The following is about:
- what fast money & slow money is in real estate investing
- the benefits of fast money & how to get it
- the benefits of slow money & how to get it
- why you need both fast & slow money
Let’s begin with the end in mind; you want to generate enough passive income to support your lifestyle so you can exit the “rat race”. At that point, you can work because it provides fulfillment rather than being dependent on your job for the income.
I think the best way to get there is with a combination of fast money and slow money. Fast money comes from activities that require active involvement. Typically, fast money investments have an investment life cycle of 12 months or less (short term investing). Fast money payments come in forms of commissions & fees, profits, and capital gain profits. Fast money is your today money. That means you rely on it to get by today.
On the other hand, we have slow money. Slow money is passive income. It does not require your active involvement. Typically, slow money investments have an investment life cycle of greater than 12 months (long term investing). Slow money payments come in the form of rents & dividends, interest, and appreciation. Slow money is your tomorrow money. That means you count it coming tomorrow, and the next day, and the next day, ad infinitum.
I’ve put together a quick rundown of fast money and slow money for full time real estate investors. The concept of earning fast money and slow money drives my personal investing style. It comes from working with and observing multi-millionaire real estate investors who own and control sizable portfolios. You can modify it to fit your area of expertise. Since my expertise is in value add residential & commercial, apartments, and hard money lending — that will be the basis of the examples I provide.
Fast Money & How to Get it
Fast money are short term investments. The purpose of fast money investing is to generate quick profits to build your capital base. Your ability to create a large capital base will determine the size of the passive investments you can pursue. For example, if your goal is to purchase a $5 MM apartment building, you should plan on building a capital base of at least $1.25 MM. Now you know why you need fast money, let’s explore a few ways you can get it.
Examples of Fast Money Investments
Fixing and flipping real estate. Renovating and flipping real estate for profit is an excellent way to build your capital base. You learn a lot about real estate from buying and renovating distressed assets. I really like fixing and flipping real estate because you learn a lot; how to identify value-add projects, how to use OPM to fund your projects, how to calculate construction costs, and how to build a team and relationships that will fuel your business.
Brokering & wholesaling value-add real estate. Marketing and selling value-add properties is an excellent way to earn commissions and fees to build your capital base. If you are good at these two activities, you will never have to worry about money because there will always be demand for your skills. Brokering & wholesaling real estate is my primary method of building my capital base. The skills to make it will serve you in any endeavour and include: sales and marketing skills, mastering negotiation, and sourcing new opportunities.
Hard money lending. Short term lending can be a great way to earn short term gains via fees and interest. I really enjoy hard money lending because I get to work with investors in a complimentary way as when I broker or wholesale value-add properties. You need to be very detail oriented and organized to do well in short term lending. On top of that, you really need to differentiate yourself from other lenders. That’s because financing has somewhat become a commodity due to state intervention in the capital markets. The skills to make it as a hard money lender include: how to underwrite value-add projects, how to source capital, as well as accounting and organizational skills.
The Benefits of Fast Money
Keep this in mind: The purpose of short term investing is to build your capital base. That’s what fast money does via profits, commissions, and fees. The main benefit of fast money is in its name; you make it fast! From there, you just need to stack and save, stack and save, stack and save. Then you can pursue your slow money ventures.
The Drawbacks of Fast Money
There are a couple drawbacks of fast money. And it’s dangerous to depend on fast money alone. That’s because when you stop working, the money stops flowing. Making fast money means you have a job. It requires active participation. It’s not passive. In addition, fast money is taxed as ordinary income. Depending on your state and tax bracket, you can count on paying 10% – 37%+ in taxes on your short term profits. Ouch.
Examples of Slow Money Investments
Rental properties. I love rental properties. Quality rental properties are one decision investments; you make the decision to buy and you cash flow forever. Depending on your investment goals, you can refinance to pull cash out which helps build your capital base to acquire more investments. I invest in residential and commercial rental properties. There are differences between the two but the purpose of holding rental properties is passive income from the rents.
Mortgage notes. Financing real estate and holding the note is a great way to earn cash flow over a long period of time. You can also buy mortgage notes that are ‘seasoned’, meaning the borrower has made payments over a set period of time and means the borrower is less likely to default on the payments. Private mortgage note investing great way to earn a fixed rate of interest over a set period of time. Most notes are amortized over a fixed period of time and the payout may occur sooner. For example, the loan may be amortized over 30 years but the loan term is 7 years. This is very common in commercial mortgage notes. I think mortgage notes are great to have as a slow investment in any portfolio.
REIT investments. Real estate investment trusts are publicly traded companies that invest in commercial real estate. REITs pay dividends to their shareholders. I don’t personally own any shares of REITs at the time of this writing (Fall 2020) but I’ve read about some great opportunities to buy shares of undervalued REITs. REITs are a great way for a small investor to own shares of a large real estate asset. For example, REITs will regularly purchase $100 MM commercial assets, which is far larger than what private investors will purchase on their own. The dividend payout comes from the cash flow the asset provides.
The Benefits of Slow Money
Keep this in mind: The purpose of slow money investments is to provide passive income to support your lifestyle so you can exit the ‘rat race’. At that point, you can choose to work because it provides fulfillment rather than being dependent on your job for the income.
Slow money is passive income. That means it does not require your active involvement, the money comes whether you get out of bed or not. Further, because slow money is a long term investment (held for more than 12 months), it is taxed at a much lower rate than ordinary income. Imagine if you could keep an additional 15%+ of all the income you make; that’s how you accelerate your wealth building!
The Drawbacks of Slow Money
I’m going to make an assumption here. You’re building your real estate empire from scratch and you own 50% or more of each of your properties. If you’re a professional syndicator or you inherited a massive portfolio, the drawbacks I’m going to outline won’t really apply.
Slow money requires patience. You need to delay gratification to build your capital base. That means making short term sacrifices to meet your long term goals. Once you acquire a slow investment, the money comes in slow. Typically, oncer per month. All of a sudden, you own a slow investment and you’re like “now what?” and the answer is — nothing! You just enjoy the residual payments as they come in. This can be tough if you’re used to active short term investing. Further, until you acquire a significant portfolio, your paydays are going to be a lot smaller compared to short term investments. Once you build a significant portfolio, it’s all about continuing to accumulate assets and preserve the wealth you’ve worked and save for!
Why You Need Fast Money & Slow Money
If you’re starting from scratch, then you definitely need a combination of fast money and slow money. You need fast money to build your capital base and acquire knowledge and skills. Even if you’ve just inherited $5 MM and you don’t need the money provided by short term investing, you can still benefit by learning a ton about real estate investing via fast money. Fast money and slow money are complimentary investing techniques. It’s proven, it has worked for me, and it will work for you too!
What you just read about:
- what fast money & slow money is in real estate investing
- the benefits of fast money & how to get it
- the benefits of slow money & how to get it
- why you need both fast & slow money
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