Don't become passive investors

[Carlos Ptriawan]

If there's one thing I learnt from the massive crash of CRE in 2023(and 2024) is that "Do not become passive investors". WHen you are passive investor, you become the dumb money , your money is being misused or mismanaged by more experienced sponsor/operator. Why ? because when you are passive and you do have money, you tend not to understand the risk. When market changes, even the most sophisticated sponsor could collapse.

At the end of the day, it's better to become "active investors" where you know every single bit of your investment, your market, your realtor, your contractor, what's the actual repair cost, actual rent, appreciation and so on and so on. Real estate is very tricky, if one can be successful it's because investor can see the hidden pitfalls and trap, and have ability to dance with the unexpected. So understand every bit of risk is important. Don't just blindly follow "oh this is so passive and return is guaranteed", it's never work like that.

[Chris Seveney]

I agree on the point of your investment is not guaranteed and never fall in love with the sticker price of the offering (ie returns), you really need to look under the hood on these deals

But active investing is not for everyone and if you do not have the time to manage your active investments, it’s not like the stock market where you have as good a chance to return on your portfolio doing nothing than hiring a manager - if you do not have the time nor ability it typically will not end well. Also is it the best use of your time or money?

Time to me is 1000x more valuable than money at this stage of my life and if I would much rather take the money I earned and diversify my portfolio into passive investments because I am too busy in my active life.

Yes I made all my money being active in real estate but it’s not a one size fits all

[Carlos Ptriawan]

totally agree, key point is don't lose money by not having complete understanding of future risk.

we're in the great collapse of CRE market and LP is destroyed because the passive investor is the dumb money, time is important but not to lose money is incredibly even more important , the total collapse in many commercial real estate sector is way beyond 2008 as it seems.

[Scott E.]

Quote from @Carlos Ptriawan:

totally agree, key point is don't lose money by not having complete understanding of future risk.

we're in the great collapse of CRE market and LP is destroyed because the passive investor is the dumb money, time is important but not to lose money is incredibly even more important , the total collapse in many commercial real estate sector is way beyond 2008 as it seems.

Carlos, where are you seeing that "we're in the great collapse of the CRE market" ?

CRE is in trouble, particularly large office buildings in big metros with a lot of vacancy. Some people are forecasting a crash or collapse in office, maybe multifamily. But we're not in one. Unless I'm missing something.

[Carlos Ptriawan]

Quote from @Scott E.:

Quote from @Carlos Ptriawan:

totally agree, key point is don't lose money by not having complete understanding of future risk.

we're in the great collapse of CRE market and LP is destroyed because the passive investor is the dumb money, time is important but not to lose money is incredibly even more important , the total collapse in many commercial real estate sector is way beyond 2008 as it seems.

Carlos, where are you seeing that "we're in the great collapse of the CRE market" ?

CRE is in trouble, particularly large office buildings in big metros. Some people are forecasting a crash or collapse in office, maybe multifamily. But we're not in one. Unless I'm missing something.

Office is already crashing, it's no longer projection, valuation moved to 1990s level !
Tons of MFs are in trouble or having symptom (no distribution, capital calls issued,etc). 

Even the usually-strong HML started to get flu due to local economy.

One thing I agree for office it's mostly regional, so combination of asset and place location is key where asset survived or move to the bank. But for MF it seems nationwide.

[Sam Yin]

@Carlos Ptriawan

I have to believe this applies more to the bigger institutions. I do not see it in the smaller mom and pop portfolios.

[Carlos Ptriawan]

Quote from @Sam Yin:

@Carlos Ptriawan

I have to believe this applies more to the bigger institutions. I do not see it in the smaller mom and pop portfolios.

maybe i am not conveying my message properly, but what i am trying to implying is that , pop and mom investors are doing good these days ... while bigger institution is losing investor money left and right, almost everyone is bad money manager these days... that's what I meant for not become passive investor as promised by bigger institution, it is the other way around.

