I have had many conversations with prospective passive investing partners and three common themes emerged in many of my calls, three fears and concerns that ultimately led them to consider additional investment options such as real estate. In today’s quick snippet, I share those common fears and how our firm addresses those.
Diversification
My typical investing partner has prior investment experience, most commonly in the stock market. While the stock market can provide good returns over time, it is not for the faint of heart, given its volatility. In addition, while liquid, stock investments usually yield lower returns on average (net of fees) and do not come with tax deferral benefits. Lastly, they focus on yield (growth over time) and do not generate monthly cash flow (other than dividends in some cases). It is not surprising then that many investors build anxiety or get tired of the roller coaster ride after some time.
Real estate presents a great way to diversify one’s portfolio and comes with additional benefits, which I summarized in a prior snippet.
Communication
The typical investment minimum in a syndication is $50-100K or more, i.e. a meaningful amount for many. Thus it is understandable that many investors are initially nervous writing a large check to someone they have not known for a long time. Building trust takes time not only prior to the investing partnership, but also during the tenor of the deal. Communication is one such action that helps build and reinforce trust and something that is totally within the sponsor/operator’s control.
Communicating early and often, including sharing challenges and bad news is key. I invest both actively and passively and can share that one of the worst LP experiences I have had was when the sponsor abruptly paused distributions without any notice and substantive information leading to such pause.
My team and I communicate at least on a monthly basis with our passive investing partners. Investor updates have a summary of key events and financial metrics and include not only the wins to date, but also challenges our team is facing and what we are doing to address those. I stay in touch with my investors periodically and make myself easily accessible. I do not like to bury bad news at the end of the memo or sandwich them in-between and usually share the challenged first.
Loss of principal
To be clear, all investments carry risks, including the risk of total loss. I are not going to self-proclaim as a miracle worker or being shielded from losses. While I have had losses as a passive and JV investor, thankfully I have not experienced losses on any of my syndications as a GP to date.
In order to minimize the risk of loss, I take time upfront to vet the sponsor team, the market, the submarket, and the deal. I also spend time understanding the key risks of the deal and how each risk is mitigated. I also review the offering documents to ensure they are structured within my and my investors’ risk appetite. Only after such diligence, do I proceed with investing in the offering.
Did any of these resonate? If yes, you are not alone. Being not only an active but also a passive investor has helped me understand the world of my passive investing partners, better relate to them, and strive to be a better active investor/deal sponsor.
Download The Busy Professional’s Quick Guide To Investing In Multifamily here.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.