What is passive cash-flow in commercial real estate investing?

Updated: Jul 4, 2020

The Passive Cash-Flow podcasts cover the meaning of passive income in NJ commercial real estate investing. Aaron Fragnito talks about real-world pitfalls and what investors can do to avoid them. The full transcript is below. You can also download the video-podcast on YouTube.

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Aaron Fragnito: All right ladies and gentlemen, welcome to the second episode of the cash flow podcast. We are going to talk today about truly passive cash flow, quite a topic for the passive cash flow podcast. If you want to learn more about what we do and how we do it, you go to people's We talk about how we buy apartment buildings, how we work with passive investors and make mailbox money for those passive investors.

Let's break into it, what is truly passive income? Because I've been to a lot of these workshops, a lot of these guru seminars where they say, "You could buy a two-family property and hire a management company and earn passive cash flow." Sounds phenomenal. Sounds amazing. Yes, we all love that, but it's not passive cash flow if you have to manage a management company and you're on the hook for personally guaranteeing that mortgage. There's so many gurus out there that sell passive cash flow dreams, by buying income real estate.

I own 75 units, I used to own 100. Owning real estate is a full-time job. Managing a management company is a full-time job in itself once you get enough real estate units. Let me tell you, also managing a management company and trusting a management company is not an easy gig. We hired two management companies before we developed our own. We developed our own through necessity because the first management company we hired was a very reputable, large nationwide management company. They over-promised and under-delivered and they promised us they would keep our vacancy rate at a low of 5%.

Then, basically, when they own the building, our vacancy factor was 25%. The units were just not rented properly and ended up really over-promising and under-delivering. We hired another management company after that, a small management company, and they were family-run and seemed very trustworthy. They would meet tenants of the property, they would collect the first month's rent and security deposit. Then they would meet a new tenant at the same unit two hours later, collect the first month's rent and security deposit, sign a fake lease. Then they would meet someone else the same unit two hours after that, collect first month's rent security deposit.

You see the pattern, they'd meet six different people at the same unit six times in a day, collect all the money run off with the money and that was their strategy. They lied to us and stole from us. We had to take them to court we won. By necessity we started our own management company because we realized, management companies aren't going to care for your baby like you care for it. All right, it's very important that you manage your real estate very closely in this business that you really know what you're doing. It is very important to make sure you're getting every dollar you can out of these properties.

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