[Joe S.]

I have personally observed that being an active investor grows your money much faster as well. Of course if I was trying to borrow money from more people, I would have to tell them how active investing wasn’t for everybody. Lol.

[Carlos Ptriawan]

yeah, in 2021 this is the music: are you crazy ? buying rental ? do you want to repair the toilet at 3pm ? managing tenant is risky ! lot of squatters ! do you even time to collect the rent ? just invest at syndication yooooooo

in november 2023: uuuuuh, syndication #1 is filing foreclosure , syndication #2 sold their office way above our buying cap rate , syndication #3 stop distribution , syndication #4: what a freaking nonsense, another capital call ????

us that's very active investing at SPY and plain 2/1 SF in Ohio/Milwaukee/San Jose/Miami : we are still dancing on the street ....
why ? because from 1999-2010 we want to become ACTIVE investor, so we don't get fooled by guy that's acting smarter than us.

Watch these Netflix movie about money, there's Grant Cordone in there LOL

[Dan H.]

The days of choosing any RE syndicator and getting better than 20% annual return are over. 

However, 1) there are still syndicators producing outstanding returns 2) commercial MF and office space is down significantly.  At some point they will be at the bottom.   Timing it is hard but commercial MF down 25% can be looked at as a discount/sale.  3) That good research is required if active or passive  4) those RE active investments are typically residential.  Commercial MF decline is already impacting, in my market, non-commercial MF.  5) not everyone has the ability, desire and/or time for active investments. 6) syndications provide easy means to diversify   This includes geographical, asset class, and value add.  The same level of diversification would be near impossible with only active holdings because we cannot be a expert on all things.

I have my active investments which virtually always are off market purchased value adds (my hobby that pays well) and am an LP in some syndications (passive investments that also pay well).  The syndication I am currently vetting also will be providing some additional diversification. It is very different than any of my current investments and something until recently I could not have participated in.  

I believe both active and passive investments serve a role and that at some point passive investments look much more appealing.   Time is precious.

Good luck

[Duke Giordano]

Agree, being a passive investor has a lot more land mines in the current environment than a few years ago.  Having said that, everything runs in cycles and soon there will be a great opportunity for those passive investors who are ready to take advantage of the current fall.  Many have already seen this firsthand but the worst is yet to come unfortunately.  There are good resources out there for passive investors if you dig a little, focus on your education and build up cash reserves for the upcoming opportunity.  Be wary of those passive investor sites that are pitching you deals that they are incentivized to do so, without any vetting.

Happy to help any way I can

[Evan Polaski]

@Carlos Ptriawan, your experiences seem to only have started port-financial crisis.  I have spoken to many active investors that filed bankruptcy in the financial crisis.  I have talked to OOS investors that lost big doing single family turnkey rentals in recent years because the "great tenant" that came with the house moved out mid lease and did $30k of damage on exit.

What I believe you are really going after is: don't be dumb money.  To classify all syndicators in one bucket is like classifying all Airbnb hosts as the same.  There are a lot of hosts that are losing money on their vacation rentals, and there are hosts still making a killing.  Both are active. 

So, overall, I agree with your sentiment. As an LP, you need to understand risks. You need to be skeptical of marketing messages. You need to be skeptical of track records that only cover the last 8 yrs. But the same can be said for active investors. You can lose money buying a four family, if you don't understand the risks. The same can be said for subprime borrows in 2006 that didn't understand what the ARM that the mortgage broker was selling them meant.

