Building Passive Income through Real Estate
Today we have Ben Leboyvich, a professional real estate investor. He is an investor and syndicator of multi-family residential income producing property. He is an expert in creative finance, the art of investing with no personal money down.
He is going to speak on his journey and experience with Real Estate investing and why it is one of the best ways to build wealth.
In this interview learn:
- The key differences between earned income and passive income
- Why you don’t need money to start investing in RE
- If it’s too late for you to start investing in RE
- Why Cash Flow is not really King
Ben, can you tell us how you got started in real estate?
I got started as a direct result of a direct medical diagnosis.
I am a classically trained Violinist. I have played since the age of 5 and knew I was destined to be a professional musician for as long as I can remember. My identity was ingrained as a classical musician all my life.
I earned my Masters of Music at the University of Cincinnati, Music Conservatory. At the time, I was consumed with the idea of achieving perfection with my violin skill. I wanted to make sure that I would beat the other guys around me for the “coveted job” as a classical violinist. All of my classmates were in competition with one another.
One day, during my 7 hour practice routine, a freshman walked into the classroom. I immediately sized him up and thought he was no competition. His skill was nowhere near my level, but there was something strange about him.
He just didn’t seem to care about others around him. He was enjoying himself with nothing to prove to anybody. He was secure. I couldn’t figure him out until I found out about his living situation.
He was living rent free and was financially set. His father bought him a 4 bedroom house right next to campus and he was renting out the other rooms to classmates.
The kid was a landlord.
That was when the idea of Real Estate first appeared to me. Things continued on as normal.
Then one day, while I was eating, my spoon missed my mouth and I smeared food across my face. I lost coordination in my right arm and had a tingling sensation in my legs. I immediately went to the hospital and the doctor diagnosed me with Multiple Sclerosis. He told me I wouldn’t be able to play Violin normally as I could lose control of my coordination at any moment.
That was when I had to look for an alternate career. I researched the world of finance and learned about Earned Income, Passive Income, and Portfolio Income.
Earned Income as a Violinist was out of the question for me and I didn’t have significant savings to start a portfolio. So I narrowed it down to Real Estate to start earning Passive Income. It was a great choice because you can use leverage.
You can leverage other people’s money to get things going, and that’s what I started to do. You just need to learn how to negotiate.
Can you explain the different types of income?
Earned income is employment and self-employment income. It is the result of performing labor in exchange for a paycheck. It’s the be healthy and go punch the clock kind of income.
Since I wasn’t sure how long I’d be healthy, the punch the clock approach to making money wasn’t going to do. I could probably do it for a few years, but long-term, I needed to find ways of generating income that would not be limited by my physiology. I was 24 years old and single at that time but I wanted a family. It was important to me that I could provide for my family’s future regardless of my physical limitations.
The biggest problem when we talk about income is drawing the distinction between disposable income and passive income. Disposable income is what’s left at the end of the day after income level expenses: Taxes, FICA, Social Security, etc. For earned income we are looking at W2 or 1099 income.
The main distinction between passive and earned income is not that one happens to materialize without any effort on your part or that you’re trading time for money. This may be true to an extent, but the bigger problem is that W2 and 1099 are highly taxed. So it’s very difficult to get ahead.Earned Income is where you work & don't get paid for 4 months out of the year, due to taxes.Click To Tweet
Passive income by its very nature, is a lot more passive. Most importantly with passive income, you don’t have to earn as much to be left with more. This is simply because your tax liability is lower.
Because of how we leverage debt and other people’s money in the Passive Income category, you actually end up making more and not less. You also get taxed less, not more. So it’s a very interesting dichotomy. That’s how it is.
In my case it was more pragmatic. I asked myself, “Hey, if I can’t earn money playing the violin. Then what do I do?”
I figured it would be important to work with my head versus my hands and muscles. There was no guarantee that my muscles would cooperate in the future. But everything synergized towards having to make money either on schedule E (rental income) or other more passive ways than W2 or 1099. This is a loaded question, so I can’t answer it fully.
But if you become disabled, you can always make money via some sort of passive income. The added bonus of Passive Income is:
A. You can do it without being present nearly as much as W2 or 1099.
B. The ceiling on it is a lot higher. Because it is systematized. You can buy, create and implement your own systems.Real Estate is a nice system in a box. The potential for wealth is unlimited. Click To Tweet
You manage your systems and your ceiling can be so much higher than with W2 or 1099 where you’re trading your time and effort for money.
Most people think it takes a lot of money to start investing in Real estate. Is this true?
