Real Estate Investing Basics

The First (and Most Critical) Step to Passive Real Estate Investing

Expertise: Personal Development, Commercial Real Estate, Real Estate News & Commentary, Landlording & Rental Properties
99 Articles Written
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Have you ever tried to make reservations for a Subway restaurant? That’s a ridiculous question, right?

Subway started in the 1960s and grew to be the largest food franchise in America, with over 25,000 locations. No matter where you are, if you’re craving a Subway footlong, you are likely minutes away from satisfying that urge.

Have you ever tried to get reservations for Noma restaurant in Copenhagen?

René Redzepi’s Noma is the most in-demand table in the world. On the sixth day of every month, the third month out opens up for reservations (this coming January 6th, for example, they start taking requests for March). It takes only a matter of hours for an entire month to book up. Noma managing director Peter Kreiner estimates that about 20,000 people attempt to get a table on reservations day.

(Note: This is the historical norm. Noma reservation policies are different during the pandemic, but the restaurant is still prospering. And Subway started spiraling in 2014. Poor location selection and the Jared scandal were the culprits.)

So, what does this have to do with real estate?

Real Estate Syndication Deals Abound

I’m entering my third decade as a full-time real estate investor. And I’ve noticed a disturbing trend. Syndicators and investment opportunities are popping up on every corner, like Subway restaurants.

I fear the future for many of today’s celebrated syndicators. The rising tide has lifted all boats since the Great Financial Crisis. But as Warren Buffett said, the tide will eventually go out, and then we’ll see who is swimming without a bathing suit.

Related: Warren Buffett’s Advice to Real Estate Investors: “Stop Skinny Dipping!”

Are you planning to invest in a passive real estate opportunity?

I’ve been investing this way for some time, hundreds of friends have joined us to do the same. We’ve been combing the fruited plain for years on a quest to find the very best operators and deals. And we’ve learned something: This is a lot harder than it looks!

If you want to do it really well, that is.

I started researching syndication in the mid-2000s. I spoke with a Virginia-based syndicator of shopping centers to learn all I could about that process. The barriers to entry for syndicators and investors seemed hard to overcome in those days.

The word “syndication” made me nervous back then. I had grown up watching The Godfather, and I wondered if syndicates had anything to do with horses’ heads and such.

In those days, it was hard to find a great syndication opportunity. The fat cats had the corner on the market and small investors had little meaningful access. And there was limited information online. I can’t imagine just how little information was available before the internet.

Looking-for-work

Oh, how times have changed. Syndicators have come out of the woodwork since the Great Financial Crisis. People who weren’t even investing in real estate are now raising millions of dollars for their deals.

Social media and a proliferation of online portals, as well as relaxed SEC syndicator and investor restrictions, have resulted in an explosion of opportunities. Most are beautifully packaged. Some are great… others are not so great.

Related: Tech Is ‘Democratizing’ Real Estate—Creating Big Opportunities for Syndicators & Investors

Exercise Caution When Investing a Syndication

I’m not saying there is anything sinister about all that. Many fabulous business people have transferred their skills in other arenas to the real estate realm and are crushing it on behalf of their investors.

What I am saying is this situation calls for great diligence on the part of investors. There’s a lot to choose from out there, and making the right choice could dramatically impact your future and your retirement.

I know. I’ve made and lost a lot of hard-earned capital on passive and active investments over the past three decades. This school of hard knocks has been painful at times, but it’s meaningfully shaped our firm’s investment philosophy and practice today.

Related: 7 Ways to Organize & Structure a Real Estate Syndication

The great news is you don’t have to travel this same oft-painful road. There are smoother highways that can help you bypass a lot of the pain and loss that many of us have experienced.

One way to do that is through coaching and mentoring. Another is through a plethora of books and training courses. There are hundreds of podcasts with thousands of episodes that can provide an education that exceeds what you’d learn in any university.

And, of course, there’s BiggerPockets. You’re likely here because you love to learn and want to connect with like-minded investors and entrepreneurs. You’re in the right place to do that. There’s no other place like this on the planet!

Real Estate Syndication Due Diligence Is So Important

So, before we wrap up, I want to give you a few specifics to assure your due diligence efforts are on track. There are just too many great podcasts and books to list here, but I’d like to call out one particularly great book written specifically to help you in your due diligence efforts.

If considering investing in a syndication deal, check out The Hands-Off Investor by my friend Brian Burke. It’s published by BiggerPockets and you can get a copy in the BiggerPockets Bookstore.

You need to be sure you deeply trust any syndicator you hand your cash to. The critical question to ask yourself is this: “Am I willing to be in trouble with this person for the next 5 or 10 years?”

Why? Because almost every deal has trouble of some kind. Do you trust this person to handle your capital through tough times?

