Why is Successful Passive Investing in Real Estate So Difficult?
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesWhy is Successful Passive Investing in Real Estate So Difficult?
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Bianca BarcelosBusiness Member
NH · Member since 2026 · 88 posts · 48 votesI'm with you! I think that true "passive" investing in real estate is difficult because it misses the point of the asset itself. Real estate simply isn't a "passive" investment to just plop some money into; it's an active operational business with physical space with appliances, furniture, walls, floors, and people management to think about.
Even if you completely outsource to a property management company, you still can’t completely run this type of investment (to its most successful potential) if you're checked out. RE investing requires a level of asset management and check in's with your active partner (PM or otherwise). Understanding the financial analysis, operating expenses, rent rolls, etc. is important as well as knowing the physical condition of the property, neighborhood, strategy, and tenant.
All of these things, coupled with the current environment where cash flow is harder to come by, the margin for error is shrinking and we can't afford underperformance in our investments. Real Estate is a great investment but a tough one to do passively. It's important not to completely gamble cash on someone else's management of your asset.
Bianca Barcelos, Real Estate55 Reviews
57 Replies
- Inland Empire, CA · Member since 2017 · 151 posts · 79 votes2mo
Appreciate you sharing Don. Yeah I can only speak to multifamily syndications, but I'd think LPs would want to thoroughly vet the team and each operator in it, and have a pretty good understanding of how to do their due diligence on the market and deal they're considering. So on the front end I'd say it's not passive, but after that, sure it is. In my opinion, I don't think an LP needs to underwrite at the same level the operator does, but they should know how to spot red flags and ask good questions, understand it's all about assumptions and do those assumptions fit what's actually happening, is the deal structured in a way they're okay with, does the operator have enough skin in the game, etc. All of which takes time and I think it should otherwise you wind up getting into something without fully understanding the risks. I'm still surprised when people don't even take the time to review a deal's subscription docs...smh
- 2moBianca BarcelosBusiness MemberNH · Member since 2026 · 88 posts · 48 votes
I'm with you! I think that true "passive" investing in real estate is difficult because it misses the point of the asset itself. Real estate simply isn't a "passive" investment to just plop some money into; it's an active operational business with physical space with appliances, furniture, walls, floors, and people management to think about.
Even if you completely outsource to a property management company, you still can’t completely run this type of investment (to its most successful potential) if you're checked out. RE investing requires a level of asset management and check in's with your active partner (PM or otherwise). Understanding the financial analysis, operating expenses, rent rolls, etc. is important as well as knowing the physical condition of the property, neighborhood, strategy, and tenant.
All of these things, coupled with the current environment where cash flow is harder to come by, the margin for error is shrinking and we can't afford underperformance in our investments. Real Estate is a great investment but a tough one to do passively. It's important not to completely gamble cash on someone else's management of your asset.
Bianca Barcelos, Real Estate55 Reviews - Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2mo
@Don Konipol, I would argue that it is not so much "difficult" to succeed as it is to have a realistic definition of success.
If you are expecting 8 and 9% cash flow, net of fees, from a "value-add" multifamily, you are looking at, either, low income areas, rural areas, variable rate loans, IO periods, unfunded deferred maintenance, or bringing some level of risk into the equation that is likely not present on the 3-4% cash flow deals.The biggest issue is investor expectations (and I am one). "I want 7%+ cash flow, 18%+ Net IRR, high income, low leverage, fixed rate long term debt, growing market with limited new supply..." This is a unicorn. And unfortunately, there are syndicators that telling LPs all of this is possible, and then sending out opportunities that "almost" match this. They hit the return metrics, they try to convince investors that "70% LTV" is low leverage, and likely don't mention all the new supply that is being built within a couple miles, or that the MSA is growing, but the pocket they are buying in is declining, or some half truth like that.