I didn’t have any money when I started investing. I’m not going to say this is the best way to start in Real Estate. But for me it was the only way I could start.
If it’s a small “piece of the pie vs having no desert,” I will gladly take a small piece of the pie.
At that time and place in the stage of my life, I had no choice but to take a small piece of the pie.
No money down, can be very effective. It is still effective for me to use now as well. But, I’m not going to say this is the best way or the only way to get started in Real Estate Investing.
Certainly having money, provides a measure of safety. The issue you have to be careful of is that, with money comes responsibility and stewardship. When you have nothing to lose, you have nothing to lose.
But if your money is on the line, you better make sure you are very knowledgeable and careful in how you deploy the money.
The short answer is,
“No you don’t need lots of money to start investing in RE. But it’s very nice if you do. You can amplify and leverage your efforts with some of your own money.”
Having no money is not something you cannot overcome. You can definitely overcome it and start investing without any of your own money. It’s not the only way or the best way, but it’s just the way I happen to do it.
Is it ever too late to start investing in RE?
Absolutely. Sometimes it can be too late to get in the game.
If you’re 70 years old and want to go out there to start leveraging real estate. Then no, I would not suggest that at all.
Real estate is more or less a young man’s sport.
If you’re 40, 50 or 60. You better already have your ball rolling so that all you have to do is add momentum to something that is already working. That’s when it’s okay. That’s the place where I am now.
So for somebody looking to start investing, what would be some general guidelines or tips?
That’s a very difficult question because those guidelines are relative to the investor.
How well is someone collateralized?
How well are you funded?
What is your liquidity relative to your investing style?
It depends on who the investor is and what kind of circumstances they are in. What is their income, their profession, skill set and frame of mind?
Describe specifically to me a certain person, so that I can offer intelligent guidance in what their first or second step should be.
Hypothetically speaking, let’s say it’s a professional with $100,000 to invest. Would it be a good idea for them to invest in Single Family or multi units? What’s a good strategy?
Well, it depends what that person is trying to accomplish.
What is your end goal?
So you’ve saved up some money. Why real estate, why not a Vangaurd account?
What is it that they are looking for exactly?
Well, they’re looking for passive income with a good rate of return while building up assets.
Well, in your marketplace does it make sense to invest in single family or multifamily?
If what you are looking for is cash flow, what asset class is going to be successful in generating that cash flow for you in that marketplace?
Is the person single, or does he have a family with kids?
Most likely they have a family with kids.
Then my advice would be to build his assets with decent cash flow.
Since we are talking about real estate, it’s important to analyze the worth of a particular asset with respect to the amount of cash flow it puts in your pocket and the amount of equity it puts on your balance sheet.
I made this mistake when I first started. Do not focus strictly on cash flow.
Everybody says, “Cash flow is king.”
But it’s not all that there is.
Cash flow, while it provides a little bit of flexibility and freedom, does not generate wealth.
Equity appreciation generates wealth. That today, defines the quality of assets I’m interested in buying.
Some property I bought in the beginning put some cash flow in my pocket but they never appreciated. So the only spread I get on the balance sheet is from the principal pay down.
Paying down the principle is a very slow and tedious process. I want something faster.
In order to realistically generate great rates of return over the life of the property, is to have appreciation.
With that in mind, it would make sense to take that $100,000 and invest it in whatever asset you believe in your marketplace is going to provide the best blend of cash flow and appreciation.
You have to give a little bit on cash flow to buy higher quality, which will likely appreciate better. Now whether that’s single family or multi-unit is determined by the specific market.
Whether you divvy up the $100k into 5 SFRs or you put it all down into a 10 unit, that’s up to you. You gotta know which one is going to produce the best results.
On both ends of the spectrum of cash flow and equity.
Continue to – RE Investment Strategies
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Ben Leybovich Bio
Ben is real estate professional. He is an investor and syndicator of multi-family residential income-producing property. He is an expert in creative finance and works extensively with private as well as institutional capital. His specialties are in real estate investment, passive cash flow enhancement, tax, general business, real estate sales, real estate education, training, and motivation.
In addition to being a full-time investor, he is also a licensed Realtor in the State of Ohio with Yocum Realty in Lima. He is also a trained classical violinist at the University of Cincinnati College-Conservatory of Music.
Ben is a constant learner and always improving. He loves to teach as much as he likes to learn. He has helped many people get started in real estate. He has developed an educational program called Cash Flow Freedom University in conjunction with a cash flow analysis software, CFFU Cash Flow Analyzer.