There are so many ways you can invest in real estate from wholesaling, to fix and flip, buy and hold rentals, raw land, note investing, private lending, syndication, raising private capital, house hacking, etc., the list goes on and on.
With each of these different approaches, the same term gets used a lot, even misused. That term is passive income. The truth is, no investment is truly passive. Some investments are more passive than others, but none are truly passive. At the very least you have to vet deals, build systems and process, and manage those systems and processes. When first starting out investing in real estate, you’ll likely self manage your property, which requires you to find, screen, and place tenants, manage maintenance requests, pay the bills, keep accounting records, manage insurance policies, handle leases, etc. This is by no means a passive approach. But it is an approach many people find themselves doing with illusions it is passive. Sure, at times it can be relatively smooth sailing. But at other times it can feel as if the wheels are falling off the wagon. I know, because this is where I got my start investing in real estate. There have been a lot of peaks and valleys.
So what is one to do it they want a truly passive investment? Well, as far as I know there is no such thing. Here’s why I say that. Let’s say you have a large sum of money you want to invest of $1,000,000. First you consider traditional asset classes, like stocks, bonds, and mutual funds. You’re probably going to enlist the help of a money manager. Well now you need to research that manager and firm. Already your investment is not so passive. Then you need to meet or talk with that manager periodically to review your portfolio, make adjustments, etc. You’ll likely find yourself watching the news, keeping up with the market, and searching for that next big opportunity. You’ll concern yourself with which companies are expected to beat earnings, which are going to increase or cut dividends, etc. Next thing you know you can’t go a day without worrying about the market. And the worst part is, that’s all you can do is worry. You cannot control the details of any vehicle you invest in.
So next you consider investing your $1,000,000 in real estate. As we discussed, there are numerous ways to do so. You could buy quite a few single family homes. You would need to research, interview, and vet a qualified property manager. Then you would have to manage that property manager, review monthly income & expense statements, and navigate through all those other things we talked about. This approach isn’t so passive, you come to find out. You decide that instead you’re going to loan money for real estate projects. You have to vet the borrower, understand and vet the project, have the contract drawn up by an experienced attorney, and then hope the project is successful and you are repaid your money with interest. This is a bit more passive, but not entirely. With this less involved approach, you lose out on a lot of those benefits of real estate, like the power of leverage, depreciation, principal pay down, etc.
The moral of this story is investing money requires at least some level of due diligence and active involvement. Nothing is truly passive. If you are going to invest your money over time, then you should pick the best investment vehicle and strategy that fits your goals. If you want to be very hands-on, then perhaps building a business is the best approach. You’re investing both your time and money by doing so, and hopefully one day you can automate that business and step away from it. If you want to be as hands-off as possible, then partnering with someone else or a group of people is probably the best option. But remember our private money lending scenario, where you are less involved, but also less rewarded.
So what is one to do? It all comes down to what your goals are combined with your personality. What I mean by that is, you have to ask yourself what it is you want, then find a way to achieve that knowing your personality and what approach best fits you.
Many of the guests on the show have shared their journeys with us. They have all shared with us what drew them to real estate investing and how they got started investing. There have been lots of guests who have started as passive investors, partnering with more experienced real estate investors on their first deals. One benefit of this is they are able to learn from that experienced partner on a real project. They are able to “tag along” and see, sometimes, the life of the project from finding and vetting properties, to financing, managing and exiting the project. There are many ways to partner with real estate investing. That’s the beauty of real estate investing, is there are very few rules on how and what you can do. So long as you and your partners are following the SEC laws and reporting your income to the IRS, then your imagination is the only limit to what you can do.
Some experienced real estate investors whom I’ve learned about partnerships and so much more from include Joe Fairless, Matt Faircloth, Ben Leybovich, and Vinney Chopra. They are experienced and professional real estate investors, and all emphasize the power of partnerships.
One of the most common ways to form a real estate partnership is called a syndication. We’ve talked quite a bit on the show about syndications, but just to quickly define the term again, syndication is simply a fancy word for pooling resources – money, knowledge, time, & experience – together to invest in properties much bigger than one would be able to individually. Most of the time, syndications involve larger projects such as apartments, commercial or retail buildings, storage units, office buildings, etc.
