The role of the passive investor

One of the greatest perks to being a passive investor in a syndication is the hands-off approach that you can take in regards to your investments. Once you’ve invested your capital, your sponsor will do most of the heavy lifting when it comes to the time-consuming responsibilities of real estate, like managing the property and evaluating important decisions.

As with any investment, however, there are some steps that you, as an investor, need to take before you can lean back and let go. This work and research will protect your investment and ensure confidence in how it will perform over time. In this article, we’ll provide a high-level overview of what you should expect in a passive investor role and what kind of tasks you should anticipate throughout the process.

Find a trustworthy sponsor with a good track record

Before you hop straight into a deal, do your research. Since you’ll be invested in their deal for a few years, you will want to find someone who you like and trust.

A great sponsor with a mediocre deal will do your capital more good than a bad sponsor with a great deal.

It doesn’t matter if this is your first time joining a syndication or if you are an experienced investor: checking up on the experience of a sponsor protects your investments and ensures that you will feel completely confident when handing them your capital. Once you find a sponsor, set up another meeting and look over their background until you are comfortable working with them and understand the goals they have for their investments.

Review deals as sponsors send them to you

After you’ve established a good relationship with a sponsor, you’ll go about everyday life and wait for them to send prospective investments your way. You should look thoroughly through each deal, even if you’re not sure if you want to be involved: this way you’ll become familiar with how the deals are structured and how the sponsor operates their deals.

Read through the investment summary

The investment summary will include an overview of the market, the property, comparable properties in the area, the management team, and a breakdown of the expected returns on the investment. It will provide a high-level view of what makes the asset a good investment and of the business plan that will be used to produce the returns.

Attend or watch the webinar

Sponsors usually send invites to webinars or presentations on a specific deal that they want to offer. These presentations give you an overall idea of what the deal is and demonstrate why the sponsor feels that it is a good investment opportunity. If you can’t attend a live presentation, ask the sponsor for the recording so you still have an opportunity to review it. 

It’s important to review a potential deal soon after you receive the investment summary or presentation.

Many investments fill up quickly, and are first-come, first-serve. If you commit after all the slots are filled, you’ll have to wait for the next deal to come around.

By this point, it’s common for sponsors to ask for a “soft commit” from investors. A “soft commit” does not guarantee a spot in the investment, but tells the sponsor that you are interested and how much you will plan to invest so they can make sure to follow up with you when the time comes to formally invest in the deal.

Ask the sponsor any additional questions if something isn't clear

Part of the sponsor’s role is to familiarize investors with each investment opportunity. Most investors’ questions are answered in the investment summary and presentation, but if you have a more specific question about the investment, don’t hesitate to ask questions so that you understand everything that you need to know about a potential deal.

Pay close attention to the important documents

Once the legal documents are ready, the sponsor will send them over for you to digitally sign. There are three legal documents for each deal that you will want to pay close attention to: the private placement memorandum (PPM), the operating agreement, and the subscription agreement. You will want to read these in detail and you should have your attorney review them for you before moving forward in an investment.

Private Placement Memorandum (PPM)

A PPM lays out the details and any disclosures of a private real estate offering. It includes details on the property, disclosures of any risks and fees, and the use of proceeds that are collected from investors for the down payment, financing, closing costs, and other expenses to acquire the property. It also covers the offering terms, like the rate of returns and the minimum investment required from investors. The PPM is a long and technical, and important, document, which is why you should review it with an attorney.

Operating Agreement

The operating agreement will describe how the business will be run. It covers the roles of members, the rules concerning equity distribution and the handling of profits and loss, and what the limited partners can do if the sponsors are mishandling the investment. An operating agreement is important because it sets an agreed-upon method of handling unforeseen situations that otherwise could result in legal trouble or conflict between members.

Subscription Agreement

A subscription agreement operates as your formal application to be a part of a syndication for a specific deal. It includes a breakdown of your role as an investor, the equity you hold, and the way that returns will be distributed to you. This signed document is your hard commitment to invest in a deal.

Evaluate the risks

The risks outlined in the PPM will help you understand potential downsides to a particular investment based on conditions or variables of the property itself, such as how its location impacts its value, or whether market trends might decrease the potential for return. This helps you make a personal analysis of the risk associated with the investment and understand what could prohibit a deal from performing well.

Investing in a deal

Say you’ve looked a deal over and feel confident in moving forward. Congratulations! There are still a couple steps to complete your investment. You will need to determine your investment amount and sign all the legal documents, like the subscription agreement. When you have sent those over to the sponsor, you will send your investment amount to the sponsor, usually through a wire or ACH withdrawal. If you do use a wire, confirm the wire instructions with the sponsor before sending the wire so it ends up in the right place. Make sure you receive a confirmation of your investment and save it along with a copy of the legal documents for your records. Some sponsors may use an online investor portal that saves this information for you.

Review periodic updates

From here on out, your role takes on more of that “passive” nature. You can sit back and wait to see distributions hit your bank account, but you should still want to do some due diligence by reviewing updates on how the investment performs over time.

A good sponsor will send out monthly or quarterly updates that will cover progress on the investment and updates on your distributions. Review these regularly, not just to check on your returns, but to see how the real estate is performing and being managed. Keeping in touch with these details will help you maintain confidence in the deal over time.

Our commitment to investors

After reading this article, we hope that you feel more confident in your role as an investor in real estate. Reach out to us with any questions about investing or getting in touch about future opportunities.

It’s important to find a network of investors and sponsors that value transparency and communication. At JH Real Estate Investments, we send regular updates on rents, vacancies, renovations, and financials: everything an investor needs to know to feel confident on how their investment is performing.

Interested in investing?

I provide opportunities to passively invest in larger multifamily properties. To learn more, visit www.jheckrei.com. If you want to get started, join our investor club.