My Realty Gains

Prashant Kumar, CCIM - Founder, MyRealtyGains

Business and technology leader with roots in tech consulting Currently specialized in Cyber Risk at a Big 4 Consulting Firm Founder of Compounding Capital Group (CCG) and has successfully stabilized various apartment buildings in Cincinnati MSA.

What You’re Going to Learn:

  • Ways to Invest Passively in Real Estate by Jay Balekar
  • How much time should a person invest in education before Investing in Real Estate?
  • How important it is to set your goals before Investing Passively?
  • How can you set long-term goals with Real Estate Investments?
  • Why should beginners Invest Passively instead of Investing Actively in Real Estate?

Click on any platform below to listen​

Show Highlights

Ways to Invest Passively in Real Estate by Jay Balekar

Ways to Invest Passively in Real Estate by Jay Balekar

Prasant Kumar, CCIM – How can they invest in Real Estate or asset classes passively and build wealth and fortune for themselves? Please share your thoughts.

Jay Balekar – I’ve found myself stuck in the same situation as well. And what happens is, when you have a good job in tech, it pays you enough to have a comfortable life, but it doesn’t pay you enough to build wealth. There’s a difference between running on the treadmill and making enough to have a comfortable life versus building a legacy and building wealth. That’s one thing that I realized in my tech job. I and my wife were both in tech. We’re making good money, but not enough to build true wealth. Then we realized that one of us was working only to pay half of our household income and was going towards taxes.

I was like I have to do something to reduce my tax liability because we listen to the news and hear on all of these online media that Donald Trump is paying $0 in taxes, Elon Musk is paying $0 in taxes.

How can they do it and we can’t. We are employees making a lot less than them. When all of that happened, I was like I’ve got to educate myself first. I think that’s what I encourage all of your listeners to do as well it all starts with education.

I started with one of the books that I had read a long time ago in school. When I was in third grade or fourth grade, I read the book- Rich dad and Poor dad, which I revisited after I started working. I loved that book back then and I loved it even more now when I was able to apply some of those concepts of assets versus liabilities because one of the biggest mistakes we do is we get done with college, and during college, we don’t have money. We are scrambling and stuffed in one apartment with four other roommates eating the same old food every day. Once we start earning, we start splurging that on liabilities. We buy Tesla, we buy fancy cars, but we are not truly building assets that pay you Passive Income. 

We should understand the between Assets and Liabilities, that was the first step for me credit goes to Rich Dad and Poor Dad by Robert Kyosaki for that. Then Cash Flow Quadrant was the other book that had a huge impact on my mindset that the employee quadrant pays the most amount of taxes, while the Investor and entrepreneur quadrant. They pay almost next to nothing in taxes. And it’s not a loophole in the tax system, but you are being rewarded by the tax law to create jobs and housing and provide opportunities for others and for taking the risk. That was the other AHA moment for me if I Invest in businesses and Real Estate to provide housing, my tax liability is going to go down. For a good reason. It made complete sense to me. I think those two were the biggest AHA moments for me. Then I started Investing my time in learning more about Real Estate. I read a few books about Real Estate in general, then read some more books about Multifamily. It was clear to me that multifamily made more sense than single-family home investing. My Real Estate journey started directly with multifamily. I never invested in single-family homes outside of the residence that I live in. The way it started was when Covid happened. My job before Covid was a travel job, consulting. I was always on the client’s side. Monday through Friday, Monday through Thursday, I was traveling nonstop and I didn’t have the time.

And to your point, earlier in tech, we get paid for 40 hours but we work 60 to 80 hours minimum. You don’t have time left for any of the side hustles, and you don’t even have time left to explore these opportunities. Whatever time you do have, you’re just enjoying this family, having good meals and then going back to work. That was me and then during my time, when I was flying to client sites on these flights, I was reading all of these Real Estate books. 

Then when Covid happened, I know that COVID was a disaster for a lot of people, but for me, fortunately, I was not very impacted by COVID it was a blessing in disguise because now I was not traveling and I got some time, evenings and weekends to start Investing in Real Estate. That’s how I started Investing in Real Estate.

