Work Less & Earn More With Commercial Investments—Here’s How

by | BiggerPockets.com

So you’ve been beating your head against the wall looking for a house to flip, a duplex to buy and hold, or a multifamily property of any size that is not overpriced, eh?

You love real estate investing, but you’re finding it hard to grow your portfolio—or even get your first deal! At this point, you’re thinking of quitting and going back to the stock market or Bitcoin or doubling your efforts in your company’s 401(k).

But there are other options! You can join thousands of other investors who love real estate and make a lot of money in it without quitting their day jobs.

You can be a successful passive real estate investor. (And you don’t have to be ashamed of it.)

How to Be a Successful Passive Real Estate Investor

Let’s discuss how to make real estate investing as passive as possible. I’ve identified several ways to profitably invest—specifically, in commercial real estate.

Here are seven paths to success that I suggest:

Path #1 is to work your way up the ladder slowly, from small to large deals.

Path #2 is for those who have access to large capital and want to jump in big from day one.

Path #3 consists of being a deal-finder for other syndicator/sponsors.

Path #4 is to become a capital-raising partner for a syndicator/sponsor (many legal pitfalls here).

Path #5 is to get a job in the industry (say in property management, asset management, or brokerage).

Path #6 is to be a passive investor.

Path #7 is to hire or find a great mentor.

I’d like to discuss the sixth path in detail—being a passive investor—and how you can make your passive commercial real estate investments as effective as possible.

I speak with dozens of real estate investors each month, and I find that a lot of them are spending almost every waking moment beating their heads against the wall looking for that next house to flip or trying to build a single family rental portfolio. The latter has the goal of creating a passive income stream so that they can retire or enjoy life more than they are today.

Unfortunately, the popularity of a variety of HGTV and other shows has made most everyone think they’re a home flipper. This has driven competition for these properties through the roof, and of course, that means prices have also gone the same direction.

This has made it very hard for investors to obtain profitable deals. And if the market drops, many others will get burned. Let’s not soon forget what happened a decade ago.

I spoke to an oral surgeon in the Pacific Northwest a few weeks ago. He explained his goal of building a stable of about 20 rental homes to replace his income. He was on home No. 4, and it was driving him crazy!

He found himself on the phone between surgery appointments trying to find painters. His free time was eaten up with tenant screening. He wasn’t happy.

He confided in me that he needed to go passive. He’d never have the patience to manage 20 homes.

I spoke to a successful single family residential investor from North Dakota last fall with a similar story. He told me how he got to about 325 units at a relatively young age. His portfolio was a mix of single family homes and small multifamily properties.

Though he had a management team in place, he admitted that his business was driving him crazy, too. He made a plan to sell off about two-thirds of his properties and move those funds into passive assets.

To these two investors (and many more like them), I have one question. Why work harder than you need to, to make less than you could?

Related: Game Changer: Here’s How to DOUBLE Your Real Estate Equity

How to Work Less and Earn More

The answer for many investors is to go passive.

Passive real estate investing means:

  • Forgoing control, but also forgoing a lot of hassle and risk.
  • Losing the thrill of the hunt, but opening opportunities for you to find your thrills elsewhere.
  • Possibly leaving a little money on the table, but more than likely gaining more profit by investing with experts.
  • Getting most of the same tax benefits as active investors (as long as you join a syndication or fund that provides direct investment).
  • Building profits and multi-generational wealth in real estate without quitting your day job by tapping into decades of someone else’s experience.
  • Making things arguably easier by going through a single process to vet a great sponsor rather than vetting each deal.
  • Creating an opportunity to model someone else by freeing up the time you’d usually spend vetting hundreds of your own potential deals. (When vetting a sponsor, you can ride on someone else’s coattails.)
  • Devising a plan to make sizable returns from this asset class, while still being able to enjoy your retirement since you won’t be tied to a location or stable of properties.

My history includes dozens of house and land flips, building seven new homes, doing a subdivision, building up a stable of single family rent-to-own homes, building and operating multifamily properties, and more.