- 2moRyan RomingerBusiness MemberReal Estate Broker · Indianapolis, IN · Member since 2018 · 340 posts · 144 votes
I think there's some truth to that. Passive investing still requires active due diligence upfront not just on the deal, but on the operator. From what I've seen, the strongest outcomes usually come from investing with experienced teams that communicate well, have a solid track record, and have meaningful skin in the game alongside their investors.
Intrigue Real Estate & Property Management4.6285 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2moThere are a lot of good comments already on this post. I agree with Evan that the ones that people basically chase returns and want a high yield with low risk and it just doesn’t typically work that way. I spoke to someone last week that wants their investment to double every 2-3 years. My comment to that is when you find it let me know.
7e investments53 Reviews - 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
Responding to point #1, part of the issue is that many syndicators market deals with unrealistic terms and projections. They're often the ones with the largest marketing budgets and the greatest visibility, so less experienced retail investors repeatedly see those offerings and begin to view them as the market standard. That ultimately contributes to unrealistic expectations.
Just today I saw a capital raiser marketing investments in already constructed build-to-rent communities. The distributable cash flow being advertised doesn't appear achievable from the properties' operations alone. It makes me wonder whether they're raising more equity than the acquisitions require and using a portion of that capital to fund early distributions. I have not found it challenging to obtain outstanding returns via lp in various syndications.
I do agree you need to vet the operator and the deal and this takes work or you can invest in a fund of funds and potentially give up return to have someone else do the getting on the projects (you need to vet the fund of funds operator). Note I personally believe getting the operator is more critical than vetting the deal.
One of my current investments is in danger of losing investment for our first time, a lot went wrong.
Our annual return at exit has been over 30%/year.
I also believe the other 3 I am currently invested in will achieve good returns. One seems on track to return far better than 30%/year. One is hard to judge but could be the best return of the 4 I am currently in,
Note my goal in non passive RE investment is to recover full investment in no more than 4 years. This is a 20%/year and takes work. The syndications take less work and have so far have easily met my 4 year rule.
I also think criticism related to no control is unwarranted. You either have active or passive:; passive by definition implies no control.
Good luck
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2mo
@Dan H. oh, the fund of fund model. Within these forums, I see very little value. If I can invest with sponsor for $25k or $50k, or a fund of funds going into the same deal with a $50k investment, why double fee. "But the FoF gets better economics...". Maybe, but to have to vet a second layer, deal with a middleman, etc the net better be substantially better.
And that doesn't even hit on the fact that many of these Fund of Funds groups are run by people that just came out of a weekend seminar focused almost exclusively on marketing and have no concept of how to underwrite deals. They are often pulled in by groups that are charging 5% acquisition fees, 2% Due Diligence Fees, large loan guarantee fees on non-recourse debt, placement fees, and still commanding aggressive carry for the GP.
When I have spoken to some of these FoF, some of whom have raised $10s of millions for some sponsors, their vetting and understanding is: how much of acq fee do I get, what's your year 1 cash flow projections and when do distributions start. Not how do you derisk your investment, how is the sponsor aligned long term with my investors, etc.
And @Stuart Udis, just remember: a 5% going-in cap rate, while borrowing at 6% interest, borrowing at 70% LTV, always yields an 8% annualized cash flow. It is as simple as counting. Just trust the incomplete spreadsheet I have built to force these numbers.- I suspect I am in one of the more prominent, if not the most prominent, fund of funds.
Quote from @Evan Polaski:
@Dan H. oh, the fund of fund model. Within these forums, I see very little value. If I can invest with sponsor for $25k or $50k, or a fund of funds going into the same deal with a $50k investment, why double fee. "But the FoF gets better economics...". Maybe, but to have to vet a second layer, deal with a middleman, etc the net better be substantially better.
And that doesn't even hit on the fact that many of these Fund of Funds groups are run by people that just came out of a weekend seminar focused almost exclusively on marketing and have no concept of how to underwrite deals. They are often pulled in by groups that are charging 5% acquisition fees, 2% Due Diligence Fees, large loan guarantee fees on non-recourse debt, placement fees, and still commanding aggressive carry for the GP.
