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Do You Fit the Passive Investor Real Estate Syndication Profile? Find Out Now!
Apologies if the title of this article conjures images of astrological forecasts - I just want to get to the heart of what passive investor real estate folks are all about. With this info, perhaps you’ll be able to answer yourself once and for all whether you are a passive investor in real estate or an active investor in real estate.
Yes, There is a “Type” of Passive Investor Real Estate
There is in fact a “type” or “profile” for the kinds of investors that are drawn to passive investing in multifamily syndication. Perhaps you’re one of them and don’t know it? Or maybe you’re on the fence and need a final summation to help you choose one side or the other?
Basically, This is the Distinguishing Feature…
Passive investors investing in multifamily syndications enjoy owning real estate assets without the day-to-day hassles of landlording. I need to clarify something here: as the passive investor doesn’t rightly own the real estate property - they in fact own shares in the LLC, as it’s the LLC that officially owns the real estate property in a syndication deal. It’s important to make this clarification.
But the point remains the same: passive investors enjoy earning cash flow on real estate without having to do any heavy lifting, decision making, or being “on call” for the myriad of issues that can come up when owning real estate property.
Yep, together with my husband we’ve owned single family homes and ran the landlord sprints of finding quality tenants (in many cases, NOT finding quality tenants), managing repairs, renovations, and general upkeep and maintenance. And honestly, it was great but a TON of work for a measly 3 bedroom/2 bath home. I mean seriously!
Once I got a taste of multifamily syndications I knew I wanted in. Think about it - it’s incredible when a bunch of investors decide to pool their money together so they can participate in an LLC deal for a multifamily apartment building. Collaborating with other investors, they can get involved in much larger real estate projects than they could on their own, plus they can make a positive impact in a neighborhood while building their family’s wealth.
Not to mention the tax advantages and the ability to diversify into all sorts of markets and asset classes without having to scope out the properties and secure the deals yourself. It was pretty sweet.
However… not everyone is ready to be a passive player.
Take for instance, Vio.
Vio is my general contractor, and he’s the best there is, truly. In addition to his contracting biz, he’s a real estate investor with a penchant for flipping properties. He inquired one day about multifamily syndications, and after I gave him a brief 101 primer on the topic, he said simply: “Nah, not for me.”
See, Vio - like many other RE investors I know - get a lot of joy out of being an active investor. They love nothing better than rolling up their sleeves and making decisions. He’s definitely an active investor through-and-through - no passive investor real estate here!
I was first drawn to passive investing in multifamily syndications, but soon I got the bug and desired to get more involved. With experience and several deals under my belt as a limited partner, I decided to branch out and start my own syndication deals as a sponsor. This is ACTIVE work, to be sure.
So I suppose whether you’re active or passive isn’t set in stone. This may change over the course of your investing life, as well as depend on your present-day circumstances, goals, and finances.
Are you a Vio (Active Investor) or Once-Me-o (Passive Investor)
There are a few questions to ask yourself to determine which investor camp you are more comfortable in. Take a gander at the following and find out if you may be a budding passive investor...
1. Do you enjoy making decisions?
If you’re like Vio and enjoy making decisions, from vetting tenants to planning renovations and choosing contractors, then passive investing isn’t for you. Passive investors must feel comfortable allowing their sponsor to make the important decisions. This goes without saying that they should have done their research on sponsors and partnered with someone they trust and have tremendous confidence in.
Although you won’t be making any major decisions as the passive investor, you won’t be in the dark. Sponsors will send you investment summary decks, monthly, and quarterly updates on how the investment is progressing.
2. Do you have plenty more than 50K to invest?
Now, as I’ve mentioned before many times (and I’m gonna say it a thousand times more still!), the minimum investment in a multifamily syndication is $50,000. I don’t care how much your net worth is, 50K isn’t chump change. Plus, keep in mind your 50K will be illiquid for a five year hold time.
Are there any upcoming expenses on the horizon that make you question whether you’ll need access to that cash? Or maybe your finances are stretched a bit too thin, in which case if you have JUST 50K on hand, I’d recommend not banking it all on passive investing in multifamily syndications.
Although I believe in syndication and haven’t had a sour deal yet, it’s still an investment - and like all investments, there are risks associated.
And of course, do I even have to say this? DO NOT invest in syndications by taking out a loan or a cash advance on your credit cards. Just DON’T.
3. Are you eyeballing that 1031 exchange?
Many investors in real estate opt for a 1031 or “like-kind” exchange when selling their property. They then roll over their profits at sale into the purchase of another property. As the limited partner in a syndication does not effectively “own” real estate property and instead owns shares of an LLC that owns the property, the individual cannot roll over their profits to purchase another property. In order to take advantage of a 1031 exchange, the LLC that owns the current property would need to purchase a “like kind” multifamily apartment, and unless all LLC partners are interested in doing such the 1031 exchange won’t happen. So while a 1031 exchange is possible, it’s unlikely.
4. Do you need a short-term investment?
Multifamily syndictions are a buy-and-hold method to cash flow. Although the average hold time is 5 years, it’s still half a decade and a significant amount of time. A lot can happen in five years: a medical event ($$$), job loss ($$$) death of a loved one or primary earner ($$$).
Again, to underscore what I previously mentioned - are you okay with your money being tied up for 5 years?
5. Can you share?
In general, syndication deals are an 80/20 or 70/30 split with the limited partners receiving the bulk of the profits and the sponsor receiving the smaller slice. You may be sharing profits with 20-100+ other limited partners, as well as the sponsor. While profits are often very handsome in a real estate syndication, many investors like my pal Vio prefer to find a fixer-upper, flip it, and claim 100% of the profits.
It comes down to which role fits your personality more.
Are you active or passive when it comes to real estate? That’s the main point. If you have 50K to invest comfortably (without feeling like you’re cash-strapped), if you would rather let someone else do all the work and make those hard decisions, if you aren’t stuck on a 1031 exchange, and if you don’t mind sharing what are usually generous profits with other limited partners and your sponsor, then passive investor real estate may be for you.
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We help you create passive income & ongoing cash flow so you can live life on your own terms.
Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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