All Forum Posts by: Randy Smith

@Connor Lawson.  The skills you gained over the past year will serve you for years to come.  Capital raising and deal finding are two of the best skills to have in this space.  I'd encourage you to continue down this path as the rewards and growth opportunities are amazing as I'm sure you already know.  

I'm not in a position to bring on additional employees at this time, but please feel free to reach out if I can help in any way.

Once you’ve found that perfect real estate investment to start off your passive investing journey, there are some simple steps that you’ll want to follow to complete the transaction. While each operator’s process will be a little different, we’ll walk through some of the common steps among all operators so you’ll know what to expect.

Soft Commit – Reserve Your Spot

The first step is to tell the operator that you plan to invest with them on a specific opportunity. You’ve likely received some type of communication via email with all the details on the investment, and that email will usually have a section where you select to “Soft Commit,” “Invest Now,” or “Reserve Your Spot.” This will bring you to an online landing page where you’ll fill in details like your name, email address, phone number, investment amount, and accredited investor status (see previous blog for this definition). You might also have to designate if you will be investing as an individual, married person, or another entity at this point, and I would encourage you to check with your legal/tax counsel to determine the best option for you and your specific situation.

Do I have to Read the Legal Documents?

Once you’ve made your commitment to invest in the previous section, you’ll receive instructions on how to receive all the legal documentation for the opportunity. This process can seem a little daunting, but I strongly encourage you to read everything that is provided. Yes, it will take some time to comb through the paperwork, but you will learn a tremendous amount about the business plan, the risks of the investment, and quite possibly a few other things you didn’t even think you needed to know. You’ll want to take note of any questions you have as you work through the documents so you can circle back with the operator for clarification before signing.

Executing the Legal Documents

Often, the legal documents will get forwarded to you via DocuSign for execution. If that be the case, you’ll get prompted through the documents to the points where you’ll need to input information. Most of the inputs are easy to figure out, but you can always call your investor relations contact with your operator if you run into any questions. The team should be very well versed with the documents and be able to answer your questions or find the answers to your questions quickly.

Wiring Your Funds

This point in the process will likely be the most nerve-racking part of the entire investment process. We’ve all heard horror stories about people wiring their funds to the wrong person or someone intercepting and manipulating the wire information before you receive it. To avoid issues like this, I prefer to pull the wire information from the portal where all the other documents are housed or calling my contact to confirm the information verbally before heading to the bank versus using the information that is emailed to avoid any possibly errors or fraudulent activity. Once you are comfortable you have the correct wire information, head to the bank to wire the funds. You’ll get a confirmation form your bank and should expect to get a funds received confirmation from your operator as well within 24-48 hours.

Congratulations on your first passive investment in real estate! You’ve come a long way since you first started your journey to passive investing. Most of the work is done, and you can sit back and watch your distributions come in and start the process to find your next great opportunity.

We’ve all heard the saying, “It’s better to bet on the jockey than to bet on the horse” because a good jockey can make a bad horse run fast, and bad jockey can make a good horse run slow. The same is true when looking at operators in the investment space. In the following article, I’ll discuss some of the most important items to consider when choosing your jockey.

Familiarity

If you’ve been reading all my blogs, you are likely starting to see a trend with this first item. Much like the asset class and the market, familiarity with an operator can be the best way to determine whether you should invest with him/her or not. You can learn a lot by simply watching and observing an operator for any amount of significant time. It’s important to know, like and trust your operator, so choosing one you have familiarity with will allow you to do just that. Referrals are also a great way to borrow a trusted source’s familiarity with an operator, and this is something I have leveraged heavily with many of my investments.

Track Record

The most important item to consider is an operator’s track record. If they have been able to perform at a high level in the past, it is more likely that they will be able to perform at a high level in the future. Of course, past performance does not guarantee future performance, but success quite often leaves clues.

I like to work with operators that have a recent and lengthy history successfully performing the business plan that I plan to invest in. It’s true that many of the skills required for various asset classes are transferrable, but each asset class, market, and business plan have unique challenges that operators can only perfect by working in those situations over a significant amount of time.

If an operator is new to a certain asset class or business plan, it is extremely important to know that they have been successful in other areas. Everyone deserves a chance, but I prefer my operators to get their training on their own dime versus my hard-earned money.

Match Your Investment Goals

Just as the best plumber in town would not be a good choice to give you heart surgery, a growth focused operator will not be able to provide you the cash flow you need to live on. Obviously, it’s important to know what your investment goals are to be able to find the right operator to meet those needs.

