The ONE thing you wish you’d known before investing passively?

Question

If you are truly a passive investor, I'd love to know what you wished you'd known before you'd started.

I don't know what I don't know right, and I'd really appreciate the feedback, both for me as an investor who is always looking to improve and for my podcast audience. There is a lot of hesitancy out there right now, and one thing I am hearing a lot is "I feel like I am going to miss something."

Understand if you don't want to respond publicly, please hit me up directly. You should be able to click on my name and then hit connect and type a quick response there. Thanks so much!

Jake

Bruce Lynn · Answer

1. Who are the boots on the ground and how much time do they have for asset management. This is more and more important with true asset management coming into play. If you're based in Dallas and buying a C/D in Houston you want boots on the ground there. 5 years ago maybe it didn't matter as much...1x month or ever 2-3 months site visit was ok. These days 1x month in minimum. If a co-GP is the local contact what do they do....are they a full time ER doc focused on medicine...a VP at GS focused on their career, or are they full time flexible RE investor that has control of their time, that can spend a little more or a lot more time at the asset if needed.

2. You're charging me an asset management fee.....what does asset management look like to you? 1x a month phone call with PM? 1x month review of financials? That might be ok on Class A 97% occupancy property, but it is NOT ok on 80% class C with value add reno strategy.

3. I don't know about for other people, but my passive journey has been anything but passive. Different work, but still work. Instead of looking at 100 properties in person or online, I'm looking at 100 presentations. Instead of cleaning up rat poop in 110F heat with no AC, I can sit at home and review financials. Just challenge an operator as to why a dog park was pitched in the presentation as part of the value add, dog park built, and out of 178 units we're only collected 2 pet fees???? You have to did and look and question more carefully these days. Pet audit now in place and collecting something like 40 pet fees a month. Just questioned $100,000 worth of signage. Still not to the bottom of that one yet. Lots of the billing and accounting from PM is just sloppy...maybe AM is catching/questioning/fixing, but maybe they're not. Maybe they are as green as the PM. That's not set it and forget it, even after you hand over hard earned money.

I don't think I've done it on any passive investment I am in, but I wish I would have gone to look at the asset if possible, and be in a position to inspect them now and then. There are places I've turned down, because I drive by it every day and don't believe the business plan of turning a C/D dump into class A. Of course I hope they prove me wrong and their investors make out like bandits, but knowing something about the area and the development itself is much better than just seeing it pitched in a presentation. I see crap like people saying Houston is home of NASA, when pitching a class C in Woodlands. Chances are there is not one person who works for NASA living or going to live in that development....so the presentations look good, but you have to dig deeper.

Hope this helps.

Ronald Rohde · Answer

How about, there is no such thing as passive investing?

It requires a lot of active work prior to making you investment and collecting dividends. The difference is that the work is just front loaded. Vet the deals, vet the sponsors, review the legal documents, etc.

Chris Seveney · Answer

@Jake Wiley

To be truly passive you would be investing in a syndication / fund - anything else is not passive.

What I would say is just because someone has a great marketing team, is a smooth talker or has written a book does not automatically given them a free pass from due diligence

As someone who has done multiple syndications - they are hard and you are constantly learning and get asked a ton of questions. I do have a list of questions you can ask to really understand the syndication. Send me a message and I can email to you as I cannot advertise / provide links in posts.

Thanks

Account Closed · Answer

You're only passive as an LP, so the is GP running the show, by law that's the setup. A close second is a real NNN like a QSR like a net leased Starbucks and basically do nothing and also maybe a ground lease deal.

But if you're hiring a property manager to 'do all your work' then it's not passive bc you must "manage the manager" and they will come to you to make major decisions, which is mentally taxing.

Jake Wiley · Answer

Ronald Great point! Thanks for chiming in.

Matt Engle · Answer

A strong argument can be made for real estate syndication being the only truly passive form of real estate investing.

Joel Owens · Answer

I tell people there is pre-work and post-work to buying a property.

Pre-work vetting a syndicator, a fund, a deal you will buy yourself and THEN post-work who will be running the property ( tenant, fund, syndicator, yourself ) after the property is purchased.

The massive differences are in post-work when it relates to type of asset class and structure in place.

I tell clients the process of buying NNN is not passive BUT when we find the right property and fit for your goals and risk tolerance THEN can be really passive. Some properties absolute NNN and ground lease really maybe a couple hours a year of items to handle and if have a loan updating personal financials to your lender.

The question becomes do you have more MONEY than TIME?

Making 500k a year up into millions and tens and millions of dollars people have no time. They want to find the best people to do business with. Vetting the persons knowledge and character is very important for someone who has no time. Those who have lots of time or partial time tend to want to do themselves and be more hands on.

John M. · Answer

Here is the typical order of the most passive investments (syndication) to the least passive in my opinion.

1)Syndication as a Limited partner

2)Absolute Ground lease investments

3) NNN investments

4) NN investments

5) Multifamily/Residential with a property manger in place

6) Short term rentals

7) house flips

8) development

Duke Giordano · Answer

Great question @Jake Wiley

I think in this current market environment it is more important now than ever (in recent time) to focus on one's education and proper due diligence in all components of the deal. Just to reiterate that includes the sponsor, the market, and the deal, but as we all know the sponsor is by far the most important. I think what I would say as a learning point looking back is to not be afraid to take it slow, and focus and devote time on your education when evaluating all three of these components. It is particularly important to pay attention to the debt structure today and how it relates to exit plans for the sponsor. In addition whether it is a fixed or floating rate that, and if floating what is the rate cap cost, and what is the sensitivity analysis for increasing interest rates. If it is a fixed rate what is the prepayment penalty or yield maintenance, and how does this change overtime implicating exit plan down the road. Although I'm still investing in this market, I am certainly treading lightly and more selective for which the deals I invest in. I find very few deals that are appealing at this juncture when analyzing some of the components as outlined above.

The ONE thing you wish you’d known before investing passively?

The ONE thing you wish you’d known before investing passively?

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