Early Investor’s Guide to Passive Investing in Multifamily Real Estate
In this article, I want to speak to beginning passive real estate investors. You may have a few deals under your belt and want to learn more: how to find better deals, how to get the most out of your deals, and how to build your passive real estate investment portfolio beyond a few small deals.
A few points first. If you are new to passive investing in multifamily real estate, read my beginner’s guide or download my free report on passive investing. If you haven’t thought about passive income or multifamily real estate, now is the time.
Okay, on with the article.
A Few Successful Deals – Now What?
It’s exciting to get involved in the first few passive investing real estate deals. I’m going to assume that you are working with a sponsor and probably have invested in one or two properties. Each month you’re generating income and expect the property to sell in the next three to seven years.
This early success means it’s time to start planning for your next deals. Depending on your available capital, you may be considering entering more deals over the following months or within the next year.
As a professional real estate investor and entrepreneur, I understand what it takes to build a strong, stable portfolio. Here are my recommendations for how to guide you towards passive real estate investing success.
Early Investor Recommendation #1: Assess Your First Deals
Before looking to your next deals, I recommend you conduct an evaluation of what did and didn’t go well with your first few deals. This assessment doesn’t need to take much time, but it should answer a few critical questions:
- How was the process of finding and selecting the sponsor and/or the property?
- Do you want to continue working with the sponsor/syndicate?
- What do you like about the property, property management, and the local market?
- How long did it take for you to invest and to begin receiving returns?
- What returns were you promised and what are the actual periodic returns?
- What would you do differently next time and what mistakes did you make?
You can see that these questions get to the heart of what went well, what is going well, and what should be changed. A good habit is to ask these questions after each deal.
Early Investor Recommendation #2: Leverage Good Sponsors and Syndicates
Hopefully, you answered yes to question number two above was ‘yes’. If so, your current syndicate or sponsor is a good place to start to find your next deal. Why? Through your deal(s) you are already part of a known network of investors and sponsors. Connect with them to see if they can recommend your next deal. Now, part of the reason I do this is because finding strong sponsors, partners, and investors isn’t always easy. I believe that it’s important to build upon what is working.
Early Investor Recommendation #3: Find an Expert to Guide You
Okay, so you have your first few deals and everything is going well. This is exciting, but can be dangerous. Why? Because you don’t know what you don’t know.
If you plan on growing your multifamily passive income portfolio substantially, I highly recommend finding a mentor or, at the least, a group of committed investors to work with. Eventually, all investors find themselves in complicated deals with a high chance to cost them money. Having knowledgeable people around can help you side-step many problems, and can help you catch some of the mistakes you are already making. I’ve written about some important mistakes (active and passive) here.
Early Investor Recommendation #4: Focus Early on the Tax Benefits
I’ve seen time and time again how passive income investors neglect tax advantages. Investors often focus on the internal rate of return (IRR) and equity multiple, while failing to consider the tax benefits of the investment. Tax benefits from multifamily investing can dramatically reduce your tax burden. While active investors get more from an investment in terms of deductions, as a passive investor you still gain access to tax benefits. Read more about taxes in my article Multifamily Tax Advantages and Strategies.
Early Investor Recommendation #5: Think About Diversification
Now that you have invested in a few deals, you may be thinking more about diversification. Naturally, a few deals mean you will be top-heavy in a particular market or a particular multifamily property subtype, such as apartment buildings or condos. Depending on your risk tolerance, you may want to consider expanding into different markets, property subtypes, or even different syndicates.
Know What You Own, and Know Why You Own It
The above quote comes from famed investor Peter Lynch. This sums up nicely the early investor’s goal: to understand what makes a good deal and why that deal works for you. Of course, the next step is to duplicate the process, building a portfolio of stable returns – all passively. As always, if you have any questions or need advice, click here to contact me. I manage over $129 million worth of projects and have been in this business for a long time.
Comments