I have been a residential real estate agent for 7 years and during that time I’ve sold more than 300 homes and $350,000,000 worth of residential real estate. In order to get there I had to show thousands of properties, take tens of thousands of calls/texts, and spend time honing in my craft of selling in my market, Denver Colorado. I’ve lived the intense highs and crushing lows that this industry is bound to bring and navigated the challenges of growing a 100% commission-based service business from scratch.
So you can trust me when I say, I know what it is like to live with limited bandwidth, a constant fight for my attention, and an overall pressure to do “more” at all times. This is why I’m passionate about the topic of residential real estate agents finding a lane in passive real estate investing and focusing on buying back their time. We as real estate agents have a unique opportunity to make a lucrative income while building an incredible network and affecting our local communities. The tradeoff for these rewards is our time, which is often stolen from us at a moment's notice in service of others. And while that it not a bad thing, most agents lose the ability to say no, set boundaries, and use their time in ways that serve themselves or their families in addition to their clientele.
I’m going to share with you my top 5 reasons why I personally started investing all of my extra income into passive investments and how that has allowed me to take the pressure off my day-to-day sales career although I am very much still an active and producing real estate agent. I’ve found that many agents aren’t aware of some of these advantages and therefore have never focused on their investments outside of their primary home or a small portfolio of single-family properties. Let’s change that.
1. Time Management
As a real estate agent, your biggest asset is your time. I know agents who coach, start property management firms, flip homes, and even develop. However, if you boil down these efforts in a dollars-per-hour framework you’ll be hard-pressed to beat the amount of income you can make simply selling homes in your market.
Agents are notoriously distracted, I can say that as one of them! So it is easy to get pulled in many different directions without ever outlining a strategy to building wealth. Worse still, the more time put into these side efforts that yield you lower incomes, the less time is going to your high-income per-hour activities (selling homes). If you’re attempting to both a) have a high income and b) a life then you’ll need to focus diligently on your buyers and sellers while removing the burden of time from your wealth building.
2. REP Status
Real estate agents by default have Real Estate Professional (REP) status with the IRS. This means that they can use depreciation and passive losses against their active income, lowering their federal tax burden all the way to zero in some cases. People think that Donald Trump is a tax evader, not true. He has REP status which allows him to depreciate his properties against active income. Since he has so many large properties he can do this year after year and carry his depreciation forward against active income for life. This is YUGE!
As a real estate agent, you too have REP status. I’ll give you an example. Say you invest $100,000 in a 100-unit multifamily deal with 10 other investors and that as an investor in this property, you are given the pass-through tax advantages. You invest in the deal, and your sponsor closes and performs a cost segregation study, since this is a value-add deal with 100 units there are many items in the building to depreciate. The cost segregation study comes back with $1,000,000 of bonus depreciation to claim. Since you’re working with an operator who allows their investors to participate in the entire tax benefits, you get your claim of 1/10th of the bonus depreciation, or $100,000. You essentially just bought yourself a $100,000 write-off against your active residential real estate income that year! If you made $350,000 that year after other business deductions and expenses, you now get to slice that down to $250,000 my friends and save tens of thousands on this year’s tax bill! (*please note I am not a CPA and this is not financial advice)
I can’t overstate how massive this is for residential real estate agents. Career investors spend hundreds of hours each year attempting to gain REP status with the IRS because of how lucrative it is. There is no other career field in the country that allows for this scale of tax relief and you get to take advantage of it automatically as a real estate agent. How great is that!?
3. Active Investing is Overrated in this Market Cycle
I get it, I too thought at the time that my way to wealth was to buy one or two properties a year in my market and slowly amass a portfolio of single-family homes. In fact, that’s exactly what I did to start! My wife and I committed to buying 2 properties per year between 2019 and 2022 and by almost every metric it went great. We bought right, amassed a small portfolio of single-family homes and duplexes in our market and out of state, and cash flowed the every house.
