Passive Investor Series Part 1: Introduction

Real estate can be a very expensive game to play. With that, it is often heard an investor expressing their desire to get into real estate through using other people’s money. Or I hear those who have been investing as a passive investor or limited partner (LP) wanting to become a syndicator. In my mind, I ask myself, “why?”. There are enormous advantages of being a limited partner, why would you want to take an active role and do all the work for potentially less of a payout?

gradyreese/Getty Images

In this passive investor series, I will cover topics on being a passive investor also known as a limited partner in syndication deals. I will also discuss the advantages and drawbacks of being a passive investor and why many times investors want to get into the active side of syndications.

Realize, being an active syndicator is not for everyone. There are long hours of work with thousands of dollars spent that oftentimes may end up going nowhere. It can be an emotional rollercoaster throughout the process where it is necessary to stay cool under pressure and not make an emotional decision. Everything may be going smoothly during your deal then one or more semitruck-sized issues will wipe out what you are working on and put the deal at risk.

My goal is for you to see the advantages of being a passive investor which may outweigh your thoughts of being an active syndicator. Don’t consider this a series on talking you out of being a syndicator, but to help you see if it is really for you.

Before starting out there series, we should define what a passive investor is and how it relates to syndications.

What is a passive investor?

A passive investor is one who places their funds in an investment vehicle with expectations of a return on that investment with minimal effort by the passive investor. Some examples of passive activity include investing in a stock market index fund that tracks the broad stock market, real estate investment trust (REIT), crowdfunding, and real estate syndications.

What is real estate syndication?

A real estate syndication is the pooling of funds from multiple passive investors to purchase income-producing real estate. The syndicated real estate is actively managed by sponsors also known as general partners (GP).

Passive investor versus limited partner

A limited partner (LP) is a type of passive investor who invests in a syndication such as real estate where the LP will not take any active role in the operation of the investment. The only role of the LP in a real estate syndication is to provide funds to the deal.

Deal Sponsor

A deal sponsor is the operator of the property on behalf of the passive investors. They invest the sweat equity into the deal including scouting out the property, raising funds, and managing the asset after closing. Another name for the sponsor is the General Partner (GP).

There are enormous advantages of being a limited partner, why would you want to take an active role and do all the work for potentially less of a payout?