The longer I continue in this business, the more convinced I am that passive investing is the best option for the vast majority of real estate investors. This has not only become evident from my own experience but is also validated by lengthy discussions I’ve had with hundreds of other investors over many years.

I’ve got math to show how a passive investor with $100,000 could potentially grow their portfolio to $2 million to $6 million in 20 or 30 years. And amazingly, it’s possible that they’d pay very little in taxes on this journey. That’s the power of passive commercial real estate investing!

low stress landlord, rental property, real estate

How to Make Commercial Investments as Passive as Possible

I’ve identified three ways to be a passive investor, and any of the three provide valid opportunities for investors to get involved.

  1. Become an active-passive investor.
  2. Become a passive-passive investor.
  3. Become either of these through a crowdfunding portal.

Active-Passive Investing

An active-passive investor is someone who goes to great lengths to vet the syndicator they’re working with. But they don’t stop there. They also take a deep dive into each deal that the syndicator puts in front of them. They stay involved over time.

To execute this strategy, spend the majority of your time vetting the sponsor. You need to really know who you’re investing with and you need to get to know them well. Start with a default position of saying NO to investing with each of them. And make them prove that you should switch it to a YES.

Visit them in person. Do background checks. Google their name and companies, and critically review what people are saying.

Google their name with “SEC violation” in the same search. Check their references, and try to track down references they didn’t give you.

Then when you’re reviewing a deal, take a deep dive. Go tour the property. Read online reviews. Do your own market study.

Learn to read financials and critically question theirs. Talk to competitors. Check zoning, and ask about new competition at the planning and zoning office.

Under this strategy, you’ll not only keep a close eye on the operator but also on the deal itself. If this is too much, the next strategy is a bit more streamlined. (Note that many investors migrate from this strategy to the next over time, as operators develop their track record with the investor.)

Passive-Passive Investing

For this strategy, you need to go to the same depth of due diligence on the sponsor—perhaps even more. Review more than one. Compare their private placement memorandums. Meet them in person. Go see some of their past or current deals. Do all of this in addition to everything else I said in the previous section.

The difference here is that once you’ve deeply vetted a sponsor and you’re sure that they are everything you believe them to be, you may choose to not critically review every deal.

In other words, you trust them, you’ve verified their track record, and you elect not to fly out to see every deal and review every financial statement in detail.

Let’s face it. Some people are too busy or don’t have the skills and knowledge to carefully evaluate each and every deal. This could be a great passive path for you if you are in that boat.

And before you protest, realize that is what you are doing every time you invest in a mutual fund or even in a specific stock. If you invest in Berkshire Hathaway, you are trusting Warren Buffett and his team to make the very best acquisitions and achieve the very best possible results. Your interests are aligned with them. You’re not joining them to perform due diligence on every asset they acquire and questioning them on each income statement line item.

Many very wealthy and experienced passive investors follow this strategy. But perhaps you are new to this, and you’re not ready to invest $50,000 or more in each operator or deal.

Are there other options?

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

Confident young woman standing on an urban rooftop daydreaming with her arms folded backlit by the bright flare of the rising sun

Active-Passive or Passive-Passive Investing Through Crowdfunding

The Global Investment in American Jobs Act of 2013 opened up a whole new world to prospective investors. The real estate crowdfunding portals that have arisen since then are providing a limited amount of vetting and wide access for millions of investors to meet sponsors, review deals, and (sometimes) invest smaller sums of capital.

And this “smaller” issue can actually lessen risk since investors may be able to dip their toe into a handful of investments rather than sinking most of their liquid nest egg into one.

However, here’s a word of warning: if you’re using a crowdfunder, don’t assume they have fully vetted each sponsor and each deal to your standards. There is only so much they can do.

Each one I’ve spoken to has claimed to have more investments than good deals, which means there could be a propensity to broaden their nets. This may be less than ideal for you!

