Generating an Income While Not Drawing a Salary
An often overlooked asset class can be the key to financial independence
Earlier this year, The Information ran an article highlighting a number of high profile tech execs who are currently in between gigs. I personally know several of the super-talented people mentioned in the piece and it got me thinking about working, not working, and financial independence. The between jobs situation experienced by the execs in the article is a common one. There are lots of great people who have done very well professionally as well as financially – yet at some point in their career, find themselves no longer drawing a regular salary.
For some people the between jobs status is not by choice but the result of circumstances. In the same vein, Silicon Valley is full of people who have actively chosen to take some extended time away from work. There are even those who have decided to take “a permanent sabbatical”, as one former tech worker recently described it me. And then there’s those who are part of the 4-Hour Workweek movement.
Lastly, I’ve met many successful entrepreneurs who, after having their company acquired, have turned around and launched their next thing — usually forgoing much in the way of salary especially at the start.
Whatever the circumstance — the one thing all these people have in common is that they are no longer seeing a steady pay check from work. After I left Google in 2007, I experienced this myself. At the time, I was an independent angel investor making speculative bets on new start-ups. The outcomes of these investments would not be realized for 5–10 years, if at all. Safer investments in public equities (stocks) were part of an even longer-term buy and hold strategy. And my fixed income investments (bonds) were producing very little income at all.
My search for greater fixed income returns led me to learn about an asset class many investors overlook or simply are not aware of: commercial real estate. Most investors’ real estate holdings are limited to their personal residence. (Also see: “Sorry, Your Home is Not a Good Investment”). The real estate I’m talking about is different. It’s what’s referred to as commercial multifamily real estate — as in large apartment complexes.
One of the most attractive aspects of multifamily real estate investments is that they can generate strong annual income — typically in the 6–10% range, which is paid quarterly. What’s more this income can be offset with depreciation, which means that in the short-term investors are often not paying taxes on these payouts. (Taxes are deferred until the property is sold).
In addition to annual income, there are a number of other advantages real estate offers investors — such as the opportunity for capital gains when the investment property is later sold. And again these additional returns can be tax advantaged as well. Plus commercial real estate can provide healthy diversification for a portfolio of mostly stocks and bonds.
What many people are unaware of is that these properties can be invested in passively through private firms, also know as “Sponsors”, that specialize in acquiring and managing this type of asset. (Of course partnering with the right sponsor/real estate investment firm is key.)
As noted above, real estate can offer investors a number of attractive benefits including tax advantages and diversification. But most importantly for investors who are not drawing a regular salary, real estate can be a source of consistent meaningful income.
A $2 million investment in real estate that is paying a tax-deferred annual return of 9% is similar to drawing $300,000 in salary.*
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Note: I am a partner in a social impact real estate investment company called OpenPath Investment. OpenPath investment opportunities are for accredited investors. Like all investments, OpenPath’s investments bear risks which are detailed in each investor brief. Please read these before investing. I am not a CPA or professional financial/ tax advisor. All views are my own. I can be reached at David at OpenPathInvestments.com
*This is just for illustration. Actual investment returns may vary. $2M x 9% = $180K, which is roughly equivalent to the after tax cash flow of $300K in salary.
In addition to financial returns OpenPath is also committed to delivering social and environmental benefits.