Checklist For A Passive Real Estate Investor

Back when I started investing in real estate deals, I recall wishing that I knew a successful passive real estate investor who could download their knowledge to me and who I could bounce questions off.   The world of real estate investing is a very different world than passive index investing, and it is difficult to find good, unbiased sources of information on this topic.  I’ve come to realize that there aren’t many passive real estate investors out there, because of one main reason – like my past-self, people are unaware this type of investment exists    Passive real estate investments are not well publicized, compared to the financial industry’s marketing machinery of stocks/bonds/ETFs/mutual funds.

In my experience,  the 2 best vehicles to invest in real estate passively are:

  1. Private Mortgage Loans
  2. Joint Venture (JV) Investments

Although there are many different types of passive real estate investments, I will be referring to these 2 types when I discuss “passive real estate investing” in this post.  For examples, please see “Investment Stories”.

If I had to compare these 2 investment vehicles to passive index investing, then private mortgage loans are like bonds (interest income), and JV investments are like stocks (capital gains and “cash flow dividend”).  However, the similarities end there.   There are no % allocation, MERs or rebalancing with passive real estate investments.

The mindset for passive real estate investing is quite different from passive index investing.   If you have ever watched Dragon’s Den (or Shark’s Tank), the Dragons listen to pitches and vet out deals to invest their money in.   I would suggest that a passive real estate investor should think like a Dragon.   You are sitting on the hot seat now.  Deals are presented to you (by a mortgage broker or JV partner) and you have to decide whether to invest or say “I’m out”.

Kevin O’Leary nicely summed up how to view your money (and applies well to real estate investments):

“Here’s how I think of my money – as soldiers – I send them out to war every day. I want them to take prisoners and come home, so there’s more of them”

Using his analogy, in the case of private mortgage loans  (6 months – 2 years), you are deploying your soldiers to help the borrower for the term of the loan.   You receive new prisoners every month, until the end of the term when your original soldiers return home.

For JV investments, you are deploying your soldiers, under the command of your active JV partner, to set up a new military base (buy an investment property +/- renovate).  Your soldiers will ideally return home after the base is set-up (refinance in 6-12 months).  You leave the prisoners (or let’s say “reformed soldiers”) at the new base (investment property) to command, who are now trained to take new prisoners on their own.

You now have your original soldiers + prisoners back at camp ready to be deployed again, as well as a new military base.  Rinse.  Repeat.   You can see why real estate investors refer to their real estate portfolio as their “empire”.

Credit to ‘PT Money’

But before you start deploying your soldiers to build your empire, here’s a checklist that I have compiled for anyone thinking about becoming a passive real estate investor.  Even if you have no intent in becoming a passive real estate investor, some of the tips are useful for anybody wishing to strengthen their financial standing.

Review Your Credit History and Score

As a passive JV partner, you may be required to apply for mortgages under your name.  Therefore, it is important to know your credit score and make sure your credit history is clean prior to applying for a mortgage.   You can obtain free reports at Equifax, Transunion or Borrowell

Establish a Relationship with Your Bank’s “Elite” Advisor

All major Canadian banks have an “elite” division for high-income, high net worth customers, where you have a dedicated advisor that you can access anytime, kind of like a concierge service (i.e. CIBC’s elite division is Imperial Service).   These “elite” advisors have more experience/knowledge and better access to credit/mortgage products than the “regular” advisers.  They have the ability to get you the bank’s lowest interest rates on mortgages/HELOCs, and can offer you the highest clearances for cheque deposits on your accounts.

You can skip the teller lines by going directly to your advisor or e-mailing/phoning your advisor for transactions.  You can also get little perks, like having them waive your bank draft fees.   If you are a high-income profession, like a physician or dentist, or a small business owner, then you will qualify for an “elite” advisor at your bank, but you have to ask or else the default is a “regular” advisor.

There is no cost to access CIBC Imperial Service (I use CIBC, therefore I am familiar with them).   I am not as familiar with the other major banks’ “elite” divisions.

Having an “elite” bank adviser is instrumental when applying for mortgages for JV deals.

Home Equity Line of Credit (HELOC)

Now that you have a relationship with one of your bank’s “elite” advisors, leverage that relationship to your advantage!

If you are unfamiliar with HELOCs, you are essentially unlocking your home’s equity without selling your house to invest, or another view is using the bank’s money to invest, with your house as collateral.

Set-up a HELOC with the maximum amount allowable at prime rate or less (some banks also now have HELOCs where the limit increases as you pay down your mortgage).   The maximum HELOC amount is usually 65% of your principal residence’s appraised value (minus any outstanding mortgage).  There is no cost to getting the maximum HELOC amount.   For those with paid-off mortgages, a HELOC is also good insurance against title fraud.

The set-up will require appraisal and legal fees (approximately $1k).  DO NOT pay these fees.   These fees should be waived for you.   Many people do not know that you can ask for these fees to be waived.   There is no cost to getting/having a HELOC.  You only pay the interest (tax-deductible) on any amount that you take out.

