How to Become a Successful Passive Investor in real estate investing?

How to be a successful passive investor

To be or not to be a Passive Investor

The word “passive” in “passive investor” has some negative connotations. We often hear “passive voice”, “passive role”, or “passive person”. Generally it conjures notions we’d rather avoid.


But “passive investor”? Someone who doesn’t have to be an active participant in earning money. Someone who makes strategic decisions from the outset, that when in place pretty much run themselves?


That sounds pretty sweet!


Through passive real estate investing, I’m able to spend more time with my two kids and husband and enjoy the beauty of all our city of Chicago has to offer. Passive investing allows me to take a more active role as a wife, parent, and community leader. If that sounds good to you, here’s how you can become a successful passive investor.

What is Passive Investing?

Successful passive investor

“If you don't find a way to make money while you sleep, you will work until you die.” - Photo by Canva

First off, passive investing isn’t about putting your money into a real estate syndication or apartment syndication and sit on your laurels. No, the last thing you want to do is “hope for the best,” with your hard-earned money. Passive investing is smart investing that doesn’t try to beat the market, and instead invests over long periods of time usually with the “buy and hold” approach. Compared to active investors, passive investors often have lower risk tolerance and focus on the long-view grand prize rather than short-term gains.

The nice thing about passive investing is that just about anyone can break into the market. You don’t need to be an accredited investor you just need to do some homework and play the investing game smart. 

While active investors often use fund managers that may come with fees for every single trade, passive investors usually manage their own investments on their own terms. Similarly, while active investors in real estate may purchase a property to fix it up and turn it into a rental property, passive investors instead invest in real estate syndications. In this way, passive investors can see cash flow each month while the property builds equity. When the syndicate sells the property, the passive investor benefits from any appreciation in the property in addition to the cash flow they’ve gained each month over the term hold – all without the hassle of personally having to fix, maintain, and upgrade the property over the years.

Passive Investments in Real Estate Syndication

Real Estate Syndication

Real estate syndication is a great way for investors to pool their resources to invest in properties much bigger than they could afford or manage on their own.Photo by Canva

In this article, I want to focus on real estate syndication, particularly value-add multifamily deals because that is what I have the most experience in. Passive investing in private real estate and commercial real estate used to be for the blue bloods, that is the deals that where only accessible if you knew the “right people” with connections or had those connections yourself.

Not so anymore! 

Today anyone can enter this market. However, to be successful you need to do your due diligence and avoid certain pitfalls that can trip you up. These considerations are as follows…

Know the Available Asset Classes

Available Asset Classes

Successful passive investors know the various asset classes for multifamily syndicates. - Photo by Canva.

Successful passive investors know the various asset classes for multifamily syndicates. There are A, B, C, and D asset classes. For each asset class there is a different style of investment return. Let’s run through the list, knowing these will help you be more strategic when planning your real estate syndication investments.

Class A:  

  • Type of Unit: 10 years or less, luxury

  • Best for: Appreciation

  • Tenants: White-collar, so beware of potential spike in vacancy during a recession.

Class B

  • Type of Unit: 10-25 years

  • Best for: Appreciation

  • Tenants: White-collar/blue collar mix

Class C

  • Type of Unit: 30-40 years

  • Type of unit: Rents below market rate

  • Best for: Appreciation in a rising market and cash flow

  • Tenants: White-collar/blue collar mix

Class D

  • Type of Unit: 30-40 years

  • Best for: Moderate to high cash flow in strong markets.

  • Tenants: Blue collar, government-subsidized.

Know Your Market

To be a successful passive investor, you must know your market. In particular, you want to know the 3 to 5-year historical growth across population, income, and wage. Here are some other considerations as you do your research:

  • Which markets stay strong during recessions?

  • How does the cost of living compare with the median household income?

  • Who are the primary employers? Are they diversified? (I recommend that no sector be more than 20% of the total employment).

  • Know the school district, is it attractive to potential tenants? (In my experience, the best tenants value good school districts).

Sponsor

Sponser

when you participate in a passive investment, you are putting a significant amount of trust in the sponsor or operating partner. - Photo by Canva

Successful passive investors know who the sponsor is and their track record. Questions to ask are whether the property management company is in-house or hired as third-party, how many deals they’ve done prior, and whether these deals were profitable or not.

Hold Period

The hold period is the amount of time the investment is held by the investor. In the case of real estate syndication, hold period is the agreed-to set of terms for how long the syndicate will hold the property before selling. Once the hold period is up, the investor gets their original investment back. Generally the target hold period is 5 years, of course the holding term may change, depending on the sub-market.

Underwriting

Unsuccessful passive investors often skip this step, not because it’s particularly difficult but because there isn’t a lot of information on how to analyze the deals. To be successful, you need to know a thing or two (or three) about how underwriting property deals work. In so doing, you can identify issues and more easily suss out overly aggressive benchmarks.

Fees

Fees are important because it gives the sponsor an incentive to ensure their own interests are compatible with the investors’ interests. Such fees you’d expect to see include:

  • Acquisition, asset management, property management, construction, financing, refinancing, disposition, and termination.

  • Fees may range from 1%-5%.

  • The fee percentage depends on the asset and business plan.

The Path of Success

Passive investing is a fabulous way to build wealth, but like all investments they require due diligence. If you do your homework and follow these tips, you’ll be well on your pathway to successful passive investing.

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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