COVID-19 was an unexpected event that shocked many investors. I continue to hear from individuals looking to move out of the stock market into safer and more stable investments. Naturally, real estate is an and has always been an excellent fit – especially for mid- to long-term investments. It’s hard to beat a tangible investment capable of weathering a market downturn.
Now, for many, active involvement with the day-to-day of a real estate property is too much hassle. We call this the tenets, toilets, and trash challenges of managing a property. New investors or those without a background in real estate want to skip this and simply invest in a property. That is passive investing in real estate. As the CEO of a private real estate equity firm, my job is threefold: find great properties, raise money for the properties, and grow the properties into a profitable return on investment (ROI). I do the day-to-day work while you invest in the properties of your choice.
If this sounds good to you, but you don’t know how to get started, then read on. I’ve created this 10-step guide to launching your first passive investment in real estate. This guide will focus on how to create passive income in real estate, with a focus on multifamily. Investing in multifamily properties is where a lot of the future growth will be in real estate in the coming years.
Step 1: Understand the Benefits of Passive Investing in Real Estate
I hear this question all of the time: Is it possible to generate passive income in real estate? People are curious and often a little skeptical. Passive investing is popular in the stock market, but in real estate?
The truth is, yes, you can generate passive income in real estate. Passive real estate investing means you spend most of your time selecting a good deal while others manage the property and the deal. For more on passive investing in multifamily real estate, check out my article: Passive Income Through Real Estate Investing – Is It Possible?
Step 2: Understand the Benefits of Multifamily Properties
Now, I mentioned above that we are dealing with multifamily properties. For those new to multifamily, this includes the following property types:
- Apartment buildings
- Mobile home parks
- Fraternity and sorority houses
Step 3: Determine Your Investment Objectives
After doing background research, this is a good next step, especially if you are either new to investing or new to investing in real estate.
As an asset class, real estate provides a number of benefits (and drawbacks) to consider. Below are a few questions I recommend investors ask themselves:
- Will real estate be your primary investment?
- Do you prefer active vs. passive income?
- Are you investing for the short-, mid-, or long-term?
- Do your investments need to be local or can they be in other markets?
- Do you prefer monthly cash flow or appreciation?
- What kind of returns do you need based on your financial situation?
Step 4: Review Your Portfolio and Determine How Much To Invest
You’ll want to carefully select how many deals to invest in based on your investment objectives. A key point that many new investors need to know is just how illiquid real estate deals can be. Depending on the property type, investment strategy, and deal requirements, your capital could be tied up for between three to 10 years, even more in some deals.
Also, the buy-in for a passive real estate investing deal can range from thousands of dollars to tens or hundreds of thousands. It is still common for many investment deals to be restricted to accredited investors, however this is beginning to change.
Step 5: Outline an Investment Plan
An investment plan has many parts, which I will briefly describe here. If you want more information, download a free copy of my report, Passive Investing in Multifamily Real Estate.
A standard investment plan includes the following information:
- Available capital
- Risk tolerance
- Preferred rate of return
- Length of investment
- Preferred property types and classes
- Select markets
- Number of investments
For example, maybe you have $20,000 and you plan to invest for seven years in condominiums in the Dallas metro area. You will invest as a passive investor in a syndicate, expect to 2x your investment, and can handle a moderate amount of risk.
Step 6: Search for Deals
After you’ve made your plans, now is the time to reach out and find deals in your target market. This can be done online or through word-of-mouth. You want to search for syndicates, which are groups of investors who pool money to purchase a property. A syndicate will manage the deal and hire a property manager, allowing you to be a full passive investor. Private equity firms, like mine, also raise capital for deals.
Step 7: Gather Deals Options
By now, you’ve probably spoken to quite a few investors, syndicates, funds, or properties. You may have found a deal through a local contact or online via a crowdfunding marketplace or on a private equity firm’s website. I recommend investors gather seven to 10 deals – enough options but not too many. You want to make sure the deal you choose fits your requirements exactly. This is key. Choosing the deal is where the passive investor puts most of his time. This is like selecting a company to invest in.
Step 8: Conduct Due Diligence
Examining your selected deals can be a time-consuming process. This is where the rubber meets the road. I spend on average six months to a year evaluating a selection of deals, looking for those that fit my criteria. You should too. Below is a non-exhaustive list of what to consider:
- Property history
- Property owner history
- Tenant comments and complaints
- Local and regional economies
- Sponsor reputation, team, and strategy
- Deal assumptions, forecasts, payout structure, and fees
- Investment duration
- Exit strategy
Step 9: Invest Based on Your Investment Plan
After you’ve carefully reviewed the property, sponsor, and deals, you’ll want to cut the total deal count down to two or three. Go into further detail, reviewing each deal again, looking for reasons to exclude the deal. Keep doing this until you are down to the final deal. Make sure the deal fits your objectives and then it is time to invest.
Step 10: Review Your Plan and Investments Quarterly
The beauty of passive investing is that much of your work is done upfront, in finding and selecting the right deal. The day-to-day management is done by the deal owner and property managers. I recommend investors review their plan and portfolio at least quarterly.
Last, if at any point you hit a snag and need guidance, I recommend you reach out to me, your investment advisor, or a local real estate professional. What you want to avoid is spending unnecessary time gathering information when advice will help you.