[Doug Smith]

Hi @Carlos Ptriawan, Great post to get a discussion going. It's hard to get voice inflection into a post here, so any disagreement with you on this is not intended to be a "disagreeable". One thing that I've found on BP is that there is a very fine line between "do it yourself" and losing one's behind because of a lack of knowledge. We "do it ourselves", but we've got over 30 years of real estate lending and over 15 years of development experience. We have the licensing, training, and degrees to do what we do. Many people that I see trying to do it themselves are light lambs heading to slaughter. I'll give you a couple of examples. I've seen numerous newer investors come to us for help after they've purchased a flip property in need of a massive rehab that did not know about the "FEMA 50%" rule. On the lending side, we see a lot of private individuals that try to lend out of their IRA just because the borrower is a "good guy". Full disclosure...our development arm and our lending arm JV and Consult with investors with less experience to ensure the downside risk of their investment is protected. I'm still a big fan of JVs and Syndications IF the operator really knows their stuff, but I am 100% in agreement with you that many in not most of the synicators that I see on here lack the experience to protect the downside risk. If the person managing the synidation does not have a pre-2007/2008 track record, that is not one I would get involved in. Great, discussion-provoking post!

[Ian Ippolito]

Quote from @Carlos Ptriawan:

If there's one thing I learnt from the massive crash of CRE in 2023(and 2024) is that "Do not become passive investors". WHen you are passive investor, you become the dumb money , your money is being misused or mismanaged by more experienced sponsor/operator. Why ? because when you are passive and you do have money, you tend not to understand the risk. When market changes, even the most sophisticated sponsor could collapse.

At the end of the day, it's better to become "active investors" where you know every single bit of your investment, your market, your realtor, your contractor, what's the actual repair cost, actual rent, appreciation and so on and so on. Real estate is very tricky, if one can be successful it's because investor can see the hidden pitfalls and trap, and have ability to dance with the unexpected. So understand every bit of risk is important. Don't just blindly follow "oh this is so passive and return is guaranteed", it's never work like that.

You're certainly entitled to your opinion.

I'm an investor who has both passive and active real estate in my portfolio. And in my opinion both have their pros and cons, neither one is superior to the other and I purposefully want a diversified portfolio of both.

First of all, 2023-2024 was not a "massive crash". The great financial crisis of 2009 was a "massive crash": meaning all real estate asset classes went down at the same time and stayed down for multiple years. In comparison, 2023-2024 has been a hiccup. The only real estate asset class that has been badly hammered is office. And a good # of the "fluff" multi family deals of recent years that were underwritten very aggressively (floating rates, high leverage) are having to stop distributions, raise more capital or in trouble. But at this point, the rest are fine.

Second, I can give you a long list of active investors who were wiped out in the Great Recession. So in a significant recession, merely being active or passive is not actually a way to avoid losses.

Finally, there are a lot of active investors who lose their money even *outside* of a recession because they make too many newbie mistakes. On the other hand, a good passive investor hires sponsors who have years more experience than they can ever hope to achieve.

So again, this is why I feel a balanced portfolio needs to have both types.

[Carlos Ptriawan]

Quote from @Ian Ippolito:

Quote from @Carlos Ptriawan:

If there's one thing I learnt from the massive crash of CRE in 2023(and 2024) is that "Do not become passive investors". WHen you are passive investor, you become the dumb money , your money is being misused or mismanaged by more experienced sponsor/operator. Why ? because when you are passive and you do have money, you tend not to understand the risk. When market changes, even the most sophisticated sponsor could collapse.

At the end of the day, it's better to become "active investors" where you know every single bit of your investment, your market, your realtor, your contractor, what's the actual repair cost, actual rent, appreciation and so on and so on. Real estate is very tricky, if one can be successful it's because investor can see the hidden pitfalls and trap, and have ability to dance with the unexpected. So understand every bit of risk is important. Don't just blindly follow "oh this is so passive and return is guaranteed", it's never work like that.

You're certainly entitled to your opinion.

I'm an investor who has both passive and active real estate in my portfolio. And in my opinion both have their pros and cons, neither one is superior to the other and I purposefully want a diversified portfolio of both.

LMAOOO....LOLLL... I am merely following your track record result and opinion also Ian.

