{"id":132541,"date":"2020-12-02T14:21:27","date_gmt":"2020-12-02T21:21:27","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=132541"},"modified":"2023-06-26T08:51:53","modified_gmt":"2023-06-26T14:51:53","slug":"and-criticalstep-passive-real-estate-investing","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/and-criticalstep-passive-real-estate-investing","title":{"rendered":"The First (and Most Critical) Step to Passive Real Estate Investing"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC5261700587\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><\/p>\n<p>Have you ever tried to make reservations for a Subway restaurant? That&#8217;s a\u00a0ridiculous question, right?<\/p>\n<p>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\u2019re craving a Subway footlong, you are likely minutes away from satisfying that urge.<\/p>\n<p>Have you ever tried to get reservations for Noma restaurant in Copenhagen?<\/p>\n<p>Ren\u00e9 Redzepi&#8217;s\u00a0Noma 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\u00a0attempt to get a table on reservations day.<\/p>\n<p>(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.)<\/p>\n<p>So, what does this have to do with real estate?<\/p>\n<h2>Real Estate Syndication Deals Abound<\/h2>\n<p>I\u2019m entering my third decade as a full-time real estate investor. And I\u2019ve noticed a disturbing trend. Syndicators and investment opportunities are popping up on every corner, like Subway restaurants.<\/p>\n<p>I fear the future for many of today\u2019s 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\u2019ll see who is swimming without a bathing suit.<\/p>\n<p><strong><em>Related:<\/em><\/strong><em> <a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-investors-stop-skinny-dipping\" target=\"_blank\" rel=\"noopener noreferrer\">Warren Buffett\u2019s Advice to Real Estate Investors: \u201cStop Skinny Dipping!\u201d<\/a><\/em><\/p>\n<p>Are you planning to <a href=\"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investing\" target=\"_blank\" rel=\"noopener\">invest in a passive real estate opportunity<\/a>?<\/p>\n<p>I\u2019ve been investing this way for some time, hundreds of friends have joined us to do the same. We\u2019ve been combing the fruited plain for years on a quest to find the very best operators and deals. And we\u2019ve learned something:\u00a0<strong><em>This is a lot harder than it looks! <\/em><\/strong><\/p>\n<p>If you want to do it really well, that is.<\/p>\n<p>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.<\/p>\n<p>The word &#8220;syndication&#8221; made me nervous back then. I had grown up watching <em>The Godfather<\/em>, and I wondered if syndicates had anything to do with horses\u2019 heads and such.<\/p>\n<p>In those days, it was hard to find a <a href=\"https:\/\/www.biggerpockets.com\/blog\/2010-08-30-real-estate-syndication-3-ways-you-can-profit\" target=\"_blank\" rel=\"noopener noreferrer\">great syndication opportunity<\/a>. The fat cats had the corner on the market and small investors had little meaningful access. And there was limited information online. I can\u2019t imagine just how little information was available before the internet.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-124470 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/04\/landlording-guide-cover-702x336.jpg\" alt=\"Looking-for-work\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p>Oh, how times have changed. Syndicators have come out of the woodwork since the Great Financial Crisis. People who weren\u2019t even investing in real estate are now raising millions of dollars for their deals.<\/p>\n<p>Social media and a proliferation of online portals, as well as <a href=\"https:\/\/www.biggerpockets.com\/blog\/breaking-newssec-approves-crowdfunding-laws\" target=\"_blank\" rel=\"noopener noreferrer\">relaxed SEC syndicator and investor restrictions<\/a>, have resulted in an explosion of opportunities. Most are beautifully packaged. Some are great&#8230; others are not so great.<\/p>\n<p><strong><em>Related:<\/em><\/strong><em> <a href=\"https:\/\/www.biggerpockets.com\/blog\/democratize-real-estate-what-it-means-benefits-involved\" target=\"_blank\">Tech Is \u2018Democratizing\u2019 Real Estate\u2014Creating Big Opportunities for Syndicators &amp; Investors<\/a><\/em><\/p>\n<h2>Exercise Caution When Investing a Syndication<\/h2>\n<p>I\u2019m 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.<\/p>\n<p>What I am saying is this situation calls for great diligence on the part of investors. There\u2019s a lot to choose from out there, and making the right choice could dramatically impact your future and your retirement.<\/p>\n<p><em>I know.<\/em> I\u2019ve 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\u2019s meaningfully shaped our firm\u2019s investment philosophy and practice today.<\/p>\n<p><strong><em>Related:<\/em><\/strong><em> <a href=\"https:\/\/www.biggerpockets.com\/blog\/ways-structure-syndication\" target=\"_blank\" rel=\"noopener noreferrer\">7 Ways to Organize &amp; Structure a Real Estate Syndication<\/a><\/em><\/p>\n<p>The great news is you don\u2019t 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.<\/p>\n<p>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\u2019d learn in any university.