By Harman Nagi and Anish Patel

Peter Lohmann - Engineer Turned Property Management Firm CEO

Peter received his Bachelor’s in electrical engineering and spent 5 years in the control system engineering industry before founding RL Property Management, which now manages over 700 units.

• More balanced market: This is one of many news sources that is pushing the narrative of a more balanced real estate market in 2024. As mortgage rates begin to settle, buyers are building increased confidence. In turn, sellers are bringing more homes to market. The TreppWire podcast also reported increased transaction volumes indicating a narrowing of the “bid ask spread”; in other words what buyers are willing to pay and what sellers are willing to sell for seem to be coming into closer alignment. » Implication: This is a double edged sword. On one end, you’ll have more listings to consider as investment opportunities; however, there will also be more competition. An off-market deal sourcing approach can circumvent these dynamics.

• Zillow’s 2024 hot housing markets: Zillow predicted the hottest housing markets in 2024, which considers local home value growth, transaction velocity, job growth per new home permitted, and growth in owner-occupied households. Buffalo, Cincinnati, Columbus, Indianapolis, Providence, Atlanta, Charlotte, Cleveland, Orlando, and Tampa came in the top 10. » Implication: If you are still trying to figure out a target market, this list is a good place to start! If you’re already working on a market that is not on this list, don’t necessarily take these types of articles as your queue to shift your focus away. So long as you are focusing on a market with solid fundamentals (e.g., growing population, diversified economy, health supply / demand, etc.) you will still find gems.

• Decline in national rent growth for the first time since 2020: Radix reported YoY national effective rent growth went negative for the first time since 2020. However, the drop was modest and is a bit of a red herring as overall rents have increased 15% over the past 6 yers and has simply returned to its long term average range. » Implication: You may see scary headlines baiting you into more anxiety and worry than warranted. While continued headwinds for rent growth are expected, primarily driven by increased supply, we should acknowledge that the extreme rent growth seen post pandemic is more the exception than the rule. Always underwrite your rent growth assumptions conservatively.

Even a broken clock is right two times a day…

Data visualization expert, James Eagle, compared actual Bank of England policy rates to the OIS forward curve, which represents the market’s expectations for the Federal Reserve’s daily target for overnight lending rates. Increases in rates were predicted for years before it finally happened. Keep this in mind as you see interest rate predictions across the internet.

Real Estate is Like Ice Cream

By Harman Nagi

Active vs Passive Real Estate

I was drawn to real estate investing by the idea of passive income, or as people colloquially say “making money while you sleep.” My conception of it was that you do a bunch of upfront work to pick a market → build a team of agents, lenders, property managers → analyze deals and make offers → buy a property → maybe do some renovations to stabilize the property → and then, once all that’s done, you get to sit on a beach and check your bank statements once a month to see the figurative “mailbox money” roll in. 

What I’ve come to realize after 4 years of real estate investing is that passive income is a bit of a mirage. While it’s true that most of the work is upfront, there’s still ongoing property management and asset management work: tenants move out, the market changes, the property manager isn’t doing a good job, accounting and bookkeeping, do you hold the asset or do you sell and trade up into a bigger/better property, etc etc. There are always things to do and decisions to be made. 

So it’s better to think of passive income on a spectrum, rather than as a binary (active vs passive) concept. Different real estate asset classes have different levels of involvement, and even within an asset class you can take a more hands-on approach or a more passive approach. For example, in short-term rentals you can self-manage the property (do all the guest communication, coordinating with cleaners and contractors, pricing, and marketing yourself) or you can hire a property manager. If you self-manage, your returns should be higher, but you’ll of course have to do a lot more work. 

Is the trade-off of more work for higher returns worth it? Should you take a more active or more passive approach? Well, that depends. It depends on what your goals are. It depends on how much bandwidth you have. It depends on how much patience you have. Let’s first talk about the different asset classes / strategies and where they fall on the passive to active spectrum, and then we’ll unpack each of these factors one at a time. 

Real Estate Strategies

Investing in syndications: Syndications are a method of pooling funds from multiple investors to collectively invest in a real estate project. These are large commercial real estate projects: apartment buildings/complexes with hundreds of units, industrial properties, office towers, shopping centers, hotels, and everything else under the sun. A typical syndication might be a $20 Million, 300 door apartment complex purchased by 99 different investors, each putting up $50,000–$1,000,000.

There are two sides to syndications: the general partners (“GP”) and the limited partners (“LP”). The GPs do literally all the work from sourcing, managing, and executing the real estate investments. The LPs just cut the checks to fund the deals, and enjoy all the benefits of real estate investing including cash flow, appreciation, and tax benefits without actively managing the property. At the end of the project the GPs and LPs split the profits based on a schedule laid out in the deal’s prospectus. Syndications are basically the dividend stocks of real estate. That’s not to say there isn’t work involved – there’s a TON of upfront education and due diligence that should be performed by LPs (more on this in future newsletters), but once that’s done and the funds are wired into the deal, there’s literally nothing for the LPs to do but read the periodic reports from the GPs.  

