Passive Income Is A Lie

Author’s note: I’m trying something new with this top section, making it more of a ‘how to’ - let me know if you want more of this!

I’m convinced that Warren Buffet’s admonishment “if you don’t find a way to make money while you sleep, you will work until you die” unwittingly spawned a legion of investing ‘gurus’ selling the dream of making money while you sleep in what they are calling “passive income.”

The favorite asset class of these scammers gurus is often real estate. You buy a house, rent it out, and watch the checks roll in! Sounds too good to be true? Yeah, well, as the saying goes.

The secret of any investment is time, so of course there is the ‘boring middle’ to any investment, but there is never a time where sleeping on your investments will pay off - monitoring, pruning, and intentionality are all best practices when investing.

In the off chance, you, like millions of Americans, are thinking about investing in real estate: first, awesome - really good idea to diversify away from your other holdings. Second, this is not easy, but it’s also not impossible. Third, be smart about this. You’re going to be owning another home, apartment, or structure of some kind. There will be upkeep. There will be times when finding a renter is hard. A flood, fire, leaky roof, it all costs and it is the furthest thing from passive. This is where doing the proper due diligence is key.

When evaluating any real estate investment, first we want to get a recent rent roll from the landlord so we know what the target property produces in income.

Next, we want to ask the current owner for maintenance records - I say ask because some will not give you this information (for a variety of reasons) so you may have to guesstimate - but don’t skip this step. These are all the costs you should factor in and then break that down by year. For example, if every three years you have to replace the hot water tank that costs $1,200, you want to figure that as a $400 per year cost. Now, once you know the income and costs of owning the asset, the math becomes easy.

If we want earn, say, 8% on our money (an average return) and we’re presented with a property that nets (net = income - upkeep expenses) $80,000 a year then we can’t pay more than $1,000,000 for the property. I got there by dividing $80,000 in net income by my desired rate of return. If I paid more than $1,000,000 for this property, I would not hit my desired return. Once you know the income, expenses, and your desired rate of return you can quickly eliminate investments that don’t make sense either because it does not produce enough income or because the seller is simply overpricing his property. This is a quick way to find real estate that makes sense for you and your goals.

Economic Data. After last week’s rosy unemployment data the case for a rate cut, further fueling the market, appears to have solidified. This week the Jerome Powell, chairman of the Federal Reserve, will testify before the joint economic committee. As usual, the market will likely hang on his every word so watch out for volatility on Tuesday and Wednesday. Also Wednesday we have a 10 year treasury note auction, this important because it will provide insights into investor confidence, interest rate expectations, and potential future economic conditions. If we see strong demand in this auction, we should get a real view on where rates are headed. Speaking of rates, we get another CPI print on Thursday along with initial jobless claims. If we continue to see CPI cooling and jobless claims tick up, the rate cut may be all but penciled in for September. Let’s see what happens! (Thanks to Neil Dutta of Renmac for the chart below).

The Championships. Wimbledon comes to a close this week. Alcaraz and Tiafoe had an epic five setter Friday, and now Alcaraz is nearly neck-and-neck with Sinner to hoist the Challenge Cup next Sunday. On the ladies side, the punters are sweet on our very own Coco Gauff, and now with Swiantek out tournament may be Coco’s to lose. Keys had to withdraw earlier today, but with six more Americans in the draw - including the incredible Danielle Collins who announced her retirement in February. Since then she’s been crushing it and is now the ranked 7thin the world, after ending 2023 at the 55 spot. An all American final is still alive on both sides of the draw, but for the Ladies’ we’ll need Collins and Gauf to make outstanding runs to the finish. Should be fun to watch!