Fundamentals of Passive Real Estate Investing

How to Get Started as a Passive Investor

Getting Started

• Build relationships with current owners and investors

• Research and complete due diligence

• Develop an underwriting strategy

• Create you own personal investing criteria

How to Find Deal Sponsors?

• Contact on commercial real estate blogs, websites, or platforms (BiggerPockets)

• Attend multifamily conferences

• Go to local real estate investor meetups

• Visit your local REIA

Understanding Metrics & Submarkets

Basic Metrics

• Gross potential revenue, net income, other income, line item expenses (T-12), and net operating income​

• Cap rate, average annual return, internal rate of return, and cash on cash ​

• Debt service coverage ratio, total return, and preferred return will give a good first round of analysis for the property.

Surrounding Areas

• Crime rates and school system​

• Average household income and average household value​

• Nearby retail, nearby universities, and key geographic indicators​.

• Migration, new jobs, rent growth, and nearby comparable’s.

Investment Opportunities

• Multifamily​

• Single Family​

• Self Storage​

• Office buildings​

• Retail​

• Mobile Home Parks​

• Industrial​

• Franchises

How to Determine Your Investment Criteria

Questions to help narrow down your investment criteria!

• How much do you have to invest?​

• Cash flow: How much cashflow are you wanting/needing to make each year?​

• Appreciation: How much appreciation?​

• IRR: What percentage of IRR are you targeting?​

• What type of assets and area do you want to invest in?​

• What are returns like in the market today? ​

• Work with sponsors who are conservative and realistic with their underwriting.

How You Can Vet a Potential Sponsor

• Look for a proven history of results​

• How many properties have they purchased?​

• How many properties have they sold (full cycle)?​

• What were the returns on the previous investments?​

• What investment criteria are they looking for currently?​

• What’s their background; have they started and run successful businesses before?

• Do they have any foreclosures, missed mortgage payments, or lawsuits?​

• How long have they been operating properties of this size?​

• Which property management company are they using, or do they own one?​

• What’s the business plan, i.e. Value-add, repurpose, buy-and-hold? Do they have experience with this type of play?​

• Can you provide referrals of past investors in your deals?

How to Vet A Sponsors Deal?

Questions to Ask Your Potential Sponsor

• What’s been your best and worst deal?

• Are you investing in the deal?

• How are you structuring your deals?

• Is there a preferred return?

• What is the split after the preferred return?

• Is there a waterfall structure for the split?

• When do you expect to sell or refinance?​

• What is your fee structure?​

• What type of debt are you looking for?​

• Who will perform the renovations?​

• What is the plan for rehab on the property?​

• What’s the current returns you’re projecting for this property?

Risks & Responsibilities

What are the risks of passive investing?​

• All investments carry some form of risk, and you could lose money​

• Inspect everything with a fine-tooth comb, risks are always present​

• Always seek to know the worst-case scenario​

• Stress test to know a variety of break-even points​

What’s the difference between a general partner and limited partner?​

GP – General Partner is the ownership group or deal sponsors​

LP – Limited Partner is an investor in the deal​

KP – Key Principal is someone who signs on the loan as a guarantor

Benefits of a Syndication Over a REIT!

• Syndication gives actual ownership of real estate ​

• Tax benefits – receive K1 and loss pass through​

• Access to the operator​

• Potential for a home-run deal​

• Ability to 1031 exchange​

• Operator paid on performance

Tax Advantages of Real Estate Investing!

Potential tax benefits of passive investing​

• Depreciation​

• Accelerated depreciation​

• Bonus depreciation​

• Tax write-offs​

• K1 as part of a partnership – losses flow through to individual passive investors​

• Real estate professional

Investment Process

During Closing​

• Review the deal​

• PPM and Operating Agreement​

• Wiring Funds​

During Hold​

• Periodic Updates​

• Distributions when available​

During Sell/Refi​

• Voting Rights​

• Return of Capital​

• Return of Profits

The Recap!

1. Attend your first meetup​

2. Find sponsors​

3. Underwrite deals​

4. Watch webinars/presentations​

5. Find a deal that matches your investment criteria​

6. Invest!