still invested, you’ll probably agree that the refinance fee is well worth it!

Disposition Fee – Finally, a disposition fee is often charged to cover the costs of marketing and selling the asset once the business plan has been executed. 1-2% of the sales price of the asset ensures a smooth transition from your syndication ownership to the next party.

How To Become A Fee-Savvy Passive Investor

With a deep understanding of the possible fees on a deal – what they’re for and how much they may be – keep in mind that each sponsor may present varying fees (in number and by percentage) depending upon their values.

Here at 23rd Street Investors, one of our guiding values is transparency. So when we publish a proforma, the projected returns are net of fees. It’s important to us that documents are easy for our investors to understand and evaluate.

Typically, the cash-on-cash returns (quarterly disbursements) and IRR projections are net of the acquisition fee, asset management fee, disposition fee, and, if applicable, a refinance and/or guarantor fee. In general, people don’t like fees, so the fewer the better! That’s why you typically won’t see more than about 4 fees on our commercial real estate syndication deals.

As part of your journey in getting started as a passive investor, learning about and understanding the fee structure is one more checkbox checked toward being ready to grab a seat in our next deal. If you haven’t already, make sure you join the Street Smart Investor Club today so you can begin browsing opportunities!

 

 

Have you ever been irked by the constant questions from your kids “Can I have this?” Meanwhile, the continuous job of reminding them to turn off lights and quit wasting water looms large. As parents, it’s easy to feel like the kids have no respect for how hard you work to provide them with an incredible life.

The thing is, most parents don’t know where to start when it comes to teaching their kids about money. It’s a big, wide-ranging topic that might even come with some baggage, so it’s easy to begin feeling overwhelmed as you’re just thinking about having a conversation!

Here we are, learning a ton, investing to the best of our ability, hustling at our day jobs, and doing our best to manage the family finances in a way that not only sets us up for a great, freedom-filled life but also passes on wealth and knowledge so that future generations don’t have to struggle like we did starting out.

So, what’s missing? Well, while we remember the struggle like it was yesterday, our kids only see what life is like today. With full bellies, all the toys they can handle, a plush bed, and a sweet vacation each year, they don’t necessarily understand the value of a dollar or the sweat and tears it took to reach this level of financial freedom.

This is why it’s even more critical that we talk openly with our kids about spending, saving, and investing and that we instill positive financial values while they’re young. We want them to be equipped with the tools to care for themselves, build their wealth, responsibly use the wealth we pass to them, and positively impact the world when it’s their time.

In this article, you’ll discover a few simple concepts you can teach your kids and tangible lessons you can implement as part of your plan toward creating generational wealth.

When Kids Can Grasp Financial Concepts

Of course, you’re not going to begin your first conversation teaching compounding interest to your 4-year-old! Children can understand a little more with each year, and you slowly build on their math skills and present simplified financial concepts based on their age, the situation, and the lesson you’re shooting for.

Young kids between the ages of 5 and 9 just need to learn basic arithmetic and have practice earning money, saving some, and spending some. This teaches them the basics of how the world works – you earn $10, you save $2, and you can buy a new toy for $8. Simple, right?

When kids can connect that each thing we do or have is paid for somehow, they’ll start to be more considerate of your household budget.  Leaving the lights on, for example, might make the electric bill higher, and you have the opportunity to present and share the statement from the electric company and discuss this financial obligation that exists month in and month out.

Between the ages of 9 and 15, children can understand adult-like financial concepts like credit cards, compound interest, investing, and compute complex equations. At this point, it’s highly recommended that you share much more about your income, your bills, mistakes you’ve made, and, yes, your investing choices with them.

Teaching concepts to our children while they’re young, while they have time to practice and experiment with money under your wing instead of when it matters (like with rent or their credit), provides them an even greater chance at financial success.

Teach Your Kids To Save AND Invest

The most important thing, no matter the tools you use, is that your child gets access and experience with money. That means earning it, making choices whether to spend or save it, losing it, investing with it, borrowing it, paying it back, and everything that we adults do with our money but on a child-size scale.

Provide opportunities for them to earn some cash, and walk them through what to do with those earnings. As you encourage them to save some, spend some, donate some, and invest some, talk to them about why these choices are important and share about similar decisions you’re making with your own money.

Don’t be afraid to share more significant concepts like the impact they could make on a large scale with donations, mistakes you’ve made and what you learned from them, or how they can double their money investing as you do now in real estate syndications. The real lightbulb moment will be when they begin to understand that investments provide passive income – so much so that, if done well, they can choose whether or not to work.