When I have spoken to some of these FoF, some of whom have raised $10s of millions for some sponsors, their vetting and understanding is: how much of acq fee do I get, what's your year 1 cash flow projections and when do distributions start. Not how do you derisk your investment, how is the sponsor aligned long term with my investors, etc.
And @Stuart Udis, just remember: a 5% going-in cap rate, while borrowing at 6% interest, borrowing at 70% LTV, always yields an 8% annualized cash flow. It is as simple as counting. Just trust the incomplete spreadsheet I have built to force these numbers.
there is no doubt they take theirs fees.
however,
1) they regularly get a position in the capital stack above what the individual investor would get.
2) they have a team and resources that allow them to vet more thoroughly than an individual investor could do. In addition, they have the resources to visit the investment opportunities that individual investors are unlikely to do.
i expect my return from the fund of funds to be lower than many of my other syndications that I have participated in but I also suspect it has lower risk. This lower risk is not only because they can vet so thoroughly, but their position in the capital stack has them get paid before the individual investors. Also, diversity lowers risk. If I invest in a dozen syndications, my risk is lower than investing in a single syndication. I am unsure how many funds the funds of funds is invested in, but it is more than I could thoroughly vet by myself.
Vet one good fund of funds operator and get into a dozen plus well vetted syndications.
how many people inadequately vet their partnerships? There is a thread on BP that I was requested to consult on the options for the investors in the past few weeks. It resulted in a less thorough look at a 2nd such partnership in the same area and with many of the same principals. I was told there were 4 such messes (you can search my posts if interested). My analysis showed there was a transitive trust relationship among the partners. Some of the partners were experienced investors. Proper vetting was bypassed due to trust and/or time constraints. Summary is I thought it financially poor decision to try to save the one I analyzed thoroughly and highly suspect that to be the case in the one I just got a high lever overview of.
someone that performs thorough vetting can reduce the odds of these types of investment catastrophes.
I think funds of funds is another tool in the toolbox. It can provide a diversification that otherwise may not be attainable with adequate vetting.
good luck
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Don Konipol Passive investing in short term vacation rentals does not need to involve general partner/ limited partner arrangements nor involve syndications.
Building a new STVR does not need to involve a syndication. An investor can find a management company with which to sign a long term triple net lease(NNN) and lock in 14-15% ConC fixed returns based on terms of the lease.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2moI am curious how successful this model is as the tenant on the nnn I have seen usually fails or the CoC is in the low Single digits7e investments53 Reviews
- Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes2mo
Quote from @Chris Seveney:
I am curious how successful this model is as the tenant on the nnn I have seen usually fails or the CoC is in the low Single digitsPro Forma shows 15% C on C. REALITY is a LOT different. We stopped funding loans secured by STR properties about a year ago.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2mo
@Don Konipol I know many markets are getting hit hard and the capex and maintenance on them are costly. Like anything real estate, got to be in a good location and hold long term
7e investments53 Reviews
- 2moDenise SuppleeBusiness MemberRealtor · Willow Grove, PA · Member since 2017 · 995 posts · 647 votes
You make some thoughtful points. From my experience, I don't think passive investing itself has to be difficult, but I do believe taking the time to understand the investment and the people behind it is important.That's one of the reasons we spend so much time discussing opportunities in our co-investing club before anyone decides to invest. We ask questions, review the details together, and learn from one another. It doesn't remove all risk, but it certainly helps investors make more informed decisions.
Spark Rental Co-Investing Club582 Reviews - Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Don Konipolwhy are you commenting on an area you have a bias against? Curious how you can comment when you have no knowledge about loans on short term vacation rental properties.
it’s not pro forma when the lease gives the actual terms and income amount.Investors should know there are plenty of lenders providing traditional financing on STVRs.