Participating in a syndication as a passive investor is a great way to be involved in a deal that you otherwise wouldn’t be. While there are many different ways that people structure syndications, most of the time you, as the passive investor, will own a small percentage of the asset, whether that’s an office building, apartment complex, etc. You will be able to review the financials of the deal, be in the loop with the renovations, and potentially receive a return on your money invested.
There are very few hard and fast rules when it comes to syndications, aside from those previously mentioned IRS and SEC laws, of course. Profit splits, entity structures, asset classes, roles and responsibilities, distributions, decision making, and business plans all vary. No one syndication is the same as the other.
If you are interested in participating in a syndication here are a few things you should consider:
- What asset class (i.e. – apartments, self-storage, office, retail, industrial, etc.) do you want to invest in? Determining this high level criteria will help you begin to narrow down your approach.
- Consider your risk tolerance. Would you rather invest in stable, low risk properties that provide lower returns, or value-add properties that need to be stabilized, but offer potentially higher returns?
- What are your financial goals? Consider and weigh near term cash flow and long term appreciation. Different projects will produce different Cash-on-Cash returns and Internal Rate of Returns (IRR).
Once you have set your own investment criteria, you can begin to explore investment options. Note that some investment opportunities are only available to accredited investors, as defined by the SEC. At the time of this recording, an accredited investor is one who has:
- A net worth (excluding one’s primary residence) of $1,000,000, and
- An annual income of $200,000, or $300,000 joint income with one’s spouse, with reasonable expectation of reaching the same income level in the current year
It’s important to consult with an attorney when dealing with any U.S. Securities and Exchange Commission regulations.
With all of that said, syndications are essentially just partnerships. Each one is different from the other. When we discussed all the different ways you can invest in real estate from flipping, to private money lending and buy and hold rentals, we briefly mentioned the levels of involvement vs. the levels of returns. For example, you don’t receive the benefit of a tenant paying down your principle balance for you on a fix and flip project, like you do with buy and hold rentals. With private money lending, you don’t get to capture depreciation. Each method of investing has pros and cons. Buying and holding real estate for the long term offers the most benefits. You are paid in the following ways:
- Principal pay down by the tenant
- Appreciation of the property
- Cash flow
- Tax advantages (depreciation is a big one)
- Hedging against inflation by securing long-term fixed rate debt
Personally, I prefer to invest in buy and hold rental properties since they pay you in all 5 of these ways. Further more, I prefer to invest in residential real estate for a few reasons. For one, I understand it. I can look at a property and at least closely assess its value or rental price. I don’t have a crystal ball to tell me what the world will look like in the future, but there aren’t any scenarios I can imagine that would eliminate the need for people to have somewhere to live. These two reasons alone are why I focus on residential real estate, specifically multifamily, rather than office, retail, etc.
From single family homes to large apartment complexes, you can find partners to invest with. Typically the larger the deal, the more complex the partnerships are. But fundamentally, all partnerships are similar. Each person contributes something, whether that is capital, time, experience, or anything else, in return for equity, cash flow, or any other benefit. You can partner with someone on a single family home, or a group of people on a larger apartment deal. You can take a more active role, managing the deal, or a more passive role by providing capital and not having to manage the day-to-day operations.
Your investment approach should be built around your goals and desired outcomes. From hands-on active roles to more passive hands-off roles, real estate offers many different options. Investing is real estate is quite the journey, and one I personally enjoy. But no investment is better than the one you make in yourself and your future. You are already investing in yourself by listening to this podcast. Continue to make that investment today and in the future. It will pay dividends far beyond anything you can measure.
If you have any questions about partnerships or are curious about the types of properties and markets I invest in, feel free to reach out to me directly. Investing and partnerships are a relationship business, and I would rather first understand you and your goals. I’m happy to share my opinions on any investments you are considering, answer any questions I can, and just talk real estate investing. You can contact me at www.JacobAyers.com/contact. Simply provide your name and email, to drop me a note. I do not share your email with anyone, nor even add you to any type of list. You won’t receive any type of email unless it personally addressed to you from me.
In the coming weeks we’ll be speaking with several guests who are successful real estate investors, capital raisers, and syndicators. They’ll show us how exactly they find and vet deals, structure partnerships, and other details of their unique businesses. In the meantime, if you have any specific questions around these topics, feel free to reach out to me and I would be happy to answer any questions and pass them along to our guests to discuss on the upcoming shows.