If you’re going to invest passively, you should develop a checklist you strictly follow. Set it up in advance and determine not to let your emotions sway you into ignoring important items that don’t align with your list. Virtually no prospective syndicator meets every single item on our list, but you should assure yours hits the points that are most important to you.

market-research

Due Diligence Process for Real Estate Syndications

Here is a sample of the issues we consider essential. (Note I’m using the terms syndicator, operator, and sponsor interchangeably.)

  • Has the operator been in this asset type since the Great Recession or before?
  • Does the operator have a cohesive internal staff?
  • What is the syndicator’s track record? Their best deal? Their worst deal?
  • Is there a moral and philosophical fit?
  • How does the syndicator speak about their spouse, their investors, and their competitors? And how do they speak to waiters and flight attendants?
  • How much skin does the syndicator personally have in the game?
  • Does the PPM (the investment prospectus) show alignment between the sponsor and the investors?
  • How much debt does the syndicator utilize and what are the details of that debt?
  • What do online reviews and other investors say about them?
  • How much and how often do they communicate with investors along the way?

The Bottom Line

I talk to active real estate investors every week. Many of them are tired of managing toilets, tenants, and trash. Many are cashing in their winnings and are ready to invest passively. If that’s you, one of the most important financial decisions of your life is where you’ll invest next.

Choose wisely, my friend.

If you boarded a plane for Copenhagen right now, you might not be able to enjoy dinner at Noma’s. You may not get a seat at Noma’s this year, or ever. Its exclusivity speaks of its quality.

If you had the time, money, and opportunity to eat at Noma’s, you would probably choose that over Subway. Especially on your anniversary.

Don’t treat your investments with any less care than you do your anniversary eating choices.

What about you? Are you planning to invest passively? How do you choose your syndicator and your investments?

Join the discussion below.

After graduating with an engineering degree and then an MBA from Ohio State, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a...
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    Steve Hiltabiddle Lender from Eastern Pennysylvania
    Replied about 1 month ago
    Paul, Always great to read your articles. I greatly appreciate you for sharing so many wise nuggets from your many years of investing. You nailed, what I think is the #1 criteria when investing passively... Bet on the jockey. They are out there so hold out till you find those folks who have earned their gray hair. Thanks again, Steve
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Steve, Thanks for your kind comments. I'm glad you enjoyed it. I didn't get my gray hair for nothing!
    Phillip Black Rental Property Investor from Vineland, NJ
    Replied about 1 month ago
    Paul great article. Your content is always spot on!!
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Phillip. That's very kind of you. Thanks so much!
    Christopher Smith Investor from brentwood, california
    Replied about 1 month ago
    Paul I'm looking to invest as a partner in a larger project. I have my own SFR portfolio that has done great mainly due to good timing - went heavy into the high quality market space during the 2010 to 2013 time frame and generated a monster payoff and which is still doing really well. However I don't possess the skills nor do I have the desire to be actively involved larger projects. However I do have cash and significant investment and tax experience. Who should I be speaking with (my PMs?) to get exposure to really credible opportunities? As you note syndications are now a dime a dozen with Yahoo's from every imaginable background pushing them but little or no bona fide track record running them. I sure don't want that. Any words of wisdom?
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Hi Christopher. That is a great question. Here are a few thoughts... (1) Check out the BP book by Brian Burke (The Hands-Off Investor) to learn more about what to look for in syndicators, deals, and funds; (2) Check out The Real Estate Crowdfunding Review by tech entrepreneur turned real estate investor, Ian Ippolito; (3) reach out to me to discuss ideas. Our firm was conceived in part to answer this question. And Ian's website, which is for accredited members only, reviews quite a few syndicators. I hope this is helpful. Good luck!
    Myriem Mhirit Investor from Brooklyn, NY
    Replied about 1 month ago
    Great article Paul, to the point!
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Thanks so much, Myriem!
    George Lui Investor from Palo Alto, CA
    Replied about 1 month ago
    I'm glad I found a reputable syndicator recently...you may of heard of them, Wellings Capital ;)
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    George, that's so kind of you! We appreciate you, too.
    Raymond Melz
    Replied about 1 month ago
    Great Insight! First time here and would like to know ways into earning passive income. I am trying to reinvent myself, after being unemployed due to covid-19. I have funds in my 401K and I would like to know more about 401K Solo and how I would be able to start earning an income to raise a family of 4. Thanks in anticipation.
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Hi Raymond. Welcome! I have a Saturday BP live show where people call in and we discuss strategies. I also do a Wednesday noon ET conference call most weeks if you would like to chat about your options. Feel free to PM me to get dial-in info. Take care, Raymond!
    Will Parish
    Replied about 1 month ago
    As usual, great article Paul!
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Thanks so much, Will! Very kind of you.
    Abdul Hamid
    Replied about 1 month ago
    Great article Paul, I am learning a lot. Those BP podcasts are great.
    Paul Moore Investor from Lynchburg, VA
    Replied about 1 month ago
    Thanks so much, Abdul! I'm glad you're enjoying them.