You get this beautiful opportunity to guide them in earning their first several thousand dollars, building up their savings, and gaining exposure to the fantastic world of investing. Just imagine how much more opportunity for freedom and impact they have just by exposure to these concepts. Amazing!

The #1 Mistake Parents Make With Kids About Money

In general, talking to your kids about money is a million times better than avoiding the subject. It doesn’t matter how much or how little of an expert you think you are on the subject. They need to know about your financial mistakes to learn from them just as much as they need to know about the great decisions you made so they can emulate them.

Either way, discussing finances and allowing your child some exposure and experience with money and financial conversations provides them more knowledge and confidence with money than if it were never discussed at all.

Unfortunately, there is one glaring mistake we’ve probably all made.

Most of us can admit that we’ve said, “We can’t afford that,” at least once to our kids in response to their request for something.

While that may be the easiest, most automatic quip, it’s a missed opportunity for a teachable moment. Sometimes you’re just tired of saying “No,” but it’s important that we lean into that conversation about why we’re not buying it and why/how we’re making different choices with our money.

The truth is, we probably can afford that. So, instead of accidentally frightening your kid into a scarcity complex (yep, that’s what really happens), intentionally replace that phrase with a new, more precise, more truthful expression like, “That’s not why we’re at the store today,” or “That’s not in the budget right now,” or “The money I’m spending today is only for groceries.”

It’s okay to tell your kiddo the truth about why your answer to their request is no, and it’s even more okay to have an in-depth discussion about budgeting, spending money on meaningful purchases, and investing for the future instead of instant gratification. Honestly, we adults struggle with these concepts too, so it’s a great idea to introduce them at a young age.

If you replace the ‘we can’t afford that’ thoughtless response with an open conversation about financial choices, you and your kids will be much better off.

What Should You Do Instead

The best thing you can do toward teaching financial literacy to your children is to model your own financial choices openly for them. Talk them through the options you have, why you’re making one decision over another, what bills you’re paying and why, and even the trade-off we all face in spending money versus saving it versus investing it.

They need a taste of reality while still living at home to learn about decisions they will have to make when they are out on their own. Allow them to exercise their own spending habits and make the $20 or even $100 mistakes now because those are much better to learn from than the $1000 + mistakes they could make with rent money when they’re older.

Share about your income and bills so they can see what it costs to live their current lifestyle. At the same time, share openly about what it was like for you when you first started out. Although it might be hard to talk about your mattress-on-the-floor and ramen noodle days, they need to know that your life wasn’t always cashflow positive.

This openness can help them realize that it’s okay to start small and that, realistically, they won’t be living their current lifestyle when they move out. While that might be scary to some, you must help them see the value of that independence. With your help, they’ll begin their independent financial life with accurate expectations and knowledge of what utilities, transportation, food, and other necessities cost, and they’ll be less likely to feel like a failure in comparison to the lifestyle you’re able to provide.

Positively Impacting The Next Generation With Financial Literacy

Create open lines of communication between you and your kids about money and financial subjects so that they can always come to you with questions, dilemmas, wins, and losses, and so that you’ll continuously have the chance to guide and teach even as they grow into early adulthood.

We’re always learning, right?  So, again, it’s a great idea to model that and discuss your journey with your kids. You don’t need picture-perfect finances to be an authority on the subject with your children. They’ve already looked to you for every answer they ever needed their whole lives, and they aren’t stopping now.

In fact, it’s better if things are a little messy because they need to see firsthand that you’re always learning, winning, failing, researching, and trying again. Remember, reveal your wins and your losses so that the lesson you’re teaching is realistic and they can develop accurate expectations for their own financial life.

The big thing is that you teach them the power of investing and help them get the correct accounts set up to practice and begin getting financial experience. Just imagine how different your trajectory would have been if you’d known about compound interest, passive income, and real estate syndication investments when you were their age!

Most of us didn’t get much of a financial literacy lesson from our parents, if at all. Fortunately, most of us are also absolutely determined to teach our children about money and break the cycle of financial illiteracy, struggle, and living paycheck-to-paycheck. With the simple tips and encouragement in this article, now we all have an opportunity to positively impact the next generation by teaching financial literacy to our kids!

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The order in which distributions are paid in a real estate syndication investment is called the capital stack, and your clarity on this concept is critical because you need to know where you fall in order of priority for returns. If you invest at a Class B level and Preferred, Class A investors receive distributions first, you want to know why, don’t you?

