Real Estate Investing Myths: Debunking 5 Common Misconceptions About Passive Income

January 29, 2025

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Creating Wealth Simplified | Investing Myths

 

Passive real estate investing can be a powerful way to build wealth, but myths and misinformation often cloud the path to success. Host Chris Seveney dives into the most common real estate investing myths, breaking them down with practical insights and personal stories. Whether it’s about the effort required, the risks involved, or the misconception that you need to be wealthy to start, this episode clears the air. Chris shares actionable advice on navigating passive investing, avoiding scams, and making informed decisions. Perfect for anyone curious about real estate investing or looking to refine their approach, this discussion provides clarity and guidance to help you invest smarter.

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Real Estate Investing Myths: Debunking 5 Common Misconceptions About Passive Income

Welcome back, everybody, to another episode of the show. We are going to touch upon five myths about passive real estate investing debunked. I see a lot of information that’s always flowing out there about passive real estate investing. I see ads on Facebook, LinkedIn, Instagram, and Twitter. I see people posting on BiggerPockets all this hoopla on passive investing.

To be honest, 90% of it is full of BS. I say that because in this environment and this world, I find everybody is looking for instant gratification, that get-rich-quick scheme and because of that, I think it leads to a lot of misconceptions about passive investing, which leads to why it’s misunderstood. I’ll share some personal stories and observations and some of these common misconceptions throughout this episode. Hopefully, it will provide you with some additional insight into passive investing, what it is, what it isn’t and again, we’re going to touch upon these five myths.

Myth #1: Passive Real Estate Investing Requires Zero Effort

Let’s dive in and start with myth number one. Passive investing requires zero effort. Passive investing can be hands-off but still requires effort. What does that mean? Upfront due diligence. I cannot tell you how many times I’ve heard from people who didn’t do any upfront research and due diligence. I’ll start with the first thing to never ever do, if you’re going to invest passively. That is listen to a friend, a colleague, a coworker, or somebody online. I don’t care if they have a show or whatnot. Do your own research.

I’ll share a few stories. One was, I’m in note investing, and somebody wanted to invest with someone because they saw online that they had like a thousand YouTube videos. They’re all over the place online and sound so reputable. The person asked a question in a Facebook group, “What do you know about this person?” Somebody posted a link to a website where it had all the lawsuits against this person. The response from the person who asked the question was, “I can’t believe this. This person has such a good social media presence. They sound so intelligent. I can’t believe this.”

I’ll tell people, just because someone has a big social media presence, it means they’re a good marketer. That’s all it means. I can tell you again, going back to the information I’ve seen. It’s all the same recycled content, just said differently. Another thing I’ll say on upfront due diligence is people don’t understand what they’re investing in. They don’t read that private placement memorandum or the offering or even understand it. If I’m investing $50,000 in something, I’m going to spend $500 to have an attorney review it and tell me what’s my risk and what’s involved.

I’ll share another example of a fund that I’d say is similar to ours. They were giving returns that were slightly above ours. Most people on a note fund are between, call it, 8% and 12%. This person bumped up to like 15% to 18%. I’m scratching my head on how they’re getting there. When they bumped it up, they turned around and raised $10 million, $20 million, or $30 million-plus from people all at the same time because everyone was looking at the shiny object of, “This is what the return I’m going to get. This is what I’m guaranteed.”

You’re not guaranteed. That’s a target. People throw out high numbers. It’s no different than going to a car dealership and saying, “You can get into a Mercedes for $30,000.” When you get there, the $30,000 is not the vehicle you want. It’s the inverse with some of these returns. If all the moons align and everything happens exactly the way it should, maybe they hit that. That’s how some operators operate.

You need to do your upfront due diligence. You should be able to articulate to a friend exactly what it is you’re investing in and what the risks are. That person should know nothing about it. Think about walking up to somebody and explaining to them the first time how to do something. If you can do that then you’re ready to invest. If you don’t understand it, you’re not ready.

The other is understanding that due diligence process of vetting the sponsor. Google their name. Google lawsuit or their fund or what’s their experience. The way I’ve explained to people is I’ve got two kids. We’ve never had to hire a nanny but if you were to hire, how would you research that person? Would you take their resume and say, “Great.” Would you listen to a show that they’re on and say, “Great.” No, you’re going to dive in and understand because for most people, for me, at least, my kids are the most important thing.

You should basically treat your money in a very similar fashion. To me, kids are much more important but you get one. Let’s jump to myth number two. I spent a little bit too much time on number one but that’s okay because it’s important to do that work up front because everybody who ever loses money skip step one in a lot of instances. They don’t understand what they’re getting into.