You are one of those that teaches me all risks involved in CRE and "passive investment".
Literally, your analysis and opinion is showing how risky it is for example, to invest at crowdfunding sites. 
Only in your direct rental ownership, your portfolio is stable.

You literally saved me money. Glad I found your site.

Crowdfunding has been a mess even before covid.
 
Now post 5% rate, many more syndications is at GFC crash situation.

Have you read the news one developer has been committed suicide last month ?

[Carlos Ptriawan]

Quote from @Doug Smith:

Hi @Carlos Ptriawan, Great post to get a discussion going. It's hard to get voice inflection into a post here, so any disagreement with you on this is not intended to be a "disagreeable". One thing that I've found on BP is that there is a very fine line between "do it yourself" and losing one's behind because of a lack of knowledge. We "do it ourselves", but we've got over 30 years of real estate lending and over 15 years of development experience. We have the licensing, training, and degrees to do what we do. Many people that I see trying to do it themselves are light lambs heading to slaughter. I'll give you a couple of examples. I've seen numerous newer investors come to us for help after they've purchased a flip property in need of a massive rehab that did not know about the "FEMA 50%" rule. On the lending side, we see a lot of private individuals that try to lend out of their IRA just because the borrower is a "good guy". Full disclosure...our development arm and our lending arm JV and Consult with investors with less experience to ensure the downside risk of their investment is protected. I'm still a big fan of JVs and Syndications IF the operator really knows their stuff, but I am 100% in agreement with you that many in not most of the synicators that I see on here lack the experience to protect the downside risk. If the person managing the synidation does not have a pre-2007/2008 track record, that is not one I would get involved in. Great, discussion-provoking post!

 I am also following your opinion and analysis as well.

You were said before that you met this hedge fund guy (or whatever) that their AUM is hundred times more than your AUM correct, but while you able to manage your portfolio and management, their portfolio is all at red. 

I've seen soo many statistics, so many data, so many non-public information where the situation at CRE is much worse than 2008, in 2023.

You can't imagine class A San Fran office is valued at below $200 PSF , in Portland even it's less than $70 PSF. This is more than a crash, it could destroy the bank as well.
 
In MF there's one syndication that already returned their key this month from their investment last year , they're crashing just because miscalculate the property tax assestment. There're just so many.

It seems to me, when we are very active investors, we are then understand the risk , and the reward/risk too, so we can make better well informed investment decision.

[Carlos Ptriawan]

Quote from @Evan Polaski:

@Carlos Ptriawan, your experiences seem to only have started port-financial crisis.  I have spoken to many active investors that filed bankruptcy in the financial crisis.  I have talked to OOS investors that lost big doing single family turnkey rentals in recent years because the "great tenant" that came with the house moved out mid lease and did $30k of damage on exit.

What I believe you are really going after is: don't be dumb money.  To classify all syndicator

Nope you are very wrong , it is the other way around, I invested since 1990s.
I primarily avoiding investing in 2005 era because MacDonald guy can buy half million house. Everyone that's very active in Zerohedge already know one bank would collapse.

I know in 2004 there would be crash in 2006-2008. So I dont invest during that time but primarily I'm waiting for the crash.

Now since you're syndicator. I am hoping all private syndicators can openly open your book and the status of your investment in 2023, periodically, to investor. Like how many syndication or fund that you have stopped paying the investor. An which one is still running well.

[Henry Lazerow]

Active investing you directly get appreciation + mortgage paydown + cashflow ALL ON A FIXED 30 YEAR MORTGAGE. The fixed mortgage is what makes these deals not very risky as long as you know basic analysis and buy cashflow positive. I also invest spare cash in SPY its not going to 0 and gives a decent long term return.

[Scott Trench]

I think that many investors are about to feel this way. 

The lesson of "don't be a passive investor" is the wrong one, I think. 

I think the better lesson is: 

- Many syndicators made big money raising capital from investors. 

