What Is Passive Real Estate Investing?
You might think of house flippers or property owners managing rental properties for extra income when you hear the term "real estate investing." If you want to invest in real estate but don't have the time or desire to manage tenants and properties, don't worry; passive real estate investing is for you.
An active real estate investor is someone who buys a property and then works as the manager finding and vetting renters, collecting rent and performing maintenance as needed. A passive real estate investor, on the other hand, is someone who buys shares in a real estate deal that is managed by an active investor (or in many cases a team of active investors) but doesn’t play a role in the day-to-day management of the property.
Passive real estate investing is a method to make extra money without having to put in the time and effort that more "active" investments, such as house flipping, require. But how does it actually work?
How Passive Real Estate Investing Works
A passive real estate investment can take many forms, such as an apartment syndication, real estate investment trusts (REITs), crowdfunding opportunities and real estate funds to name a few.
Passive investments, as the name implies, requires no involvement in the day-to-day management of the property. The only work a passive investor must do involves committing to the deal. When a sponsor team has an opportunity that meets your investing goals, you review the deal, sign the legal documents and wire in the funds you’ve committed. After that point, all a passive investor needs to do is review communications from the sponsor team and receive distributions from the cash flow or profit from the deal. This article details the steps to take when getting started with passive real estate investing.
What Information do I Receive to Help Me Decide if the Investment is Right for Me
Investment Summary
An investment summary (sometimes also referred to as an offering memorandum) is created by the sponsor team to outline the overall project. It includes an assessment of the property at the time of purchase, the local market economic trends, financial analysis and the business plan that will be undertaken to increase the revenue at the property.
The goal of an investment summary is to analyze how a certain investment will perform and whether it is suitable for a specific investor. The right entry price, the expected time horizon for holding an investment and the role the investment will play in the portfolio are all important variables to consider in an investment summary.
Investor Webinar
When reviewing a potential real estate syndication investment opportunity and deciding whether or not to invest, an investor webinar can be one of the most valuable sources of information to help you decide if the deal meets your objectives or not. The webinar will be hosted by the sponsor team and the investors on their contact list typically get first access to sign up for it.
During the webinar, the sponsors walk through the investment summary with the investors, highlighting details such as the transaction structure, business plan, market comps and their own track record. This live session allows investors to ask questions directly to the sponsor team about their experience and the project.
What is the Process to Invest?
You’ve vetted a sponsor team, found a deal that meets your investment objectives, have reviewed the investment summary and asked detailed question at the investor webinar. Assuming this deal still meets your investment criteria, it’s time to put in your commitment.
In many cases, sponsors offer an opportunity for passive investors to put in a ‘soft commit’ on a deal before the investment offering has officially opened (typically before the investor webinar). This soft commit doesn’t obligate you to invest in a deal but gives the sponsors an indication of your level of interest in the project. Whether you’ve put in a soft commit or not, you’re not legally part of the partnership in this deal until you’ve put in an official commitment by signing the documents and wiring in funds.
Commit to the Deal
Reviewing the private placement memorandum (PPM) is the first step after you've decided to invest in a deal. This is a legal document that describes the investment opportunity, the risks involved, and your position as an investor in the project in great detail. The PPM isn't the most enjoyable document to read, but it's essential that you do so in order to understand all components of the investment opportunity.
The subscription agreement is typically a much shorter document that defines the terms for a party's investment into a private placement offering or a limited partnership. This document will need to be electronically signed by either you or a custodian if investing with a qualified retirement plan.
The operating agreement is the governing bylaws of the investing entity (typically a LLC) that you will become part of when participating in this investment. The operating agreement provides owners and the government with a clear understanding of the rights of stakeholders and the protocol for handling any issues that may arise. This will also require signature from you and/or your partners or custodians.
The last step is to wire in your funds, taking care to confirm the wire instructions provided to you before calling your bank to initiate the wire. Let the deal sponsor know the funds are coming so they can keep an eye out for it.
Sit Back, Relax, & Enjoy
Your part is done!
The sponsor will send confirmation when the property closes to keep you up to date on your investment.
Following that, you’ll receive regular communications such as:
· monthly project updates
· detailed quarterly financial reports
· monthly/quarterly cash flow distribution
· K-1 statements early in each calendar year for filing your tax returns
For more details on the steps to take to start passive real estate investing, check out this article[RM1] .
Conclusion
Real estate can be a lucrative investment, but not everyone has the skills, time or desire to manage their own rental property.
Passive real estate investing is a great way for people to start earning money from real estate without having to actively manage the property or tenants. It allows you to continue doing what you love while generating cash flow to create the life you want. Real estate has helped millions achieve financial freedom while building generational wealth.
Start building your family’s legacy today and see if our team has an investment that is right for you. Schedule a call or fill out our investor form to get started.