In early 2020, we bought eight units of multifamily property in Cincinnati. That was our first investment, not with other investors, but with our capital. It was a severely distressed property. Partial reconstruction of the entire property. The balcony fell off after we bought it. The roof caved in, so we had to do roofing, new construction of Balconies, all the exterior work, and paving, so it was on just those eight units. We spent almost 25 to 30,000 per door on renovations. But after it was all said and done, the property appraised very well, we were able to pull out all of our initial capital. It was essentially a bur or infinite return deal. It still cash flows very well and I think one thing that paid off was the location. If I would have done that deal in a poor location, I would have lost money. But it was in a fantastic location and that’s why we were able to double the rents after renovation. I avoided some of those mistakes. Credit goes to education. And reading that I put in upfront, a lot of people, they realize, oh, Prashant is doing real estate, he’s having great success. Let me also buy some assets. They don’t put in the education first and then they get burned. And then they’re like, oh, Real Estate is a bad Investment. I’m never doing Real Estate again. I think if you start with education and start by Investing with someone like yourself who’s experienced, that’s a good way to start. Once you have learned that, you have plenty of options. 

Prashant Kumar, CCIM – Basically what you are saying is you start with education before investing in Real Estate.

How much time should a person invest in education before Investing in Real Estate?

How much time should a person invest in education before Investing in Real Estate?

Prashant Kumar, CCIM – Education is needed for a Tech person to Invest Passively, Elaborate on this statement.

Jay – Active Investment comes with its own set of risks. It is extremely overwhelming. The time commitment needed is insane. I was able to do it because I don’t have kids and my travel stopped because of covid. Children do take up a lot of time and I had to make compromises on that front to make this happen. I think in terms of Passive Investing, which also I think is the best way to start and get your feet wet in Real Estate. I would say maybe like about three months of education. But getting the basics, understanding why you are Investing in Real Estate and what’s the outcome that you’re looking for. What are the tax incentives that you get by Investing in Real Estate. What are the different vehicles that you can use. Like your self-directed IRA, you may have 401K from the old employer that you can convert to an SDI and use that. It is important to understand, what are the pools of funds that you can tap into to Invest Passively in Real Estate.

I think some of those basic financial terms are when an active investor or syndicator is telling you that this is going to be your Cash on Cash Return or this is going to be your IRR or Equity Multiple, what that means, I think understanding that is important as a Passive Investor. Then, it is important to get fully wet out a good syndicator or a sponsor versus someone who’s not as sophisticated, or experienced, someone who does not have credibility. To understand whose projections are not very conservative and very ambitious, versus a syndicator who’s experienced and whose projections are very conservative. Who’s taking your money more seriously than their own money. Those things are, I think, more important if you want to Invest Passively. 

Prashant Kumar, CCIM – That’s a very good answer and that’s what we are trying to communicate to our listeners and readers. I would like to do what Jay did, but if I did not have time, I would not go and do it. I’m not trying to discourage anybody. Jay took a bold step and he learned a lot from that but if he did not have time, if he was still traveling, he probably wouldn’t be able to pull it off on the first attempt. If you were an experienced guy, maybe you would have done it easily but hands off to you that the first time you were able to do it, you were able to pull all your equity out of the deal. The deal is still cash-flowing, which is an incredible thing. But everything needs time and education. You took your time to educate yourself and you took your time to do things yourself. I imagine you have done a lot of acting roles, finding the GC, trying to take all the code, and getting it done.

Jay Balekar – I was working at the time and I was working remotely, so I was still on Zoom calls all day long. I was working out of my car from the parking lot in front of this Property every single day. I don’t want to make it sound like it’s so easy. Anybody can do it. It’s a huge commitment and a lot of risks.