Understanding the waterfall effect in which returns are paid in a real estate syndication will also allow you to select real estate investment syndication deals in which the capital stack is favorable toward your investing goals. Your knowledge of the risk and priority at each tier is a vital piece of knowing why and when you’ll receive distributions.

Inside, I’ll share what the capital stack is, why it’s essential, and how it impacts you.

The Waterfall

The way the capital stack works is called a waterfall. Imagine a list of everyone participating in the deal with the debt and equity partners categorized into groups – those with the lowest returns and the highest risk at the top. When cashflow is available, it gets distributed like a waterfall, starting at the top and trickling down to those with higher returns and lower risk toward the bottom.

A waterfall structure is outlined in each deals’ PPM (Private Placement Memorandum) at the beginning of a deal. It explains who, how, and when each partner, whether general or limited, gets paid during the real estate syndication deal.

Some classes receive only cashflow, while others participate in cashflow distributions and capital returns profits when the property is refinanced or sold. So, you want to understand where your potential investment is in the waterfall structure and know which pieces apply to you and how they might help you toward your financial goals.

• Are you solely focused on creating passive income in the form of monthly or quarterly cashflow?
• Are you mostly interested in appreciation on the property and “winning big” at the sale of the property?
• Are you desiring a mix of both – a little support in the cashflow department plus some longer-term gains?

As we explore the types of waterfall structures and capital stack styles, keep in mind that any common equity or preferred equity partner is not in a position of debt. Also, cashflow distributions are always paid out to partners after expenses, fees, and debt on the property.

The Impact

The capital stack affects investors in three main ways:

• Cash on cash
• IRR
• Velocity

Cash on cash returns is the before-tax earnings an investor makes on their invested capital, also referred to as cashflow or distributions. If you’re in the preferred tier, you may have more significant cash on cash returns because preferred investors have a higher priority, thus get paid first.

IRR means Internal Rate of Return and is a metric to measure the deal’s profitability (cash and equity). It’s a fancy way of calculating your return while accounting for the time value of money, a concept that holds today’s money more valuable to you than that returned to you in the future.

Velocity is your ability to invest in more deals at a faster rate. As an example, when a deal gets refinanced, you may get some capital back if you’re participating in a capital returns position (not everyone gets their capital back – more on that in a minute). You can take that returned capital and invest in another project. This way, you’re effectively getting returns on two real estate syndication deals when maybe you only had enough for a single deal to begin with.

Suppose you have a clear idea about each of these concepts and how each position in the waterfall or capital stack impacts each class. In that case, you’re able to make better investment decisions to support your personal financial goals and achieve them faster.

The Capital Stack

As an investor, you always want to do your own research on the property, vet the sponsor team, and you definitely want to know who gets paid what, and when each payout is supposed to happen. It’s nice to know what to expect and be utterly comfortable upfront so there’s no confusion as to when you’re getting paid, right?

Well, the capital stack in a real estate syndication investment is where debt and equity partners are ranked in order based on an inverse relationship between risk and priority. The highest priority, lowest risk partners are toward the top of the capital stack, while the lower priority, higher-risk partners are toward the bottom.

At the top, you’ll always have what we call Senior Debt. This includes mortgages and loans to finance the property. Just as you’d never miss a house payment, the senior debt is the highest priority, and they get paid first. Mortgage-type loans typically have a meager rate of return (2-4% for the past several years) in exchange for being top priority. 

Next, there are second-level, mezzanine-type loans like second mortgages and bridge loans. These are also debt positions and are ranked as a higher priority and lower risk than our limited and general partner investors.

Continuing down the waterfall, you’ll see preferred equity (limited) partners come next. They are prioritized after debt payments but before the general partners. After the property mortgage, expenses, and fees are paid, preferred investors have “dibs” on distributable cashflow. There may be a higher investment required at this tier, and there are limited positions available at this level. Still, preferred investors often have a higher projected cashflow than other investors down the waterfall.

Following the Preferred Equity Partners are the Common Equity (general) partners. This tier comes with the highest risk and the lowest priority. These investors are likely participating in capital returns and cashflow distributions but fall after the preferred level, typically with a split of earnings up to a certain percentage of cashflow.

There are two main types of capital stacks – single and dual-tier. Just as you might imagine, the dual-stack is a little more complicated.