- 2moHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votesThe topic is Passive investing. Means there is a syndication and proformas. There could be a 2 person partnership without syndication or proforma but that becomes more of an individual loan.
Quote from @Todd Goedeke:
@Don Konipolwhy are you commenting on an area you have a bias against? Curious how you can comment when you have no knowledge about loans on short term vacation rental properties.
it’s not pro forma when the lease gives the actual terms and income amount.Investors should know there are plenty of lenders providing traditional financing on STVRs.
I don’t do STR or syndications. - Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes2mo
Quote from @Todd Goedeke:
@Don Konipolwhy are you commenting on an area you have a bias against? Curious how you can comment when you have no knowledge about loans on short term vacation rental properties.
it’s not pro forma when the lease gives the actual terms and income amount.Investors should know there are plenty of lenders providing traditional financing on STVRs.
No knowledge? I began making loans secured by STR properties in 2002. Probably made about 25 of them thru the years, most were 12 -24 units used as STR, a few were large SFR types. Further, I was actually in the business (with my daughter) in NYC before the city revised and enforced regulations making STR on a professional scale much more difficult.
I can comment because I hold a masters degree in real estate finance; I’ve been a real estate investor since 1977; I’ve been managing partner of three real estate mortgage investment funds with combined assets of over $100 million and total loans of over $400 million; I’ve syndicated over $500 million in real estate notes and over $250 million in real estate properties; I’ve held or hold broker’s licenses in three states; and I have close to $10 million of my own capital invested in real estate, real estate notes, real estate syndications and REITs.
I’ve seen many 3N leases written for a 15% return to the landlord, or even more. The characteristics of these are some or all of the following
1. The buyer is paying significantly over market and is induced to do so by a lease set at double or more the market rent. When the lease terminates the buyer now has a property he can only lease for half as much and which is worth 30% or more less than what he paid
2. The tenant is paying way over market because they’re so weak both financially and historically that the risk of default is elevated by a multiple of risk. As a result the more important RISK ADJUSTED RETURN Is quite low.
3. The property is in an area likely to undergo significant negatives. When it does the lessee will walk away and the owner will be looking at a piece of paper you’ve issue saying 15% C on C and a reality of 0% C on C.
But that’s just my experience Todd. I’m always ready to learn. But, your obvious BIAS (as this is your livelihood) requires me to see actual PROOF OF CONCEPT and not merely your self serving statements and declarations. - Real Estate Investor · Memphis, TN · Member since 2016 · 423 posts · 141 votes2mo
Quote from @Henry Clark:
The topic is Passive investing. Means there is a syndication and proformas. There could be a 2 person partnership without syndication or proforma but that becomes more of an individual loan.Quote from @Todd Goedeke:
@Don Konipolwhy are you commenting on an area you have a bias against? Curious how you can comment when you have no knowledge about loans on short term vacation rental properties.
it’s not pro forma when the lease gives the actual terms and income amount.Investors should know there are plenty of lenders providing traditional financing on STVRs.
I don’t do STR or syndications.The Investors I follow on LinkedIn Say it takes 5 parts
1 Deal finder
2 EMD
3 Loan Qualifier
4 Down Payment
5 Asset Manager/Operator
I would rather a small group of folks take down a few deals first. I would like to get the hang of operating. You can spend the 30k-100k to start a fund, but that just means you have access to money that you can lose.
- 2moHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
Quote from @Jamie Parker:
Quote from @Henry Clark:
The topic is Passive investing. Means there is a syndication and proformas. There could be a 2 person partnership without syndication or proforma but that becomes more of an individual loan.Quote from @Todd Goedeke:
@Don Konipolwhy are you commenting on an area you have a bias against? Curious how you can comment when you have no knowledge about loans on short term vacation rental properties.
it’s not pro forma when the lease gives the actual terms and income amount.Investors should know there are plenty of lenders providing traditional financing on STVRs.