Myth #2: You Need A Lot Of Money To Get Started

Number two, you need a lot of money to get started. Passive investing is not only for the wealthy. It’s not only for accredited investors. I’ll share again, we have a fund open to accredited and non-accredited investors that you can start with $5,000. We’ve had people who start with $5,000 and say, “I get 8%. I only get $38 a month.” Where are you going to get something better? You can go put it in Bitcoin or in the stock market. You got to evaluate the risk return but you don’t need $100,000 to get started.

Creating Wealth Simplified | Investing Myths

Investing Myths: Passive investing is not only for the wealthy. It’s not only for accredited investors.

 

For me, I’ve spoken to a lot of people who want to invest in funds, continue to grow and understand that due diligence process and paying $5,000 to get into a fund and see how it’s managed and operated, see what you like and don’t like. To me, it’s that knowledge itself. Hopefully, you should continue to make some money on this thing. It’s like free education.

Also, these smaller amounts allow you to diversify between funds. I’m an accredited investor. If I have $100,000 to spend, I don’t want to put it all in one fund. I’d rather put ten funds at $10,000 or five at $20,000 because you can diversify. If you have $20,000, there’s plenty of opportunities out there of funds. They’re not just real estate. They’re everything.

Myth #3: Passive Investing Is Risk-Free

Our original broker dealer is Dalmore. You can go to their website, DalmoreGroup.com. They got all different types of offerings. You can invest in racehorses. You can invest in hamburger and flipping machines. You can invest in short-term rentals and in notes like our fund. There’s so much out there. A lot of them are $500 or $1,000. Some of them may go belly up, but that’s part of investing as well, which leads to myth number three, it is risk-free. Passive investing has risk.

Multifamily investors have seen that over the last several years. Recency bias was a few years ago and everyone was getting nice, fat, and happy of the returns in multifamily. You didn’t invest to manage an asset. You could buy it and just do nothing with it and sell it three months later and make money. That has changed, interest rate environment and managing the asset. Some people are good managers and still deals go bad.

Some people are poor managers and deals have gone really bad. Original investing is no different. It needs a balanced risk reward. People invest passively in our fund and expect us to manage it properly. One of the ways we target and focus on that is balancing and diversifying our portfolio, performing loans and non-performing loans. What do our performing loan portfolio looks like? What’s our non-performing portfolio look like? That’s a way to mitigate risk.

If it’s one asset, you’re sinking or swimming on that one asset. If you have 50 to 100 assets and if one goes bad, it shouldn’t have a major impact on that opportunity on that fund. Other mitigation tips on things we look for is diversification can mean many different things. It can mean the asset class, the location, or the asset type. What I mean by that, I’m not buying all my notes in Tampa, Florida. We’re in twenty different states. We have performing and non-performing.

We typically stay within the single-family residential space because that’s where we’ve got a lot of experience. My background is in commercial real estate and we could do that as well. It’s got a higher price point and doesn’t allow me to diversify. That process is vetting. If you’re investing passively or actively, have a vetting process and understand when you’re buying something, have the end in mind. What’s your end goal? I just wanted to share. It is not risk-free. If anybody ever guarantees something, it’s not guaranteed. I see all the time in BiggerPockets and a Facebook group about “gator lending,” “20% return guaranteed. Pay you back in 30 days.”

If you're investing passively or actively, have a vetting process and understand that when you're buying something, have the end in mind. Share on X

Myth #4: You Lose Control As A Passive Investor

The only way you can guarantee something is as far as you have it. If you need to borrow money for 30 days, it means you don’t have it. How are you going to get it back? Anybody who guarantees or is pushy, run and walk. Run away. Another is myth four, you lose a lot of control as a passive investor. Do you have as much control? No, you’re more passive. You don’t have a say in the investments but you have a say in what you invest in. You want to select the right vehicle that can give you different levels of control. Again, I’m a mortgage note gu.

Say, you’re buying a rental. You can be very active, which is you manage a rental, lease it up yourself, and do everything. You can be more passive by hiring an agent and a property manager. Notes are the same thing where you can buy performing notes, put it with a servicer, and have a borrower on ACH. It’s very different than self-servicing a non-performing loan. You invest in a REIT. A very different level of control. Invest in a fund.

Again, a different level, but, at least, you control what you invest in. As part of the control process, what plays into that is transparency. How transparent is the fund? To me, it boils down to how reputable the sponsor is. There’s a sponsor I’ve seen. I interviewed this person on a show. They gave me bad vibes from the start and didn’t provide transparency. All their answers were very fluffy.