Single-Tier Stack

In a typical single-tier stack, Senior Debt is at the top, carrying the lowest risk and ranking highest in priority. A great example of this is a mortgage at an approximate ~70% loan-to-value ratio.

Then you’ll see the Common Equity – Class A preferred return below the senior debt carrying a little higher risk and a slightly less priority. This would likely be the limited partnership level in a single stack, which might be earning a 7-8% preferred return with a 70/30 split beyond that. These limited partners (you) are likely participating in capital returns and would receive a portion of the profit after the sale too.

The last level in a single-tier stack is Common Equity – Class B. These are likely the general investors who carry the most risk and are last on the priority list. They have no preferred return and only receive their 30% split of the 70/30 distributions if the property cashflows greater than the 7-8% preferred that the Class A investors are projected to receive.

Dual-Tier Stack

The dual-tier stack is a little more complicated. Still, it’s becoming more popular because this waterfall structure can provide higher cashflow to class A investors with the tradeoff that Class A are not participating in capital returns.

First up again is the Senior Debt and includes any mortgages or loans on the property. After this is where it gets fun!

Next, there’s a Preferred Equity – Class A level. This group receives projected cashflow at a preferred return only. This might be 9-10%, for example, with no payouts beyond that and no capital return. This is perfect for investors who are only looking for consistent cashflow distributions. One caveat might be that this Class A Preferred Equity status likely comes with a more considerable up-front investment with limited shares available. For example, less than 30% of the deals’ shares might be available for a minimum $100,000 capital investment.

After the Class A level, you have the Common Equity – Class B investment level, which may include preferred returns, splits beyond the preferred percentage, and capital returns participation. For example, maybe a $50,000 capital investment would earn a projected ~ 7% preferred return, 70% of the 70/30 split, and capital returns at the sale.

Trickling down the waterfall, the last level would be the Common Equity – Class C. These investors carry the highest risk and the lowest returns because they receive cashflow after other tiers. An example of payout at this level might look like 30% of the 70/30 split and capital returns after the sale in exchange for a $50,000 investment.

Conclusion

As always, the capital stack and the waterfall schedule are outlined in the PPM (private placement memorandum) and are available to you as a potential investor before you commit to the deal. But, the PPM details might seem like gibberish if you aren’t clear on the capital stack, how it works, or where you fall in priority for distributions.

Now that you have a solid explanation and a few examples, your confidence in reading any PPM and selecting a real estate syndication deal that is in alignment with your investing goals will skyrocket!

I’d love to share upcoming deals with you, but first we need to talk so I can hear about your investing goals and help you determine capital stacks that will be favorable for you. I have a couple deals in mind with different tier structures and would be happy to help direct you toward the one that will move you toward your goals more efficiently.

Join The Street Smart Investor Club now to get the “inside scoop” on our past and upcoming deals. Once you apply to join the club, I’ll get on a call with you so we can see if we’re a good fit to help you with future real estate syndication deals!

 

I’m sure you’ve been there, that shopping trip where you browse the entire store, finding things you’ve just “gotta’ have” and once you get to the checkout, you’re faced with the realization that not only did you buy what you didn’t need, but you didn’t get anything you actually needed.

Your cart filled up with pretty stuff, you blew the budget, and you don’t even know how it happened. Meanwhile, you lost hours of precious time and didn’t really get anything done. This is the same aimless frustration you might experience when you first start looking into real estate syndication deals.

It’s possible you’ll begin to receive a seemingly endless string of opportunity emails, each with a summary that could be 50 pages long! Although this is exciting, without knowing specific tactics, your goals, and a strategy for sifting through these, that aimlessness might turn into overwhelm. Ain’t nobody got time for that!

Right here, right now, you’re going to learn how to put a stop to that meandering and decide within 5 minutes if a deal is right for you.

The First Glance

New deal alert emails are like a surprise gift. You had no idea it was coming, but you can’t wait to rip it open and see what’s inside.

The emails you receive about new deals are full of valuable information, but a few highlights you’ll want to pick out at first glance are the type of asset, market, hold time, minimum investment, and funding deadline.

If you open the email simply aiming to extract only these pieces of information, you’ve already avoided unnecessary information overload. All you’re trying to do at this point is to find out if these data points match your investing goals. If not, there’s no reason to waste any further time or energy. As an example:

You receive a deal alert and pull these details:

• Asset Type: B-class multifamily
• Market: Dallas, TX
• Hold time: 5 years
• Minimum investment: $50,000
• Fund Deadline: 3 weeks from today

With this simple, at-a-glance information, you’re able to immediately see that although this is the perfect asset class and market you wanted, you are aiming for a longer hold or an emerging market. Or perhaps you already know you need more than 3 weeks to access your capital. PASS.

