5 Passive Income Investment Traps To Avoid
Passive income investments are critical. Far more important than just trying to save a nest egg of cash. Yet, there are traps to avoid.
1. The Risk of Low Returns
Risk and returns are a balancing act on a scale. Too much risk and you may never see the returns or get your capital returned. Go too heavy the other way, and you won’t see enough returns. That is a whole other type of risk which is often ignored. If yields are too low, any promised returns could be eaten up by inflation and taxes, actually leaving you in a net negative situation.
2. Not Truly Passive
Some types of investments are promoted as being ‘passive’ but are far from it. Single-family rental homes and Airbnb condos are a classic example of this. If you are managing them yourself, being a hands-on landlord is actually a ton of work. It’s nights, weekends and holidays. It’s stressful and intensive. If you are already working 100 hours a week, then it may be a nice break and a bigger paycheck, but it may not give you passive income.
3. Delegating to Inexperienced Management
The above can be fixed by choosing a turnkey real estate investment or participating in a real estate partnership. It all comes down to the experience of the managers and their ability to execute and deliver on the promised returns. They have to be good at marketing units, leasing and dealing with tenants daily.
4. Lack of Diversification
Diversification is essential for consistency in passive income. If you only have one massive rental home in The Hamptons which rents for the summer season, that is a lot of risks to take on. You are held ransom by the weather, fashion trends, transportation costs, and more. If instead, you had a piece of 100 rental apartments for the same capital investment, you may be 100x more likely to bring in income in any given month. Geographic diversity is important too. By spreading your capital across investments in several markets, you’ll never see all of your income sources hit at the same time.
5. Not Maximizing Tax Saving Opportunities
Investors who are not taking advantage of the tax savings the IRS has offered are just throwing away money every year. Missing out on the compounding potential of that investable capital can quickly scale to millions of losses over the years. Money that will have to be made up with hard earned income. There are plenty of tax saving investment tools and breaks the IRS expects you to make use of. Don’t ignore them.
ABOUT THE AUTHOR
Bill Zahller is the Managing Partner of Park Capital Partners, LLC and resides in Asheville, NC. As a Multifamily Real Estate Investor and Syndicator, he founded Park Capital Partners, LLC in 2016 after 14 years involvement in real estate investment. He works with accredited investors and professionals who are interested in real estate investment, diversification, and financial freedom.
Bill has been flying since high school. His father was a Naval Aviator and Captain for TWA. Bill has been flying professionally for over 25 years, 23 of those at his current company. He has accumulated over 12,000 hours and 7 Jet type ratings. He has also held Instructor, IOE Instructor and NRFO pilot positions with a large fractional flight company. He is currently flying the Global 6000 in a long range mission capacity. This keeps it interesting – one week its Beijing or Sydney; the next Rio or Rome.
Bill is also the founder of the Asheville Multifamily Investor Club. Visit www.ParkCapitalPartnersLLC.com for more information.