Summary

Whether you’re connecting with sponsors directly or meeting them through a crowdfunding portal, I urge you to carefully vet the sponsor. And if possible, vet each deal.

This will save you a boatload of hassle for years to come, and it may save (or make) you a lot of money, as well. Please don’t take this lightly!

If you believe in real estate investing but you’re banging your head against the wall, trying to get started or grow your portfolio, I’d encourage you to consider partnering with an expert.

I’ll leave you with the thought I postured before. Why work harder than you need to, to make less than you could?

Have you found success in your efforts to vet sponsors and find passive investments?

Share your tips and strategies in a comment below. 

 

About Author

Paul Moore

After graduating with an engineering degree and then an MBA from Ohio State, Paul started on the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They sold it to a publicly traded firm for $2.9 million five years later. Along the way, Paul was Finalist for Ernst & Young's Michigan Entrepreneur of the Year two years straight. Paul later entered the real estate sector, where he completed 85 real estate investments and exits, appeared on an HGTV Special, rehabbed and managed dozens of rental properties, developed a waterfront subdivision, and started two successful online real estate marketing firms. Three successful developments, including assisting with development of a Hyatt hotel and a multifamily housing project, led him into the multifamily investment arena. Paul co-hosts a wealth-building podcast called How to Lose Money and is a frequent contributor to BiggerPockets, producing live video and blog content on a weekly basis. Paul is the author of The Perfect Investment—Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and is the Managing Director of two commercial real estate funds at Wellings Capital.

17 Comments

  1. Cindy Larsen

    Paul,

    Thank you for a very interesting and thought-provoking post. The active passive investor path is attractive to me. I might be interested in this path, mostly for 401(k) money, but I don’t really have any idea of how to vet a sponsor.

    Perhaps you could do a post on how to qualify a sponsor or a syndicate or whatever? How do I (the passive investor) know whether or not to believe these people I am potentially giving money to, about anything? Even if they are honest, how do I know that they are accurate in their projections of the risks and returns? How do I know what skill sets they are great at and what skill sets they lack? For example they might be great at renovating properties and then turn the properties over to property managers who are not up to my standards. Or they might do the property management themselves without being good at it. Or they might have optimistic estimates for how long it takes to do the renovation to begin with. My experience is that each step in the BARRR method of investing is possible to do correctly, but that knowledge, care and attention to detail is required, and that mistakes can be very costly. If I am the one making the mistakes, at least I am learning from them. I don’t want to end up investing in someone else’s learning process. Do sponsors and syndicators write contracts that ensure I don’t end up paying for their mistakes?

    I would also only be interested in investments that I could drive to in a couple of hours. I have investigated remote investing and I have decided that that would cause me more stress than it is worth.
    Part of the reason I am a real estate investor is that I like to be able to see and walk through (and have my home inspector investigate) a property before I invest in it. So how do I find local passive investments?

    Please let me know if you have any insights into these questions.
    Thanks,
    Cindy

    • Rebecca Jackson

      I agree with you. I’ve reached out to a syndicator, but he’s only done about 4 deals and has no completed deals to show projections vs actual. I don’t like the idea of handing my capital to a stranger; I could get burned badly with no say. Both my CPA and RE mentor have advised against it. They said handle your own capital, otherwise you open yourself to unnecessary vulnerability (Madoff anyone?). I prefer notes because it’s literally money making money, the broker sends me potential borrowers, the loan servicing company takes care of everything after closing. Now that’s passive without stressing about getting ripped off 🙂

      • Paul Moore

        Rebecca, there are many syndicators out there with phenomenal track records. I know of some syndicators (including us) who allow their investors to view their books, since they have nothing to hide. There are definitely some crooks out there, but anything sketchy should be uncovered during due diligence. It sounds like the active route or notes may be your preferred methods, though!