Another deal will pop up shortly and you’ll get opportunity after opportunity to practice this little exercise. At some point, the details will all be exactly what you’ve been waiting for and you’ll get to dig deeper.

The Numbers

Once you’ve decided a deal’s initial look aligns with your goals, it’s time to dig further into the investment summary and explore.

As an example, you might learn that this particular deal is offering:

• 8% preferred return
• 9% average cash-on-cash return
• 17% IRR
• 20% average annual return including sale
• 0x equity multiple

But what does all that mean for you and your $50,000?

In time, you’ll get lightning-quick at this and know right away what all of that means, but right now, let’s pretend this is your first go.

Preferred Return & Cash-on-Cash Return

Preferred return, a common structure for deals, means that the first percentage (in this case, 8%) of returns go 100% to the limited partner passive investors. Sponsors don’t receive any returns until the property earns more than that.

This means that if you invested 50K and everything went according to plan, you should see 8% of $50,000 or $4,000 this year, which breaks down to $333 per month.

Since cash-on-cash returns are projected at 9%, that tells you that this deal is projected to pay out above the 8% preferred return at some point.

Equity Multiple

The next fun number on the list is the equity multiple. This number quickly tells you how much your investment is expected to grow during the project.

Continuing on the example above, your $50,000 investment with a 2x equity multiple should work out to $100,000 once the asset is sold. This accounts for the cash flow distributions plus the profits from the sale.

We typically aim for a 1.75x – 2x equity multiple on deals, so you can use that as your benchmark.

Average Annual Return & IRR

My last two concerns when initially examining a new deal alert are the average annual return and the IRR.

The average annual return tells you what the average earnings are, averaged over the hold time.

In the example above, we discovered that your $50,000 is expected to double to $100,000 over the next 5 years. That total return is 100% of your original investment, and when divided over the 5 year hold period, we see that your average annual return is 20%.

The IRR (internal rate of return) is the average annual return (in this example 20%) and adjusts for the time delay. Since the majority of your earnings are expected later, at the sale, and time has cost associated with it, the IRR takes that into account. An IRR of 14% or more is a great target.

The Decision

After this 5-minute analysis of these data points, you should be able to tell is this deal is a potential yes or no for you. This isn’t a final decision and it doesn’t mean you’re putting in a wire transfer this afternoon, but it does mean you can decide to spend more time reading into the investment summary or not, and you can make that decision with confidence.

If these numbers align with your investing goals, you can go ahead and let the sponsor know you’re interested by requesting the full investment summary or submitting a soft reserve.

Conclusion

New investment deal opportunities can be exciting, but if you get lost in the weeds too quickly, they can become overwhelming too.

Whether you’ve had funds ready for weeks or are still in limbo getting them rolled over into a self-directed IRA, it’s imperative to know exactly what you’re looking for so you can jump on the perfect deal and minimize wasted time.

With the data points, you learned to look at in this post, you’ll be able to identify if a deal is even worth your time and energy right off the bat.

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​The two terms, financial independence and financial freedom are used interchangeably, but what does financial independence really mean, and how’s it different from financial freedom?

Consider a toddler learning to walk. Once they figure out how to pull up and take a few steps on their own, they have achieved a new mobility level. They may not need their parents to carry them from room to room as often.

However, you wouldn’t expect that same toddler to walk the entire Zoo visit or walk all the way to the park the following day. They haven’t achieved full FREEDOM yet, although that subject will be revisited around the age of 18.

Money works the same way. Let’s dissect what it means to be financially independent vs. financially free and how investing in real estate can help get you there.

Financial Freedom vs. Financial Independence

Think about that same toddler who just learned to walk. Maybe your finances have reached “mobility,” and you have enough passive income (outside your salaried job) to cover your basic expenses. Can you lose your job and not sweat it? Do you have a fully-funded emergency fund? Will your passive income fund your current lifestyle indefinitely?

Savings is highly recommended, but it will eventually run out if it’s funding your lifestyle for any extended period. However, ongoing passive income is created while you sleep.

To achieve financial independence or financial freedom, you’ll need to build multiple streams of passive income over time. Thus, it’s called a financial journey.

Milestone #1 – Financial Security

If your salary disappeared for some reason right now and you still had enough money coming in from other sources to cover your basic living expenses, that would be financial security.

