Active vs Passive Real Estate Investing
There are numerous misconceptions with real estate where many believe pursuing financial independence through real estate must be active and is a full-time activity. We thought we wanted to be active in real estate investing because that was how real estate was described to us. No matter if you self-manage or hire a property manager, this was a full-time job dealing with toilets, tenants, and trash.
However, it wasn’t until a couple years into our real estate journey did we discover there is another way to invest in real estate where you receive the benefits of ownership and don’t have to actively deal with the property. This was done by getting started passively investing through real estate syndications.
In short, a syndication is a group of investors pooling their capital to acquire larger assets unobtainable as individuals. Large commercial buildings or apartment complexes are examples of investments that can be syndicated. This is because these types of investments typically cost millions of dollars to acquire and the average investor either does not have the capital to acquire it themselves or does not want to place too much of their liquid capital into one investment.
Syndication is not just for the large property developer or the ultra wealthy. Anyone from anywhere can syndicate just about anything. Think about a purchase you made in the past where you shared in the cost of the item and both you and the other individual(s) shared in its benefit. This in essence is a type of syndication. Both you and the other individual(s) pooled your money together to purchase something everyone benefited from.
From Skepticism To Financial Independence
We admit, we were a little skeptical at first with getting started passively investing. How is it possible we can get double-digit returns on an investment without having to do anything. When we first heard this, we immediately thought Ponzi scheme! It wasn’t until we involved ourselves in the commercial real estate community did we discover syndications were actually investments the average person can participate in.
At first, we invested a small amount of our investable capital into getting started passively investing in syndications. When we saw the mailbox money start to come, that got us even more excited. We were paid for not having to lift a finger or hammer a nail.
Eventually, a large majority of our investable capital went into real estate syndications. Because of the higher returns real estate averages versus the stock market, this allowed us to reach financial independence and make work optional sooner because we did not need to save as much compared to investing solely in stocks.
Before Getting Started Passively Investing
Before going further into passive real estate investing, we should define a few terms you will frequently see as it relates to syndications.
What is a passive investor?
A passive investor is one who places their funds in an investment vehicle with expectations of a return on that investment with minimal effort. Some examples of passive activity include investing in a broad-based stock market index fund that tracks the stock market, real estate investment trusts (REIT), crowdfunding, and real estate syndications.
Passive investor versus limited partner
A limited partner (LP) is a type of passive investor who invests in a syndication such as real estate where the LP will not take any active role in the operation of the investment. The only role of the LP in a real estate syndication is to provide funds to the deal. After debt service (mortgage) is paid, the LPs are usually the next to be paid, making this one of the most advantageous positions as an investor.
Deal Sponsor
A deal sponsor is the operator of the property on behalf of the passive investors. They invest the sweat equity into the deal including scouting out the property, raising funds, and managing the asset after closing. Another name for the sponsor is the General Partner (GP).
These are a few of the general terms to know when getting started passively investing in real estate. With these terms out of the way, we can go into more detail about passive investing and the various issues passive investors face. We will also discuss how to find trustworthy sponsors and how to actually invest. Because real estate syndications are highly regulated by the SEC (as they should), there are strict rules that both sponsors and LPs must follow. By being familiar with these rules, you can keep yourself and the sponsors out of trouble.
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