Prashant Kumar, CCIM – There is no doubt about it. Passive guys can do it. The folks who start Investing Passively with operators, as you said, in three to six months, they get more educated. They find out with whom they want to Invest. One important point I want to communicate here is unless you have a good relationship with an operator. If you have an existing relationship with an operator. We cannot go and invest with them unless it is a 506C kind of deal. We don’t want to discuss what is 506B and 506C but 90% of the deal out there are 506B where you need an existing relationship with an operator. We must educate ourselves and connect ourselves with these operators so that operators can offer that deal to you. Otherwise, by law, they cannot even offer that deal to you.

How important it is to set your goals before Investing Passively?

How important it is to set your goals before Investing Passively?

Prashant Kumar, CCIM – What happened after you bought 8 Units in Multifamily Real Estate?

Jay – I think one of the things you also have to think about is what are your goals with Real Estate Investing. I always knew I wanted to go all in, an active role and eventually even transition to Real Estate Investing full-time but I understand there are a lot of people who have high net worth, individual high-income earners. They cannot just suddenly leave the job that pays them half a million dollars and starts Investing in Real Estate. It’s not financially logical or logical in any sense but for me what happened after the eight units were a success. I mean, I still have my full-time job but after we were able to pull out most of the capital, we Invested that in a ten-unit deal.

We needed to be done with a lot of work, a classy property, distressed property, but in a gentrifying area. Did the same thing, renovated every single unit vacated everybody and turned the place around. The rent went from like five fifty dollars to one thousand four hundred dollars. 

Prashant Kumar, CCIM – Wow.

Jay – The same thing happened again. We bought the property for about 550K a door, put in 20k  a door and the property appraised at  140k a door after everything was done. It was again complete after refinance. We pulled out more than what we had initially Invested. To some extent, it’s about the location. It’s about the asset and how you are adding value to the asset, but it’s also about the market and the economy. Things are slowly changing and the market is not going to help you as much as it used to because the interest rates are going up, and the cap rates we are going to start, are going to expand very soon. Those things are changing, so the market is going to help you as well. That’s where my second project was and that gave me enough confidence to keep going. The ten units were a success. Then I did another eight units by myself, another four units as an FHA house hack where we sold the house, we were living in and moved into this four family, me and my wife, to take advantage of the FHA. Then we found ourselves basically out of capital because there’s only so much you can buy with your capital. That’s when we started buying things as a part of JV.

We did a 32-unit JV with a couple of partners, a 63-unit JV with a few partners, and all the partners that I met through networking as we met. Phenomenal people, mostly all other tech professionals. We are syndicating our first deal also here in this local market.

That’s kind of been my journey. I truly believe in organic, sustainable growth and then chasing the door count if we did ten units. Now let’s go after a 500 unit, that can burn you fast because you don’t have the experience needed to handle something that big. After all, if everything goes right, your profits could be exponentially larger but when things go wrong, and they always do, your mistakes also will be exponentially larger. That’s kind of been my journey so far and been loving every single bit of it.

Prashant Kumar, CCIM – What you are saying is to learn to walk first before you start running. This has been what you have done, and it is incredible what you have done in the last couple of years. 8 units, 10 units, eight units,32 units, 63 units and 4 units. Then even taking the step to I’m not saying downgrading yourself, but moving from a single-family home into an FHA 4 flats, living in one part of the building, you want to create wealth for yourself.

Jay – It’s a compromise because on the one hand you have the option to buy a million-dollar villa and some fancy car, but then work until you’re 80 years old or you make a bit of a compromise for a few years while you’re young and pinch yourself a little bit. Still, then you’re building wealth that will let you maybe retire at 50 or sooner. 

Prashant Kumar, CCIM – Awesome. That’s a great example for our tech minds. For those who want to come into active roles, there’s nothing better, there cannot be a better role model than UJ. It is not just to impress you, but it is to impress upon you that you have done something incredible.

How can you set long-term goals with Real Estate Investments?

How can you set long-term goals with Real Estate Investments?

Prashant Kumar, CCIM – What are your plans for the future?

Jay – I want to double down on Real Estate and maybe even explore a few other asset classes within Real Estate. I’m very bullish on multifamily because even during the 2008 recession, multifamily still did pretty well because everybody needs a roof over their head. I think the reason I started looking into syndications is I would say twofold.