Sure, you might have an emergency fund, but what if finding new employment takes longer than expected and that stash of cash runs dry? This is precisely why external sources of income are critical.

Becoming financially secure is the first step toward financial freedom and early retirement.

Milestone #2 – Financial Independence

Being financially secure means you can cover all the bare-bones basics to survive. Still, being financially independent means that you can cover those basics plus a few conveniences or luxuries like dining out, family vacations, and shopping sprees.

Financial independence allows you to retire early and maintain your current lifestyle without working ever again. Multiple streams of passive income can fund your lifestyle while you choose what you want to do day-to-day.

Milestone #3 – Financial Freedom

True financial freedom is one step beyond financial independence. Financially free individuals’ passive income can fund the luxurious, travel-inspired, do-what-I-want lifestyle.

Financial freedom means you can make choices like flying first class, upgrading to the ocean-view suite, and bringing a friend pro-bono without worrying about where the money is coming from.

Your Path to Being Financially Free

Everyone’s financial journey begins from a different place, with different numbers and circumstances. However, the ultimate goal and the milestones along the journey are the same.

You know that living paycheck-to-paycheck is not for you. You’re aware of the possibilities for your future and your financial situation as a result of carefully planned budgeting and investing. This also means you’re going to need some passive income goals against which to measure and gauge your progress down the path.

Financial Security Number

Take a look at your current expenses (bills + anything you pay for), and extract the costs for the basics. How much on average do you spend on food, shelter, clothing, and other basics?

That’s your financial security number – the amount you need in passive income to become financially secure.

Financial Independence Number

Next, take a look at your current finances and lifestyle in totality, what does it take to fund the whole enchilada? The basics (those covered by the financial security number) plus all the enjoyable conveniences and comforts you spend money on in total, equals the monthly amount you need in passive income to achieve financial Independence.

When you build enough streams of passive income to completely cover your current lifestyle, that’s financial independence. You’re financially independent from needing to work.

Financial Freedom Number

Once you have calculated your financial independence number, take a step back, and consider the things you WANT to afford. Find out how much money the lifestyle you dream of will cost. This dream lifestyle number is your financial freedom number.

Your final steps along the financial journey path include building multiple streams of income so that the passive income you earn is enough to fully fund this dream lifestyle and help you achieve true financial freedom.

How to Achieve Financial Freedom Through Investing in Real Estate

There are a million ways to generate passive income streams. You might become an author, design an app, or start a business, but all of those require significant skills and knowledge the average Jo doesn’t have.

However, more people have become millionaires through investing in real estate. Why? Because it’s so simple!

You buy a property and rent it out. Sounds like the game of Monopoly – pretty simple, right?

Investing in Rental Properties

Let’s pretend you’ve saved up $20,000 for an investment. You put $15,000 down on a rental home and use $5,000 to boost curb appeal and refresh the paint. A nice couple rents the place and their consistent rent payment more than covers the mortgage payments so you’re earning cash flow each month.

$250 per month in excess cash flow after the mortgage and taxes are paid isn’t much and won’t create financial freedom on its own, but it’s a step in the right direction! Add a rental home like this to your portfolio every year and within 5 years, you’ll be up to $1,250 per month in rental income.

It’s not fast, and there’s no magic pill, but if you take the time to build slowly, you’ll get there.

Investing in Real Estate Syndications

An alternate way to invest in real estate and avoid the messiness of remodels and tenant woes is to invest in real estate syndications.

In these types of group investments, several investors pool their money – $50,000 – $200,000 each – and the money is pieced together to cover the down payment and the cost of renovations on a much larger-scale property.

You’d be a passive investor, while the general partners (also called sponsors) are responsible for property management, renovation coordination, and occupancy rates. Sponsors do receive a cut of the returns for their work, but the majority of the profits go to investors.

As an example, a $50,000 investment into a real estate syndication with a 10% return, will produce about $400 per month in cash flow. Syndications are truly passive because your money makes money and you have no active responsibilities.

Real estate syndications are available in different markets and asset classes, which allow you to diversify and build multiple streams of income quickly.

Enjoy Your Journey to Financial Freedom

There’s no one right or wrong path to financial freedom just as there’s no single type of real estate investment that will accelerate your journey the fastest.

Real estate can be the easy, slow and steady approach to financial freedom no matter which stage of financial security you’re at now. You’ll enjoy the journey most if you focus on the lessons, relationships, and surprises you’ll experience along the way.