- Incentive structures were and still are, really warped in my opinion. Syndicators make an acquisition fee just for buying the thing, management fees, a disposition fee for selling the thing, and have the opportunity to earn carried interests in the form of 20% of the profits. On a $100M deal, a syndicator might make $1M for buying the thing, $3M for managing it over 5 years, and another $1M for selling it. Syndicator might put zero into the deal. Heads, syndicator wins. Tails, syndicator wins. A "Free Spin". I know many think I'm too strong and idealistic on this stance, but it's how I feel - I can't give my money to someone who has no or very limited consequences personally if the investment goes south.

- Because of these incentives, only integrity and care for one's long-term reputation hold syndicators back from just raising as much as possible, as often as possible, and deploying the capital as fast as possible. Integrity and care for one's long-term reputation is enough for many, and there are plenty of syndicators who were reserved, used good judgment, and paused in the last few years. I'll point out @Brian Burke as one of those who really had a healthy fear of the market, stopped buying, and got out. 

The solution isn't to not passively invest. It's to get more rigid. To simply not invest with folks who exhibit "Free Spin" syndrome, and continually buy without putting their own money where their mouth is. To not invest with people who can't lose alongside you in a meaningful way. To not invest with people who aren't actual operators, who are in it for the long haul, managing the assets themselves, and very hands on. 

You want my money? You are on site or very hands on, manage a small number of concentrated bets, are investing alongside me, and your day job is 100% focused on ensuring a great return for me.

That's the lesson. LPs get what they tolerate. And in the last few years, they tolerated syndicators who promised huge upside, put little to nothing of their own in, charged high fees. 

As a group, let's have LPs do better. We want the syndicator to make money - alongside us. How about a modest salary during the hold period for the capital raiser, no big acquisition fees, disposition fees, or AUM fees/management fees that scale with size, a requirement to be full-time on the job managing the money, and large upside AFTER LP capital has been returned?

It's easy to simply say "no" to folks who don't offer this. And, I think that is a better lesson than simply staying out of it.

[Carlos Ptriawan]

Quote from @Henry Lazerow:

Active investing you directly get appreciation + mortgage paydown + cashflow ALL ON A FIXED 30 YEAR MORTGAGE. The fixed mortgage is what makes these deals not very risky as long as you know basic analysis and buy cashflow positive. I also invest spare cash in SPY its not going to 0 and gives a decent long term return.

 100 percent.
That's my message.

It's freaking simple. Fixed rate for 30 years. The bank worked for us. In the long run direct ownership is working because we invest in dis-inflation way. 

[Carlos Ptriawan]

I want even more Scott. And this needs to come from regulation.
Every  *private* syndication needs to have periodic 6 months a reported financial statement to investor in *public* and their future trajactory analysis of their investment.

Currently, It has better reward/risk when we invest at public REIT, because the result is available for public and everyone can gives their analysis. It's ok for their NAV/price to go up or down because all risks and future implication has been documented properly. When we as investor being told about the risk publicly, then we know the risk.

Make it the structure more like an Interval fund, so it's still not tradable, but there's periodic financial reporting to public. Not just to investor.

[Ian Ippolito]

Quote from @Carlos Ptriawan:

Quote from @Ian Ippolito:

Quote from @Carlos Ptriawan:

If there's one thing I learnt from the massive crash of CRE in 2023(and 2024) is that "Do not become passive investors". WHen you are passive investor, you become the dumb money , your money is being misused or mismanaged by more experienced sponsor/operator. Why ? because when you are passive and you do have money, you tend not to understand the risk. When market changes, even the most sophisticated sponsor could collapse.

At the end of the day, it's better to become "active investors" where you know every single bit of your investment, your market, your realtor, your contractor, what's the actual repair cost, actual rent, appreciation and so on and so on. Real estate is very tricky, if one can be successful it's because investor can see the hidden pitfalls and trap, and have ability to dance with the unexpected. So understand every bit of risk is important. Don't just blindly follow "oh this is so passive and return is guaranteed", it's never work like that.

