The Power Of Passively Investing In Real Estate

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Passive investing is when you invest your money into a project in which you do not have to manage yourself, and you have limited liability, but you receive returns on your investment generated from the efforts of the general partner (GP) of the project.

Passive investors or limited partners play a crucial role in acquiring mid-size and large apartment buildings in the multifamily industry. GPs seek out opportunities that can potentially yield returns above the market average and limited partners (LPs) benefit from these returns by having the liquidity to invest. This allows GPs to acquire these assets without needing additional loans or having to invest too much from their own pockets.

What are the benefits of passive real estate investing?

• Consistent Cash Flow: You benefit from consistent rental income by investing in real estate. You’ll receive quarterly or monthly distributions, depending on the GP of the property.
• Hands-Off Investing: You can reap all the rewards of property ownership, such as depreciation and passive income, and a hedge against inflation without any of the headaches of property management.
• Portfolio Diversification: According to JPMorgan, 15% to 30% of your portfolio is normal to be invested in alternative investments, and in some cases, they’ve even seen 50%. Real estate is an alternative investment I suggest investing in.
• Appreciation Potential: The appreciation over time from holding real estate in your portfolio can significantly boost your overall ROI.
• Tax Benefits: You can invest in a multifamily syndication or other real estate via a 1031 exchange. You can also share in the depreciation of the real estate as a passive investor and receive a Schedule K-1.

How can leaders become passive investors?

• First, you should learn what a good opportunity looks like. I recommend studying through reading books or taking a course so you understand how a well-underwritten apartment deal looks.
• Leaders should get to know, like and trust the GP team on the property you’re choosing to invest in. I believe track record and experience are the two most important things to consider when determining if you will invest with a GP
• Knowing the potential returns of an investment is important. I recommend going off the conservative numbers when investing. In real estate investing, things can happen due to the market, management or other factors, so keeping your expectations reasonable is wise.

I have come across properties that appear to be great deals on paper, but when the general partners acquire them and replace the management team, issues arise. For example, one had a pretty above-average projection and still does, from speaking with the GPs. However, it hasn’t paid its investors a distribution since it was acquired roughly a year ago.

I look for these types of things when determining if I want to work with a general partnership team, and I advise you to do the same. This group is honest and very transparent, even with someone like myself who is vetting them to see if I would like to work with them in the future. Honesty and transparency are great attributes to have in this business.

Also, just because a property has taken almost a year to pay distributions doesn’t mean it’s a bad deal. Multifamily is a long-term investment; that property could still be a home run for its investors.

Then there are the properties everyone loves, which are the ones that cash flow from the beginning, and you start receiving distributions within the first 90 days. Plus, to make things better, the distributions come on a monthly basis.

These are also the type of properties you can find yourself investing in as a passive investor in multifamily. The best part about these investments is that you do not have to do any of the work yourself, but you get paid monthly or quarterly distributions as if you are.

There is a chance you might also invest in some duds as a passive investor where the general partnership didn’t have the experience and wherewithal to manage the property. So they have to sell at a loss or do a capital call where they reach out to their investors to cover needed property expenses, such as renovations. Situations like these are why due diligence will come in handy to understand the experience level of the general partners over the property or properties you’re invested in.

Suppose they don’t have a lot of experience. In that case, at least one member of the GP team should have a substantial amount of experience operating apartment buildings or any other asset you may be investing in, such as car washes, free-standing emergency rooms or even warehouses.

Conclusion

Being a passive investor in real estate can be powerful. You get to grow your passive income and get tax advantages without having to do any of the hard work yourself. I would consult your CPA regarding the tax benefits because it depends on your occupation.

Being a passive investor or limited partner in large apartment buildings should be a part of your investment portfolio. You may also save a lot of time and lessons by leveraging the expertise of others who have been in the business for a while. It allows you to continue doing what you’re great at, like managing a business or performing surgeries as a surgeon.

The best investors like Warren Buffet and others aren’t actively managing their own portfolios on a daily basis. They have teams of people with expertise in the areas they’re managing.

By turning your active income into passive income, you can create a financially free future for yourself and your family.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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