What wasn’t so great? The endless barrage of tasks and decisions I had to make as a landlord. Mind you, I had professional property managers for every property and yet, I still had weekly to-dos for this small portfolio of 6 units across 2 states. Couple that with the activity in the residential market at that time and safe to say I didn’t feel like I was getting any room to breathe.
Remember, in 2019-2022 we were in an environment of cheap debt, high demand, and levels of YoY rent growth that have never been seen nationally. Single-family homes worked as an investment vehicle. If you found a property even slightly under-market in value, by the time you closed you could walk into a positive equity position, grab a tenant for above comparable rents, wrap it with a 3% mortgage at 15-20% down, and call it a day. It worked every single time.
Now… good luck. Interest rates have tripled while prices and rents are flat. That means, for every property you purchase you need to triple your down payment in order to keep the same cash flow. Going from 20% down to 60% down doesn’t make any sense as an individual investor. In expensive markets like mine where the average home is $700,000, that means that an individual investor needs to save almost half a million dollars before she can cash flow on her investment. That is far too much money to tie to one single-family home and decimates your return on equity calculation (the amount of wealth you generate from each dollar of equity you have in a property).
However, by this very same logic, the world of passive investing is RIPE for opportunities as an investor. That’s because in multifamily and commercial real estate assets, most debt is financed on short term adjustable notes. The hasty escalation of rates has caused balance sheet distress for many property owners forcing many to be sellers.
As Warren Buffet says, be fearful when others are greedy and greedy when others are fearful. This market cycle might be the right time to adjust your investing strategy and focus on what is most opportunistic, not what you’ve done in the past.
4. Building your Network
Before I started passive investing I had no idea this would even make my list of top reasons to do so. However, I can confidently say that as a result of passive investing, I have done far more in my sales business than when I was active investing. That is because the people you meet when passive investing are all fairly high net-worth individuals. The operator who you are partnering with to buy that 100 unit deal usually has a personal balance sheet that can substantiate that level of investment with a bank. They have hard assets, a high net worth, and influence. Pretty much the dream scenario for someone looking to build a client list. And guess what, you’re offering them value by being an investor! Now that you’re “in business” with this operator, they are not likely to forget you. In fact, they are probably in communication with you on a routine level by default.
So as an agent, now not only are you reaping the rewards of investing your active income into a vehicle that doesn’t take more of your time, but you are also investing in your primary business by simply extending your network.
Again, when I started passive investing I had no idea this would be such a large benefit but I’ve done over $10,000,000 in sales business within the last 12 months simply from the network effect my passive investments have had on my reputation as a real estate agent. Incredible!
5. Risk and Liability
When you’re investing in a single-family home or small multifamily one unit empty means the property is either cash-flowing or it isn’t, it’s black and white. Not to mention, the entire liability of the debt service is on your balance sheet as a property owner.
As a passive investor in something like a multifamily apartment building, you’re not signing on the loan, opening a bank account, hiring managers, or anything that an active investment would require. Not to mention, it usually takes 30%-45% of total vacancy before apartment building owners start to lose the ability to pay the debt service in full every month. That means in a 100-unit apartment complex 30-45 of the units have to sit vacant before the apartment building owner is in the same position as the single-family owner who sat vacant on one unit.
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About the Author:
Stuart Crowell serves as the founder and Principal of Crowell Capital, a private equity firm that specializes in providing passive investment opportunities to its limited partners through various financial vehicles such as funds and syndications. The firm primarily focuses on enhancing the value of multifamily properties. To date, Crowell Capital has invested in more than 1,200 units, totaling a combined value of over $90 million. Stuart’s key responsibilities encompass overseeing acquisitions, securing investor capital, managing investor relationships, and forming strategic partnerships with highly regarded operators in the field. Prior to his involvement in private equity, Stuart gained experience in selling high-end real estate, amassing a sales volume exceeding $350 million. His advisory role involved working with high-net-worth individuals to optimize their residential property portfolios. Currently, Stuart resides in Denver, Colorado, along with his wife and daughter. He holds both a Bachelor of Arts and a Master of Business Administration degree from George Mason University in Fairfax, Virginia.