Private lending: Private lending is similar to syndications except on a smaller scale. Whereas a syndication will involve dozens or even hundreds of investors, private lending is usually on a 1:1 basis where an individual will lend directly to a borrower. The borrower uses the funds to go out and execute their real estate strategy, and pays the lender an agreed upon rate of return. These deals can either be debt deals where the lender is owed an interest payment no matter how the deal performs (lower risk, but also lower return), or equity deals where the borrower shares in both the upside and downside (higher risk, but potentially higher reward). Even though the lender isn’t managing the real estate, because of the more personal nature of these deals there tends to be more oversight required compared to syndications. However, once the private lender has had a few successful deals with a borrower, repeat transactions can become more hands-off and passive.  

Commercial / NNN assets: Commercial real estate, broadly speaking, refers to properties used for business or income-generating purposes rather than residential living. It includes a variety of property types such as office buildings, retail spaces, industrial facilities, and multifamily apartment buildings. Commercial real estate is leased to businesses, and businesses tend to stay a long time (it’s not uncommon for commercial tenants to stay for decades) so there’s a lot less turnover. Moreover, a triple-net lease (“NNN”) is a type of lease agreement where the tenant pays for three "nets," which are property taxes, building insurance, and maintenance costs. These can offer investors the opportunity for stable and predictable income, especially when leased to creditworthy tenants.

Buy and hold houses: This is the bread and butter real estate investing strategy, what most people think of when they think of real estate investing. You buy a house (usually a single-family house, but sometimes a duplex, triplex, or fourplex) with a conventional mortgage and rent it out to tenants who live there. Over the holding period, the rent from tenants provides a stream of cash flow, the mortgage gets paid down, and the property hopefully appreciates. If you buy a house every couple of years, this is a simple and powerful long-term wealth building strategy (a “get rich slowly” scheme). A ninja hack is to buy the house and live in it yourself for a year – since owner-occupied financing has lower interest rates and smaller down payments required vs investment loans – then move out and rent it, go buy another house and do it all over again 

BRRRRs: BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It’s a buy and hold strategy but with some additional work upfront:

• Buy: Purchase a property at a below-market price to create instant equity, which often involves finding distressed properties 

• Rehab: Invest in the property by rehabbing it to increase the property's value and make it more appealing to tenants 

• Rent: Once the property is renovated, find and place tenants to generate positive cash flow

• Refinance: Refinance the property to access the increased equity and pull money out

• Repeat: Do it all over again!

Done correctly, it’s a systematic approach to building a real estate portfolio by recycling capital from one property to another. It’s basically the mullet version of buy and hold investing: more business upfront, but a party in the back!

Short-term rentals: Known informally as “Airbnbs”, STRs are an asset class that has really blossomed in the past decade. There are two genres of STRs: vacation rentals in mountain, lake, beach, and national park destinations and urban market rentals in cities. In my view, we’re now in STR v3.0. v1.0 started as basically paid couch-surfing: people renting out basements, spare rooms, or even just couches for extra pocket money. In v2.0 people realized that Airbnb’ing could be a business, so investors started buying properties for the sole purpose of short-term renting them. As the industry has matured and competition has grown, we’re now in v3.0, the era of the professional host. On the one hand, there are now a ton of apps that facilitate and streamline the day to day operations & management, such as coordinating cleaners in between guests. On the other hand, the bar is a LOT higher to compete and stand out. It’s a marketplace economy, where the winners can make outsized profits, but it takes a lot of work to win. 

Time for some Soul Searching

Now, let’s circle back to the question of “what should I do?” Do you just want to invest your money and earn a nice yield, or do you want to invest your money and time and be an operator?

Here’s the good news: it doesn’t have an either-or, all-or-nothing decision! For one, you can be both an active and a passive investor. I believe that in active real estate you should pick just one strategy and get really good at it. But investing passively with top-notch operators in other asset classes is a great way to diversify your portfolio and get exposure to other asset classes. 

For example, I have a few long-term rentals (that were BRRRR deals) and a couple of STRs. I like the dopamine rush of getting new booking notifications, using ChatGPT to optimize my listings, running direct marketing campaigns, and managing my portfolio’s P&L. But I also invest in real estate syndications from my 401k. I like reading the monthly reports for my industrial, multifamily, and build-to-rent syndications and learning first hand about other types of real estate. 

Second, you can vary your capital and time allocation over time to adjust to your life context. In 2022 I was very focused on setting up my STRs. In 2023 we had our first kid, so because my time and mental bandwidth was limited I only invested in syndications. Looking ahead to 2024, I’m focused on adding another STR to my portfolio. 

Indeed, real estate is like ice cream: you can mix and match scoops of active and passive real estate to get the best of both worlds. 

This is only our second Pixels and Properties newsletter! We’d deeply appreciate any feedback or insights you might have. Was it too long, too short, or missing something? Anything you would like us to cover in future newsletters? We’d love to hear from you! Please reply and tell us what you thought!

The views and opinions expressed in this newsletter are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Please contact your legal, tax, and financial professionals before considering any investment.