I don’t do STR or syndications.The Investors I follow on LinkedIn Say it takes 5 parts
1 Deal finder
2 EMD
3 Loan Qualifier
4 Down Payment
5 Asset Manager/Operator
I would rather a small group of folks take down a few deals first. I would like to get the hang of operating. You can spend the 30k-100k to start a fund, but that just means you have access to money that you can lose.
They are missing the most important part. An educated investor.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Chris Seveneyit’s interesting that you are unaware of successful hospitality management companies operating STVRs.
To be a moderator on this topic you need to better understand how triple net leases relate to fixed lease income payments and STVRs.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Henry Clark No, passive investing does not have to involve syndications or partnerships.
RE that is individually owned ( commercial , multi family or residential )whereby management, maintenance and marketing is done by a third party is a form of passive investing,
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2mo
@Dan H., I completely agree, but like vetting syndicators, Fund of Funds can be very similar.
I am glad you are involved with a Fund of Funds that performs true diligence and actually vets there operators. Unfortunately, like many things (syndicators, wholesalers, realtors, etc) there are a lot of people operating under that same title "Fund of Funds operator" that barely have experience making their own LP investments, but do have trusted networks and can raise money for others. Not all, but some, ask questions of sponsors they want to work with that basically start and end with: "how much am I going to make if I bring you capital". Then again, many of these are operating under the label of Fund of Fund, but are more commonly feeder funds, gathering money to place into a single sponsor and/or asset.
The point all remains the same: if you are going to invest in a sponsor or a FoF, you need to be able to vet them and understand what value they are actually providing.
If I were looking at Fund of Funds, I would be asking lots of questions about:
Which sponsors have you historically worked with?
How many new sponsors do you assess each month/quarter/year?
How do you protect my investment by going through you versus directly to sponsor (assuming it is a sponsor that I can invest in directly at a similar level)?
What diligence have you performed on the sponsors you work with?
What is your typical diligence process?
How many sponsors do you decline?
How are you compensated? - Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Don Konipol All of your cherry picked points are self serving. Father Time has passed you by. Triple net leasing in not a new concept.
Most investors do not go to lenders like yourself who charge sub prime RE rates on residential property.There is no need for investors to go the syndication route thru people like yourself. They can eliminate no control risk and syndicator vetting by buying properties individually. Financing can by done thru traditional lenders and mortgage bankers.
You cherry pick specific examples which are not the norm: 1. Vacation rental properties are constructed in tourist towns that depend on hospitality property revenue. They are not built in areas zoned for single family. 2. Most professional STVR managers have thousands of dollars invested in furnishings in each property. Unlike RE syndicators who have hefty fees and no skin in the game. STVR managers with skin in the game don t walk away. 3. New construction prices for STVRs are as low as $125/ sq ft., without land. Far from being overpriced, new construction duplexes give the investor a fixed rate that is achieved with lease coverage rates with as little as 30% occupancy.
You can’t comment credibly on subjects if you are basing your opinion on what you don t know.
- 2moHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
Quote from @Todd Goedeke:
@Don Konipol All of your cherry picked points are self serving. Father Time has passed you by. Triple net leasing in not a new concept.
Most investors do not go to lenders like yourself who charge sub prime RE rates on residential property.There is no need for investors to go the syndication route thru people like yourself. They can eliminate no control risk and syndicator vetting by buying properties individually. Financing can by done thru traditional lenders and mortgage bankers.
You cherry pick specific examples which are not the norm: 1. Vacation rental properties are constructed in tourist towns that depend on hospitality property revenue. They are not built in areas zoned for single family. 2. Most professional STVR managers have thousands of dollars invested in furnishings in each property. Unlike RE syndicators who have hefty fees and no skin in the game. STVR managers with skin in the game don t walk away. 3. New construction prices for STVRs are as low as $125/ sq ft., without land. Far from being overpriced, new construction duplexes give the investor a fixed rate that is achieved with lease coverage rates with as little as 30% occupancy.
