Passive Investors: What's your preferred investment vehicle & why?

Question

doing some research for an upcoming presentation, and as a hands-ON investor, it can be hard for me to really put my 'hands-OFF hat' on and compare passive investing vehicles without any bias.

i'd love to hear especially from those who have tried multiple strategies, which of these you lean towards most & why:

- syndications

- REITs

- private lending

- being a hands-off capital partner

- buying from turnkey companies (not sure i'd call this passive though)

...& feel free to mention any other passive investing vehicles (in the real estate space) that i haven't listed here! thanks in advance for the insight.

Ian Ippolito · Answer

Also, being a hands-off capital partner is what an investor in a syndication/crowdfunding deal is.I also invest in direct real estate (via residential rentals). In my opinion, both passive and active have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both.I feel directly owned properties are great because they give me maximum control and the ability to tweak them exactly how I want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.Also direct control means I know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.The flipside of having the power to control everything is that it can be alot of work (and a full-time job if a person is putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes. On the other hand, I feel one of the main advantages of passive investments (via syndication/crowdfunding) is that I can hire a manager who has years more experience than I can ever hope to obtain myself. And once I finish the due diligence, my work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, I can split it up into much smaller chunks across many different passive investments. This gives much better diversification protection across geographies, asset types, strategies, investment subclasses etc. versus putting all the eggs into one basket.The downside is that it's not for everyone, and a person has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone has the time and ability to do that and not everyone feels comfortable turning over control. So I feel it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.Turnkey operators are kind of in-between. However I would not consider them to be truly passive because they do not put any skin into the game like a good passive investment does (via a sizable coinvestment). This coinvestment is what mitigates the risk of the other party taking risks that could be a detriment to the investor. Turnkey operators don't work like that and they are more like a broker collecting a fee for their work (regardless of the long-term performance). So (in my opinion) they are financially misaligned on long-term performance (and I think this is why there are so many people who have had bad turnkey experiences) And, as someone who has done lots of rehabs directly myself, I have seen hundreds of ways that turnkey operator could take shortcuts (to the detriment of the investor but beneficial to their bottom line) which investor could never detect (or not until years later when it's too late). So personally I don't trust reviews from investors saying there turnkey operator is great (because really they have no way of knowing). And personally I cannot pull the trigger on a turnkey operator. However there are other investors who feel very differently and love turnkey operators.Hope this helps.

Chris Seveney · Answer

Correct this is a very niche industry that is high risk high reward.

Chris Seveney · Answer

Jessie - As a GP (and someone who went to school in worcester :) ) - it is a lot harder to invest passively as I want to be hands on. Were I have had the most success passively is investing in things I know and have some knowledge on. So for me its:

- Private lending

- Syndications - but MF or commercial - I do not have background on underwriting a mobile home park, or self storage etc. thus I tend to stay away from those types of deals.

Jessie Dillon · Answer

messaged you!

Jessie Dillon · Answer

oh small world! & noted. it's hard to really see through a passive investor's lens when you're willing, able, and eager to put in the sweat equity!

Jeremy C. · Answer

Great question! I'm a full-time business owner seeking to move into passive investments. So far the sketchiest, but most appealing to me, are the non-accredited syndications in the unsecured business debt arena. Seems like you need to be or know a few commercial/business loan brokers though..

Passive Investors: What's your preferred investment vehicle & why?

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