This person was out there raising lots of money for multifamily syndications, buying crappy properties in the ghetto, and paying very low cap rates for them. in many of those deals, all the investor money has since been lost. They’re being sued. Not only are they being sued, but when they lost these properties, they never even let the investors know. They didn’t even communicate. They’re off raising money for their next deal.

They even told the investors, “By the way, your money’s gone.” How would that feel? I invested and I want to know what’s going on, good, bad, or indifferent, because I make decisions based on the information I have. Let’s say, you were going to put a small addition on your house because maybe an in-law might be moving in or something. You’re in a fund that has $50,000 coming back, or you think it’s coming back in six months. Nobody tells you otherwise. You ask the question and they say, “Everything’s going well.”

You come to find out, the entire thing was already lost. That would have a big impact on where you’re getting the money and how you’re going to do that. You might have to finance it. You might not be able to do it. I don’t think these sponsors understand the real-life impact this can have on people by being a jerk and not communicating.

One of the benefits I think of traditional investments like stocks and mutual funds is that you have minimal control. However, you have more control because you can get in or out, and you can see on a daily basis how it’s doing. If you invest in Publix, Apple, or Microsoft, you can go online and look at it. Which reminds me, when I used to invest in stocks when I graduated college. You didn’t see things online. You had to open the newspaper, go to the back section, and see how your stocks were doing. I miss those days. Understand that you lose some control, but you don’t lose all the control.

Myth #5: Passive Investing Is Just About Real Estate Properties

The last myth, passive investing is just about real estate properties. This goes way beyond rental properties as we mentioned. There’s mortgage note investing. There’s oil and gas. As I’ve mentioned, there are companies you can invest in. I’ve seen some for sports cards, artwork, and horses. Again, Miso Robotics, which is the flipping burger machines. It’s pretty cool in my mind. Mortgage note investing, which is tied to real estate but you’re not investing in real estate.

Passive investing isn't just real estate properties. Share on X

When you look at each one of these, provides a different alternative. To me, mortgage notes can have more predictable cashflow but lower maintenance. You can diversify the properties but you don’t have the upside of owning a piece of real estate and getting that equity build. Those pros and cons that you have to look at and measure the risk boils down to what you want to invest in and what’s your goal.

I call myself a GOAT, getting old and tired. I want the lazy river. If I go to the water park, I don’t want to go up and down on all the crazy rides. That’s not what I want my investments to do. I like the lazy river that just goes. Nothing exciting but it’s predictable or more predictable than the others in regards to targeting an income stream that I can count on to allow me to make other decisions.

How To Identify Passive Investing Opportunities

Unlike what I mentioned, some of these higher-risk investments might offer better returns, but you could have gains or losses, and it’s a lot more challenging for me or maybe for you to predict outcomes and understand how you plan for that money for the future. Lastly, before we wrapup, I do just want to touch upon quickly how to identify opportunities in passive investing because that just popped into my head.

“Chris, you’re sharing all this information. How do you identify opportunities online?” This guy, Alexi, provides a lot of great content on passive investing opportunities, BiggerPockets, Passive Pockets, and 506c Club. There are investment clubs out there that are not sponsor-driven. They’re investor-driven that can provide content and information for you to get started. Again, I recommend networking, leveraging those resources, attending webinars, listening to shows, and talking to investors who invest in those offerings, but also understand you still need to do your own due diligence.

Also, to talk to people about what are some of the red flags that they’ve seen based on their experience. If you talk to somebody who’s been passively investing for 10 or 15 years, you’re going to hear a lot of red flags, unrealistic returns, staff, is it a one-man show, are there five co-GPs on a deal, many different avenues, what’s their experience, and did they just get into real estate two years ago. Many different things can pose red flags.

Creating Wealth Simplified | Investing Myths

Investing Myths: Time is the most valuable resource and asset we have because you can’t truly make more time. Money is something that you can earn more of.

 

It doesn’t mean you shouldn’t invest. It just means these are things you need to evaluate. I hope you enjoyed this episode on the top five myths of real estate investing debunked. If you have any questions, feel free to reach out. I can’t emphasize enough the value of having passive investments for building long-term wealth.

The Value Of Passive Investments For Building Long-Term Wealth

It allows you to do something that I think is so critical as you get older. I know a lot of people talk about financial independence and this whole FIRE method, financial independence to retire early. For me, I look at it as the TIRE, time independence to retire early. Time is the most valuable resource and asset we have because you can’t truly make more time. Money is something that you can earn more of. You can’t earn more time.

Some will say health and stuff but it’s how you use the resource that you have and how you value your time and use it to live your best and fullest life. Thanks for reading this episode. As always, feel free to reach out if you have any questions, comments, or want more information about our fund. I will catch you on the next one.

 

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