You can’t comment credibly on subjects if you are basing your opinion on what you don t know.
The topic is Passive investing. Very few high income investors want to buy a property. Search, analyze and manage whether directly or thru a PM.
Looks like you have years of experience. Mr Konipol has made the top level post on Passive investing being hard for folks.
From your experience could you make an original post but confine the discussion to Syndicated deals. Make the post about Syndication deal analysis components and what to watch out for on each step. Please start at the Investor step.
- Real Estate Investor · Memphis, TN · Member since 2016 · 423 posts · 141 votes2mo
There are many great points made in the thread. I have underwriting 75m$ in multifamily offerings over the last 2 months and the story is pretty much the same in every case.
1). What are your projections
2). Are they achievable
Outside of the multifamily that I have analyzed, many of the offerings that are going back to the bank are 90% telling the same story. Projected the returns based on:
1). Refinancing
2). Rent Increases
3). Capital Improvements [granite/LVP/subway tile/etc]
When the market shifted, they were over exposed. There are 3 properties within 2miles from where i live that went back to the bank for the same reason, Bad Operational Management. 14m$ for 8m/ +30m$ for 23m(Vacant/No COE )/ 9.8m$ for 6m.
Passive investments require someone to manage it. It is difficult depending your choice of manager. Apparently Grant Cardone is doing a such a job that he posted the entire Class Action Hearing on Youtube.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Henry Clark Your comments about high income investors not wanting to buy properties personally could not be farther from the truth. I personally know investors who are income earning over $500k who never invest in syndications. These people include professionals, business owners, family foundation owners and professional athletes.
They are passive owners. They have zero to do with day to day operations. Control is through a management company.
From my experience, 30 years viewing syndication deals, there are good reasons smart investors avoid syndications.
1.Loss of control, can t easily replace a management company connected to syndicator.
2.Excessive front end fees to cover: syndicator salaries, marketing costs
3.No skin in the game; syndicator has very little cash invested in purchase of property,
4. Exit strategy; no easy way to sell partnership interest.
5. Syndicator story revolves around “ greater fool” theory. If syndicator is so successful why are they not just locating properties already and getting investor interest. Why don’t they invest their own money.
As a commercial developer you should learn how to meet the goals of the gatekeepers, their requirements for the investors they represent.,
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
I feel like we've transitioned from the original spirit of the discussion, which was why passive investing is difficult, to debating what actually constitutes a passive investment.
I believe Todd is comparing apples to oranges by equating his STVR model with what others consider passive investing, namely syndications. I think we can all agree that under the syndication model, an investor is passive because they lack control. Absent extraordinary circumstances, they generally cannot make decisions, hire or fire the property manager, determine rental rate changes, approve vendors, or direct operations etc. etc. Todd, however, retains all of that control under the STVR model he described.
Where I tend to side with Don and not Todd is based on the argument that signing a NNN type agreement with an STVR property manager makes an investment passive. As the owner of NNN properties, I can tell you NNN leases with credit tenants are fundamentally different. Credit tenants have systems, asset managers, contract administrators, and legal staff who verify insurance, ensure contracts are in place before vendors perform work, and oversee countless other operational details. In summary, as the owner I can sleep well at night knowing my tenant is operating the way I would as if I was making the same decision.
I do not have the same confidence that a typical STR property manager performs those functions with the same level of sophistication. Nor would I grant a property manager the same broad authority I would a NNN credit tenant. As a result, a prudent owner remains hands on because they are not turning over the keys, both literally and figuratively, to a property manager with NNN-type responsibilities. They simply lack the infrastructure, resources, and sophisticated staff a true NNN credit tenant possesses.
Are there investment strategies where you can be a direct owner that's less operationally intense? Absolutely. To say they are passive is a stretch.
