Passive Investor Looking for Partners to Invest in Multi Family P

[Michael Kim]

Hello everyone. 

I am new to biggerpockets and real estate. I am looking invest passively into mid to large multifamily complexes in any states in US. I am preparing to sell my present business and other liquid assets, and hopefully in about a year I will have as much as 500k to invest in real estate. I listened to Podcast 227 last year with Joe Fairless. He stated that he guarantees 18% return on investment to his passive investors on Multi-Family properties in the 1st year, with which I was quite impressed. However, I found out that he only works with "accredited investors," which I am not.

I was wondering if 18% return (as a passive investor in partnership with other active investors) is still attainable in today's market.

Even 15% sound really good. What kind of return should I realistically expect?

Also, I would appreciate your recommendations and referrals to reputable and trustworthy people or company who will work with passive investors. Please only trustworthy people/company with a good track records of high returns. Any advise in this regard would be greatly appreciated as well.

Thank you and God bless you all!

-Michael

[Brian Burke]

My insight would be that anyone guaranteeing 18% in the first year is either dreaming, running a ponzi scheme, lying, living in a parallel universe or just won’t be in business long. I know Joe and my guess is he is none of the above so perhaps the message was either mixed up or misunderstood. 

But what do I know?  I can’t speak for Joe but I can speak from my own experience over hundreds of millions in multifamily experience for the last 15 plus years. 

In today’s market you should expect mid-single digit returns in the first year on a cash-on-cash basis, which should grow to the high single digits in years 2-3 and low double digits by years 4-6. You should expect IRRs in the low to mid teens, and if you get really lucky, high teens. Of course this is assuming the market cooperates and no adverse cycle throws the train off of the tracks. 

Speaking of which, if you are thinking of investing passively, be sure to ask the sponsor how they are mitigating downside risk.  Ask how they are planning for the impact of changes in market cap rates.  And carefully scrutinize the assumptions made in the financial forecasts to look for pies in the sky.

Here is how I see this business: the syndicator’s first and most important job is to not lose their client’s money. Their second job is to deliver the highest return that the prevailing conditions will allow, which means not only making good decisions based off of many years of experience, but picking the right markets and real estate to begin with. Watch out for “deal guys”—people who buy lots of real estate but lack the experience to back it up (meaning having survived an adverse cycle or two in their career). The syndicator’s success (and thus the investor’s success) is accomplished over the years that they are operating the property, not in the weeks they spent buying it (although if that part isn’t done right you already driving north in the southbound lane).

For more on vetting syndicators, check out this recent thread that ruffled up some good discussion and advice.  https://www.biggerpockets.com/forums/432/topics/503289-how-to-vet-syndicators

At the end of the day it isn’t about deals, it’s about character. Get connected with the right group and you can get good returns for many years. Connect with the wrong one and you can get wiped out. A friend of mine and one of my very first investors had a big liquidity event and I didn’t have any deals for her to invest in because the market was getting overheated and I was standing down. So she invested with this other guy and the result was disasterous. She lost her entire life savings and now can barely afford her living expenses. And that guy is spending the next few decades in the Grey Bar Hotel at taxpayer expense.  They bought quality real estate, had projections showing high returns, and were thieves. So I’ll say it again...it’s all about character.