Contrary to what the name suggests, passive investing is not truly hands off. While you are not necessarily involved in the day to day decision making, running the property, and executing on the business plan, you would still want to keep a pulse on your investment to ensure you are progressing towards your goals as planned and that the investment is performing as expected.
1. Educate yourself and stay current on news and market updates.
It is important to have at least a basic understanding of the asset class, deal and market analysis as you evaluate investment opportunities. At the end of the day, you do not want to put your hard earned money in a bad deal that enamored you with juicy returns. In addition, you want to understand the impact of macro, micro, and global economic events on real estate and the underlying investments, so you can proactively ask questions of your sponsor or raise those questions as part of your ongoing communication with them if they do not bring it up.
To empower and educate investors, I prepared The Busy Professional’s Quick Guide To Investing in Multifamily that you can use as a quick reference guide as well.
2. Review the monthly or quarterly updates prepared by the syndicator/fund manager and do not be afraid to ask questions about the update itself or about market events and how the operator is handling or prepared to handle those (e.g. CV19 moratorium, interest rates, rising cost of insurance, etc.).
Just like you review your bank account or brokerage statement on a monthly basis, it is important to track how your LP investments are performing. This can also help you spot trends early and raise questions with the sponsor to discuss those ahead of time.
3. Attend the periodic investor calls (some are quarterly and some are annual) or at least watch the recording. Do not hesitate to follow up with question during or after the call. Such investor updates are designed to summarize key highlights of past performance and outline what lies ahead. In the current environment many of those updates are setting the stage to better show and clarify why a capital call or pause of distributions may be necessary. Staying up to date would help you avoid surprises and presents an opportunity to discuss issues with the sponsor early on or conversely be prepared for an early exit (if the sponsor exceeds plan ahead of time), so you can be better positioned to have timely tax discussions with your tax advisor to maximize your gains.
4. Track your investments. Nowadays there are a variety of tools and systems. For example, Joe Fairless has a nice LP tracker. You can easily create one in Excel and tailor the columns to the key performance indicators important to you. It is great to check the investment tracker over time, especially as you start stacking up investments and seeing that additional income stream building out.
Passive investing is not truly passive as you should be a good steward of your money by staying engaged, monitoring the investment performance, and making sure you ask questions to stay up to date and stay informed so you can avoid surprises. This can also help you track how certain investments or operators are performing over time, which is a data point that can be useful for your next investing decision (and whether you want to continue working with that sponsor or invest in that market/asset class or if you should pivot). It is not an urgent activity but an important one to do (at least quarterly), so you position yourself and your passive investments for success.
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.