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Stuart Udis Just because your experience does not involve professional STVR management does not mean that it does not exist. Broaden your horizons and you will find there are hospitality managers who have systems in place to manage properties the same way the Hiltons and Marriott do.
Passive has nothing to do with your emotional mindset. Just because you feel emotionally uncomfortable in a NNN lease with a hospitality manager does not alter the fact that a NNN lease is a passive investment. STVR properties are business properties based on cash flow similar to other types of commercial business property. Emotional anxiety does not change the definition of passive RE investing.
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Todd Goedeke First, the overwhelming majority of Hilton and Marriott branded hotels are owned by third-party institutional investors or REITs, not by Hilton or Marriott themselves.
I will begin by sharing I began my career working on staff in the legal department of one of the larger hospitality REIT's which owned and managed billions of dollars in hotel assets. We had 4 attorneys and 3 paralegals on staff, someone with 20+ years of experience as an insurance broker on staff to assist us with analyzing coverage limits for 3rd party vendors, dozens of staff members responsible for purchasing and procurement and contract management, asset managers with ivy league degrees and so forth.
My point is that you're comparing your model to institutional hospitality management when they aren't equivalent. The companies managing Hilton and Marriott branded hotels are usually highly capitalized organizations with layers of asset managers, revenue managers, compliance departments, procurement teams, HR, accounting, legal & risk management. Those systems exist because they're managing thousands of rooms.
One of the primary client groups I represent is property management companies, where I assist with improving their contract management and risk management systems. Most manage traditional rental properties, while others manage STRs, condominium associations, and other asset classes. After working with hundreds of these companies, I have yet to encounter one with the systems, knowledge, or operational depth of the type of management organizations I just described. That isn't meant as a criticism of property managers. It's simply recognizing the difference.
If you are telling me you found an STVR manager that possesses the staffing and capabilities I described, I would be shocked. Not to mention, even under your NNN arrangement you are still paying for insurance and taxes and seeking reimbursement, ensuring they are listing you as additional insured on all of their contracts with appropriate indemnification language, actively auditing their contract management, reviewing property records to ensure no mechanics liens are filed, no violations exist, ensuring all licensing and permits are up to date. Is it more passive than owning a class C/D SFH where you are getting calls about a clogged toilet? Yes. Is it truly passive? No, because you still have control and responsibilities I just described and those responsibilities are more pronounced due to the type of management company you are reliant on which again differs substantially from the management companies you are trying to compare your PM/tenant operation to. This is very different than a syndication where you have no control, don't even have access to all of the information you should be privy to as the direct owner and (hopefully) receive frequent updates and a K1 with professionally audited reporting. - Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Stuart Udis I too am amazed that you don't t understand what a NNN lease is. How can you give advice when you don't know the basics of a NNN lease. The property owner does not pay taxes on revenue and does not pay for insurance.its no wonder you are unaware of what happens when professional management companies scale and manage assets on a NNN lease basis when you don t have a full grasp of a NNN lease.
Stop thinking you are the smartest person in the room when it comes to STVRs and just maybe take time to learn of many STVR management companies managing boutique hotels and 50-100+ properties allowing investors to have by IRS definition a passive investment.
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@Todd Goedeke Yes with select credit tenants, allowing them to procure and pay direct for insurance is accepted practice but no sensible owner would allow a property manager/tenant hybrid STR operator to have that privilege. Owner obtains the policy and is reimbursed and is reimbursed for taxes and other misc. items as they arise.
There's no point in arguing with someone who is clearly inept in the way they operate their real estate. You've already proven this by thinking a STR PM/Tenant operator possesses the same capacities as the management companies who manage branded hotel portfolios along with acknowledging you are so passive in your operations that you don't verify they are listing you as additional insured on all of their contracts with appropriate indemnification language, actively auditing their contract management, reviewing property records to ensure no mechanics liens are filed, no violations exist, ensuring all licensing and permits are up to date etc. etc.