At some point, your capital starts drying up but also what I was doing, I wanted to pass on the same benefits to others, my friends and family particularly. I was not comfortable doing that initially because I didn’t have the experience but then after I had about four or five deals that were successful with my capital, I had the confidence that, if I get some money from my friends and family and we syndicate these deals, everybody wins. I’m able to take down deals without having to put all the money myself. My friends and family and other Investors can get pretty good returns, better returns than they would get almost anywhere else, and the tax benefits get benefits using my knowledge and expertise.

I think that was kind of the goal there. The goal moving forward is to continue to syndicate deals. We never have a door count goal. Our goal is purely focused on the deal quality. If the deal makes sense, we’ll do it. If the deal doesn’t make sense for the full whole year, we will not do any deals until we find a deal that makes sense. Then besides Real Estate, I’ve also been exploring a few other business opportunities, franchise opportunities to create other sources of passive income, for example. That’s kind of where things are at but the long-term goal is to create wealth not just for ourselves, but also for our friends and family and our Investors to be able to give back a portion of that wealth to society because we talk about philanthropy and giving back, but to be very honest when you’re not making enough, you can’t give back. You can only give back when you have enough. I think the goal is to build that wealth and then give a portion of it back to society.

Prashant Kumar, CCIM – It’s a noble thought. We all have talked about philanthropy and some of us do philanthropy even while we are working full-time. When you start working, your working model itself is creating wealth for others. I think that’s true, unintentional philanthropy.

Why should beginners Invest Passively instead of Investing Actively in Real Estate?

Why should beginners Invest Passively instead of Investing Actively in Real Estate?

Prashant Kumar, CCIM – When the investors can get the returns passively why should they spend too much time and energy to get into Real Estate in active mode and take the risk to burn themselves?

Jay – I see a lot of people doing that. When people say, they’re going to start Investing in Real Estate, the first thing they do is buy a Townhome or a Single-family home in the neighborhood where they live. The reason why that’s not a very good strategy is multi folds. One is single-family homes. Townhomes, just the way they are valued and appraised is different from Commercial Real Estate. Commercial Real Estate is looked like a business. They will look at the Net Operating Income of the asset and value that asset based on that. While single-family homes, you are at the mercy of the market. If we buy in, let’s say 2022 and the market tanks, there goes your Investment. You’ll have to wait it out until the value goes back again. Now not saying that Commercial Real Estate is not impacted by market cycles but you can do things force appreciation through value add. You can increase the NOI of the business or the property by improving it, reducing expenses, increasing income, and now it’s valued more. You can do something yourself.

It’s in your control to improve the value of the property. Nothing is in your control with a single-family home or townhome.

Another reason is you’re buying the headache that comes with Property Ownership. You’re going to get calls in the middle of the night when toilets are broken and some tenants are even going to call you even to replace their light bulbs because they can’t do anything themselves.

That’s another hassle, so that prohibits you from scaling. You can buy one home or two homes but once you have 20, you’re going to get a lot of calls. I’m sure you can use a property manager. But in that case, the third disadvantage of single-family home investing is just the economies of scale.

Now you have 20 homes. They’re making you good rental income, but now suddenly you have 20 roofs to replace in one year and there goes your cash flow. If any maintenance item comes, it’s times 20. As opposed to that, when you’re Investing in multifamily with an experienced operator, you are taking advantage of that economy of scale as well. I think these were some of the reasons Commercial Real Estate also has better tax incentives because it makes a lot more sense to do something like cost segregation. The listeners or readers can look up what that is or ask their CPA, but you can do that on a multi-family property and it makes way more sense on a commercial asset than to do cost segregation on a single-family home.

It’s just not worth it. All of those incentives that you get by Investing in a commercial multi-family asset with an experienced operator like yourself, with a syndicator, you don’t have the hassles. Your returns are better, you get a better night’s sleep and you get tax incentives. I just don’t see a reason why you would buy a single-family home, especially in today’s crazy market where you are buying it for 40-50 thousand dollars in appraised value.

Prashant Kumar, CCIM – Wow.