You're certainly entitled to your opinion.

I'm an investor who has both passive and active real estate in my portfolio. And in my opinion both have their pros and cons, neither one is superior to the other and I purposefully want a diversified portfolio of both.

LMAOOO....LOLLL... I am merely following your track record result and opinion also Ian.

You are one of those that teaches me all risks involved in CRE and "passive investment".
Literally, your analysis and opinion is showing how risky it is for example, to invest at crowdfunding sites. 
Only in your direct rental ownership, your portfolio is stable.

You literally saved me money. Glad I found your site.

Crowdfunding has been a mess even before covid.
 
Now post 5% rate, many more syndications is at GFC crash situation.

Have you read the news one developer has been committed suicide last month ?

Carlos, if you did, then you already know that many passive investments are currently doing just fine. I'm quite happy with how the passive portion of my own portfolio is doing. And I'm pretty sure that many others are the same.

And more importantly:  Passive investments are just the same as active investments. Some or great, some are bad and many in between. And there are significant risks in all types of investing, so you have to do your due diligence to avoid the bad ones.

Also, I could point to the active/directly owned investments that have failed in this mini-downturn and claim that "all" directly owned investments are too risky (and that direct investors are too dumb to handle real-estate etc).  But that would be equally wrong for me to assume.

And the truth is that both direct and passive investments have risks and there are always going to be losers and winners in both.

Good luck to you.

[Timothy Howdeshell]

@Carlos Ptriawan 100% agree! Even with 3rd party property management you still need to manage the manager! 

[Carlos Ptriawan]

Quote from @Ian Ippolito:

Quote from @Carlos Ptriawan:

Quote from @Ian Ippolito:

Carlos, if you did, then you already know that many passive investments are currently doing just fine. I'm quite happy with how the passive portion of my own portfolio is doing. And I'm pretty sure that many others are the same.

And more importantly:  Passive investments are just the same as active investments. Some or great, some are bad and many in between. And there are significant risks in all types of investing, so you have to do your due diligence to avoid the bad ones.

No, they are not fine my friend.

Buyer in MF is asking for 7 cap. Seller want to sell in 6 cap. There's no agreement. Lender is holding the bag of bad investment, how could it's fine ?

The cap rate volatility is 100-150 bps from bottom to today's 2023 , how could you say it's fine.
It's basic math.

[Carlos Ptriawan]

Quote from @Timothy Howdeshell:

@Carlos Ptriawan 100% agree! Even with 3rd party property management you still need to manage the manager! 

 Yeah, there's so many things that I learnt as well. 
Even PMC has different attitude across different cities.

One thing that I learnt from all these experiences, pop-and-mom PMC works way better than nationally-recognized PMC.

[Scott Trench]

Quote from @Carlos Ptriawan:

I want even more Scott. And this needs to come from regulation.
Every  *private* syndication needs to have periodic 6 months a reported financial statement to investor in *public* and their future trajactory analysis of their investment.

Currently, It has better reward/risk when we invest at public REIT, because the result is available for public and everyone can gives their analysis. It's ok for their NAV/price to go up or down because all risks and future implication has been documented properly. When we as investor being told about the risk publicly, then we know the risk.

Make it the structure more like an Interval fund, so it's still not tradable, but there's periodic financial reporting to public. Not just to investor.

Disagree with you on this one. Last thing I want is any additional government friction in any processes, much less investing. That just sucks returns out of both syndicator and LP pockets going towards reporting. 

I don't have a problem with reporting. A syndicator who isn't providing real-time reporting is a non-starter, and easy to vet who provides reporting packages and who doesn't. 

And, the illiquidity of the investment is a feature, not a bug. REITs are publicly traded. Private investments are not. The expectation should be for higher returns to compensate for the illiquidity, but it's part of the deal.