Physician’s Line of Credit (LOC)

For those of you who are physicians/dentists.

All major Canadian banks offer a Physician’s Line of Credit at no cost, simply because of your profession.   Get it!   At CIBC, the limit is $250k.  Similar to a HELOC, you should aim for prime rate or less.

Put Aside Cash For Investment

Similar to stock/bond investing, the money that you have reserved for investing in a real estate deal should be money that YOU DO NOT NEED in the short-term.   While waiting for an investment opportunity to come across your plate, this money can be left in a high-interest savings account, but should not be invested in anything that has risk.  This money should be ready at a moment’s notice to be deployed.

Unlike clicking a mouse button to purchase an ETF, it may take some time for your active JV partner/their real estate agent or mortgage broker to find the right property/private mortgage loan to present to you.  You have to have patience for this step.

Due Diligence With Your Lawyer, Accountant and Spouse

On Dragon’s Den, the Dragons often mention to the aspiring entrepreneurs that final signing is contingent on proper due diligence by their team of accountants and lawyers.   Same applies to you!

Make sure that you have your own lawyer and accountant review the investment deal before signing.   Due diligence is a must, especially for your first deal.   The more advice you get from others, the better.

You and your spouse/partner need to be both comfortable with investing in the deal.  If you or your spouse will not be able to sleep well at night because of worries about the deal, then walk away, and wait for the next investment opportunity.  Being on the same page with your spouse is key with any investment!

A Dragon may see multiple deals before pulling the trigger on the right deal for them.  You don’t have to swing at every pitch.

Set-up RRSP/TFSA Accounts

For Private Mortgage Loans, you can invest money from any of your accounts, including cold cash.  However, since interest income is highly-taxed, I would suggest using your RRSP, TFSA or RESP money in private mortgage loans, as the interest income is sheltered in these accounts.

You can invest in private mortgage loans (“arms-length mortgages”) only with certain financial institutions that offer these accounts.  The most trusted and long-standing institution in Canada is Olympia Trust.

There you have it.  My checklist for a passive real estate investor that I wished I had when I started out.

You may be wondering what is the point of setting up the HELOC and Physician’s LOC?   First of all, you should not use these  LOCs for personal expenses, like vacation trips.  If you don’t have the discipline to avoid this temptation, then do not open up a HELOC!!!

Outside of real estate investment, some may use LOCs as their emergency funds, in order to have their money 100% fully invested.  There are pros and cons to this, which other bloggers have discussed, and I will leave for you to decide.

Many sophisticated active and passive real estate investors invest in deals using their HELOCs.  One situation when a sophisticated real estate investor may consider accessing their HELOC is when a great deal that is too good to pass comes across their plate, but their money is tied up with other investments.  A HELOC is kind of like having reserve soldiers to call upon when needed.  Sophisticated investors love this strategy, because they are not using their own money, but rather the “bank’s money” to invest.

Yes, there is risk to this.   This is why I recommend a newbie passive real estate investor to not touch their HELOC until they have invested in a few deals with their own money, and have become comfortable with the process.

Take-Away Points for a Passive Real Estate Investor:

  • Think like a Dragon and a Military Commander
  • Review your Credit Score and History
  • Set-up HELOC and Physician LOC (if you are a physician/dentist)
  • Due Diligence with your team and spouse
  • Have patience


 Anything else you would add to the checklist?   


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Dr. NetworthBob NealChucktowner Real EstateLoonie DoctorDr. MB Recent comment authors
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Dr. MB

Hello DN,

Those are excellent tips for using HELOC and physician LOC. I can’t stop the words “loss of consciousness” ringing through my head! We frequently have cash tied up with investments so that will be helpful. I have only ever done one passive RE investment in a REIT which did NOT go well. We used our Mad Money account for that so it was not so bad after all.

Loonie Doctor

Ironically, I got a call from a private banker at the bank where we hold our mortgage just the other day. They had identified me as a potential customer based on my large mortgage size and the fact I am a physician and concluded that I must have a high networth or potential. I thought that funny, suggesting that I have a high networth because of my debt level and income when income/spending/saving are probably the biggest determinants for me. Anyway, I chatted with her and it was largely a package with financial planning etc and I didn’t see the… Read more »

Chucktowner Real Estate

Nice checklist! Should keep this in mind!

Bob Neal
Bob Neal

Well, passive real estate investment is a tremendous opportunity for the retirement. That does not mean doing investment actively is a bad idea. Obviously not. Both have their own set of ayes and nays. Through real estate- related mutual funds and real estate investment trusts- an investor can invest passively in the real estate. Here, Dr. Networth has glossed some worth-considering loops. Besides taking the help of a well-grounded real estate professional, a passion investor should follow these lexicons for obtaining better outcomes.