<\/p>\n<p>And, of course, there\u2019s BiggerPockets. You\u2019re likely here because you love to learn and want to connect with like-minded investors and entrepreneurs. You\u2019re in the right place to do that. There\u2019s no other place like this on the planet!<\/p>\n<h2>Real Estate Syndication Due Diligence Is So Important<\/h2>\n<p>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 <a href=\"https:\/\/www.biggerpockets.com\/podcast\" target=\"_blank\">podcasts<\/a> and <a href=\"https:\/\/www.biggerpockets.com\/store\" target=\"_blank\">books<\/a> to list here, but I&#8217;d like to call out one particularly great book written specifically to help you in your due diligence efforts.<\/p>\n<p>If considering investing in a syndication deal, check out <a href=\"https:\/\/store.biggerpockets.com\/collections\/all-books\/products\/the-hands-off-investor\" target=\"_blank\" rel=\"noopener noreferrer\"><em>The Hands-Off Investor<\/em><\/a> by my friend Brian Burke. It\u2019s published by BiggerPockets and you can get a copy in the <a href=\"https:\/\/www.biggerpockets.com\/store\" target=\"_blank\" rel=\"noopener noreferrer\">BiggerPockets Bookstore<\/a>.<\/p>\n<p>You need to be sure you deeply trust any syndicator you hand your cash to. The critical question to ask yourself is this: \u201cAm I willing to be in trouble with this person for the next 5 or 10 years?\u201d<\/p>\n<p>Why? Because almost every deal has trouble of some kind. Do you trust this person to handle your capital through tough times?<\/p>\n<p>If you\u2019re 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\u2019t 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.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-79390\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/08\/multifamily-market.jpg\" alt=\"market-research\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/08\/multifamily-market.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/08\/multifamily-market-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h3>Due Diligence Process for Real Estate Syndications<\/h3>\n<p>Here is a sample of the issues we consider essential. (Note I\u2019m using the terms syndicator, operator, and sponsor interchangeably.)<\/p>\n<ul>\n<li>Has the operator been in this asset type since the Great Recession or before?<\/li>\n<li>Does the operator have a cohesive internal staff?<\/li>\n<li>What is the syndicator\u2019s track record? Their best deal? Their worst deal?<\/li>\n<li>Is there a moral and philosophical fit?<\/li>\n<li>How does the syndicator speak about their spouse, their investors, and their competitors? And how do they speak to waiters and flight attendants?<\/li>\n<li>How much skin does the syndicator personally have in the game?<\/li>\n<li>Does the PPM (the investment prospectus) show alignment between the sponsor and the investors?<\/li>\n<li>How much debt does the syndicator utilize and what are the details of that debt?<\/li>\n<li>What do online reviews and other investors say about them?<\/li>\n<li>How much and how often do they communicate with investors along the way?<\/li>\n<\/ul>\n<h2>The Bottom Line<\/h2>\n<p>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\u2019s you, one of the most important financial decisions of your life is where you\u2019ll invest next.<\/p>\n<p>Choose wisely, my friend.<\/p>\n<p>If you boarded a plane for Copenhagen right now, you might not be able to enjoy dinner at Noma\u2019s. You may not get a seat at Noma\u2019s this year, or ever. Its exclusivity speaks of its quality.<\/p>\n<p>If you had the time, money, and opportunity to eat at Noma\u2019s, you would probably choose that over Subway. Especially on your anniversary.<\/p>\n<p>Don\u2019t treat your investments with any less care than you do your anniversary eating choices.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/real-estate-companies?utm_source=blog&amp;utm_campaign=agent_directory\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-129025\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/08\/company-directory-blog-ad-1.jpg\" alt=\"\" width=\"702\" height=\"120\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/08\/company-directory-blog-ad-1.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/08\/company-directory-blog-ad-1-300x51.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/a><\/p>\n<p><em>What about you? Are you planning to invest passively? How do you choose your syndicator and your investments?<\/em><\/p>\n<p><strong>Join the discussion below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Ready to hang up your hat as an active real estate investor and invest passively? If so, the most important financial decision of your life is where to invest next.<\/p>\n","protected":false},"author":214608,"featured_media":114087,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-132541","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/132541","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=132541"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/132541\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/114087"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=132541"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=132541"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=132541"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}