    • Paul Moore

      Hi Cindy, thank you for your comment. I would refer you and others to this article: https://www.whitecoatinvestor.com/evaluate-real-estate-syndication/

      This article also has some good points: https://www.mashvisor.com/blog/how-evaluate-real-estate-syndication/

      Vetting a sponsor/syndicator is a big issue that we take very seriously at Wellings Capital. We welcome people to fly out to meet us and come with us on property visits. We allow investors to see our financials, we have nothing to hide.

      Regarding how to find local passive investments…that can be difficult, but not impossible. It just means your options are much more limited. It sounds like the active route might be more your style. Feel free to message me here on BP and we can continue chatting.

    • Paul Moore

      Thank you for your comment, Cindy. Great questions. I am actually planning to eventually do a post on our process for vetting operators/sponsors. In the meantime, I would refer you and others to this article: https://www.whitecoatinvestor.com/evaluate-real-estate-syndication/

      This article also has some good points: https://www.mashvisor.com/blog/how-evaluate-real-estate-syndication/

      It is amazing to me how many people are just not careful enough when it comes to their hard earned money. Due diligence can make or break investments, so you are definitely on the right track.

      Regarding how to find local passive investments…it is difficult but not impossible. Your potential options are just limited. It sounds like the active route may be more your style. Feel free to message me on BiggerPockets and we can chat a bit more.

    • Paul Moore

      Thank you for your comment, Cindy. Great questions. I am actually planning to eventually do a post on our process for vetting operators/sponsors. In the meantime, I would refer you and others to Google “syndicator due diligence” and check out the first few articles. Especially the one on the White Coat Investor site.

      It is amazing to me how many people are just not careful enough when it comes to their hard earned money. Due diligence can make or break investments, so it seems that you are on the right track.

      Regarding how to find local passive investments…it is difficult but not impossible. Your potential options are just limited. It sounds like the active route may be more your style, but feel free to message me on BiggerPockets and we can chat a bit more.

  2. Christopher Smith

    I went passive RE from the get go because as a securities guy I knew I didn’t want to be an active landlord in my first major foray into RE. Has worked out great so far, bought heavily during the housing crises at major league depressed pricing, limited my buys to A/A- properties and put solid PMs in place immediatly.

    RE portfolio is rolling along exceedingly well with only minor mostly discretionary time demands on my part. Now I’m back spending most of my time in securities again. BTW, I’m mostly in large tech stocks e.g., FB, Google, MSFT, Alibaba, APPL, etc. since I work in Silicon Valley and am pretty comfortable making those individual selections. For the remainder of the stock market (i.e., non-tech) I leave that to Warren and Charlie through my ownership of Berkshire shares.

    Works really well since Warren and Charlie don’t normally go for tech stocks, but know the rest of the market exceedingly well. Do what you do well, then delegate to the experts to do the rest whether that be RE or anything else for that matter.

      • kris patel

        One TIC was Office building in Dayton, Ohio near air force base. Defense budget cut, went to foreclosure.
        Second TIC is Texas, student housing. management company was bad, we won court case. They were guilty of Fiduciary Duty, Negligence and breach of Contract. Case lasted years, lot of legal cost, and had to file Bankrupcy, luckily had non-recourse loa, but lost 90% of Dn Pymt., lesson learned. It was easy to get into TIC in 2006-2010.

    • Paul Moore

      Hi Christopher, congratulations on your success. Is your real estate portfolio all single-family homes? I agree with your last sentence, “do what you do well, then delegate…”. It’s all about the circle of competence.

  3. Adrian Ayub

    Hello there Paul,

    It was great to have dinner alongside you last night in Pasadena,

    And it would’ve been nice to have an additional time slot,

    As a 100% active investor and owner of two remote real estate companies, the dream of doing less and making more is enticing.

    I can not wait to finish your book that I got last night,

    Thanks again.

    • Paul Moore

      Hi Eric, I have not invested through any crowdfunding portals myself, so I don’t feel comfortable endorsing any. I prefer to invest in our own deals we do at Wellings Capital. However, I have heard good things about CrowdStreet, RealtyMogul, FundRise, and ArborCrowd. I think they all offer direct investment.

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