In theory, anyone can abandon the ordinary responsibilities of ownership and claim their real estate is "passive." That's the category you would fall into. For the vast majority of investors, however, that is by no means passive and certainly not what I would recommend.- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Stuart Udis:
@Todd Goedeke Yes with select credit tenants, allowing them to procure and pay direct for insurance is accepted practice but no sensible owner would allow a property manager/tenant hybrid STR operator to have that privilege. Owner obtains the policy and is reimbursed and is reimbursed for taxes and other misc. items as they arise.
There's no point in arguing with someone who is clearly inept in the way they operate their real estate. You've already proven this by thinking a STR PM/Tenant operator possesses the same capacities as the management companies who manage branded hotel portfolios along with acknowledging you are so passive in your operations that you don't verify they are listing you as additional insured on all of their contracts with appropriate indemnification language, actively auditing their contract management, reviewing property records to ensure no mechanics liens are filed, no violations exist, ensuring all licensing and permits are up to date etc. etc.
In theory, anyone can abandon the ordinary responsibilities of ownership and claim their real estate is "passive." That's the category you would fall into. For the vast majority of investors, however, that is by no means passive and certainly not what I would recommend.pretty obvious Todd just chimed in to pitch his deal :). I know with my NN lease tenants that are physicians I like those.. credit great PG worth something and an on going practice pretty passive but I still have to maintain insurance for my lender my tenant pays it but i have to arrange it and make sure its proper I collect the tax bill forward it and then double check that its been paid.. I can See STVR in Ski areas ocean front and or maybe the Wisconsin Dells since Todd is WI based and I guess over there in Pigeon Forge where you have a massive amount of STR investors but to my knowledge most of those folks just hire out PM's .. So for me give me professional owner operator tenant with a PG that means something and a practice that will go on for decades.. And then just pray they continue to renew the lease every 5 years.. :)
- Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes2mo
@Jay Hinrichs No , I m absolutely sure I m not pitching “ my own deal”.
investors have been following the passive investor requirements for years when holding real estate in their self directed retirement plans( Solo 401ks, IRAs).
iRS regulations require property management to handle all facets to avoid violating IRS regulations.. This includes paying taxes, insurance and maintenance. So for you to claim this is not happening with STVRs is
complete ignorance of the IRS rules regarding passive investing and retirement plans.- 2moJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Todd Goedeke:
@Jay Hinrichs No , I m absolutely sure I m not pitching “ my own deal”.
investors have been following the passive investor requirements for years when holding real estate in their self directed retirement plans( Solo 401ks, IRAs).
iRS regulations require property management to handle all facets to avoid violating IRS regulations.. This includes paying taxes, insurance and maintenance. So for you to claim this is not happening with STVRs is
complete ignorance of the IRS rules regarding passive investing and retirement plans.
wow your quite defensive I never said investors with solo ks or iras are not investing in STVRs I have had a self directed IRA personally since the mid 80s when they first came out. And have done a fair amount of investing in my check book IRA since I have to pay all my own expenses for my IRA thats why its called Check book.. I suspect you may not be aware of those vehicles based on your response .. No need for name calling either thats quite immature of you.
- 2moStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
I would strongly advise anyone following this forum not to adopt Todd's strategy as a way to avoid prohibited transaction issues. In my opinion, it places preferential tax treatment above significant liability exposure by putting major legal and financial responsibilities in the hands of someone who simply isn't set up or qualified to handle them regardless of the argument Todd makes that his tenant/PM possesses the necessary capabilities.
At the end of the day, the owner is still on the hook if insurance isn't maintained, taxes aren't paid, uninsured contractors are hired, contracts fall through the cracks, or other legal requirements are missed. Those responsibilities do not disappear. Having worked with hundreds of property management companies, I have yet to come across one whose systems and processes I would trust with that level of responsibility with no oversight.
To each their own, but I would never let tax treatment dictate a strategy that materially increases my legal and operational risk.
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