Seeking advice on how to spend "some" equity

[Eddie Fernandez]

First off thank you in advance for all for the great advice already on this forum.  I own a rental property free clear and obviously have equity.  Instead of taking that equity and buying another property I'd rather invest in more passive means such as notes OR something else that maybe I'm not thinking of. I'm considering taking about $30K-$50K out of equity in the property and investing it in notes, and the criteria for me would be to create a monthly passive income with respectable returns and don't have to deal with tenants.  In other words something that will help me in my path to leave my W2 job.  Is this a good idea or is there something else I should consider to do with this investment?  Appreciate any advice.  Thank you, Eddie  

[Jack Martin]

@Eddie Fernandez as you seek out passive investments, there's some general info you should 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 general, 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.

A 506b will not be advertised publicly, but will allow 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 506b offerings advertised out in the open. However, if you read between the lines, you should be able to find sponsors like that here on BP. You can also get recommendations to 506b sponsors from other investors, accountants, attorneys, and real estate brokers.

With that all said, keep in mind the most critical variable in your experience as a passive investor will be the PEOPLE you are investing in, not just 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 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 target syndicators who use professional 3rd party administration that verifies the sponsor, their background, their track record, and their performance. Essentially, their role is to be the neutral party "referee" who's job is to ensure accuracy and transparency.

Another 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. If a sponsor will not allow you to talk to existing investors, that should be a red flag. 

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 reporting? 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? Historically, 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 gain clarity on those items, 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