Aspiring Passive Investor!

[Benny Morfas]

Hi everybody! I am looking for a property to invest my money into an apartment building or mobile home park. Since I'm temporarily limited physically and don't want to wait until I'm better, I was hoping to be a passive investor but have no idea where to go to see if people need a passive investor. Can someone point me in the right direction? Thank you so much!

[Jack Martin]

@Benny Morfas first of all, as you explore a passive investment, there is some general information you need to be aware of. Most passive investments in real estate are referred to as syndications and include a sponsor (who brings the opportunity) and investors who place their capital into the deal.  

The most common types of syndications you will find are known as 506b and 506c. To keep it brief, a 506c will allow the syndicator to advertise their opportunity publicly, but will restrict participants to accredited investors only. If you search public platforms for opportunities to invest, you will find mostly 506c offerings and they will come with those restrictions.

Conversely, a 506b will not allow the syndicator to advertise publicly, but will allow them to accept accredited investors and up to 35 non-accredited investors as long as proper conditions are met and prior relationship between sponsor and investor is established before an investment is made.

Due to the restrictions related to public solicitation, you won't see most offerings advertised out in the open. However, if you read between the lines, you can quite easily find sponsors like myself here on BP. You can also get recommendations to good sponsors from other investors, accountants, attorneys, and real estate brokers. 

With that all said, keep in mind that the most critical variable in your experience as an investor will be the PEOPLE you are investing in, not the DEAL you are investing in. As you connect with sponsors that resonate with you, take the time to develop a relationship with them. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has a project with an attractive pro forma to find out later they can't be trusted. Making sense of the deal and understanding their track record is important, of course, but I believe you should develop TRUST before you invest. Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation of trust.

The best way is to talk to others who have had an experience investing with the sponsor already. Simply ask the sponsor if they would be open to connecting you to a handful of investors who have known and invested with them for a long time. There is nothing that replaces a live conversation with someone who has already built that trust with the sponsor over time. Some items to touch on while you talk to prior investors:

How has the overall experience been? How accessible is the sponsor? If you have a concern, are you able to talk to them? Do they return your calls? Are they transparent? Even when they run into a problem?

Also, one of the most often overlooked components of a syndication is the reporting. When you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested.

Does the sponsor have a communication plan? How often will you receive progress reports? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? In the sponsor's history, have the reporting and distributions been on time?

Your overall experience investing in a syndication involves much more than the yield you could achieve. If you take the time to share some phone calls with a handful of prior investors, you should get a pretty good handle on what your experience is going to be like.

The purpose of investing in a syndication is to leverage the sponsor's time, expertise, and ability to source great deals, but if the experience is going to cause you to lose sleep at night, any return you might make simply will not be worth it.

All the best,

Jack