If you can check the box on the three items above, you’re likely ready to move forward with your first investment. The last thing you’ll want to do is complete your due diligence on the deal, and we’ll walk through that process at a high level in my next blog.

Now that you’ve chosen your ideal asset class, it’s time to move on to market selection. While there is opportunity in any market, a market with familiarity, improving demographics, and positive economic factors can help increase the likelihood of a positive, passive investing experience. We’ll dig into those details further below:

Familiarity

As with asset class selection, familiarity is important when choosing a market as well. You can get the upper hand in a market if you choose to invest in your backyard, a place where you have lived in the past, a place you’d like to visit regularly, or a place where you have contacts or “feet on the street.” It’s easy to understand the benefits each of these can offer so take advantage of your experience/connections in these areas to lead to investing success.

Demographic Trends

Since you’ll likely be looking to invest in assets that are fully rented with consistently growing rental prices, you’ll want the demographics to support those goals as well. Focusing on markets with increasing population and income growth will help to produce those results. We’ve seen recent trends towards the sunbelt which have made many of these markets good picks in recent years, and you can research and verify these trends through many different sites like City-Data.com.

Economic Environment

Black swan events are never expected and rarely occur, but it’s important to hedge your bets by choosing a market that that can support changes in the economic environment. I prefer to invest in markets that are diversified across multiple industries so not to depend too much on any one sector. Extreme examples would be communities that depend solely on a military base or Detroit’s dependence on the auto industry in the late 70’s and early 80’s.

Government and political influence can also help or hinder your investment returns so it’s important to invest in states that support businesses that focus on your target asset class and business plan. There is no doubt that government involvement can help in many cases, but investor returns can often be negatively impacted by programs like rent control and eviction restrictions and navigating the red tape that can be required by any development or improvement plan can be challenging at best. The easier choice for an investor is to invest in markets that support businesses and their business plans.

Of course, there are many other factors to consider, but understanding these three areas will equip you with the information you need to narrow down your market selection. Your next task will be to find an expert operator in the asset class and market you’ve selected, and we’ll dig into that process in our next blog.

@Paul Moore. That's a really great point and one that I thought about quite a bit before moving forward with this investment.  My rational to move beyond this concern was that I thought a 20 year investment would definitely suggest some challenges for this market.  Since this is just a 7 year investment, I think we'll still be very dependent on our cash systems which rely heavily on these machines.  In addition, many of those in the underbanked sector will continue to have a strong dependance on these ATMs as government programs often use debit card to distribute the assistance proceeds. 

Asset class selection is one of the first decisions you should make when deciding to start investing passively in real estate. There is a tremendous number of options to choose from that can make it a little overwhelming, so I’ll walk through some items you’ll want to consider before choosing which asset class is right for you.

Familiarity

Picking an asset class that you have personal experience with can be a great choice. Many people pick apartments or single-family homes because they have personally lived in these types of assets. Others might have experience working in office complexes, industrial facilities, or even commercial strips malls. Bottom line: familiarity helps to build confidence when making such an important decision.

Capital Requirements

Investors should have a clear picture of how much capital they have available to invest today and how much they’ll have in the future. Investment strategies will vary significantly from someone with little to no cash compared to someone that has hundreds or even millions of dollars to invest. You can start investing in real estate with any amount of money (yes, even $0), but the amount you have access to will help to guide your asset class selection process.

Scalability

Consider looking at your long-term goals when choosing an asset class for investment. While you can scale with any type of investment strategy, certain asset classes make it easier than others to grow quickly. It’s not uncommon to see the single-family investor that shifts over to multifamily, self-storage or larger commercial investing because they want to scale quicker. If your long-term goal is to have a significant real estate investment portfolio, it will benefit you to consider the asset classes that allow you to grow much faster due to the systems that are required to run these types of investments.

Economic Influence

Certain asset classes do better when the economy is growing (fix and flips), and others do much better during recessionary times (self-storage, mobile home parks). Make sure you have a good idea of what is going on in the economy and which asset classes do well during the current economic season.

As you can see, there are many different factors to consider when choosing an asset class for investment. I could easily add 3-5 other factors to consider, but the four items above will help you get started. I’ll dig into each of the main asset classes on future blogs to help you continue to refine your search for the perfect first or subsequent investment.

If you’ve decided that you want to shift some of your capital out of the stock market rollercoaster to take advantage of the many benefits of investing in real estate, it’s time to put on your investigator hat and dig in. In this article, I’ll outline the four areas you’ll want to investigate before moving forward with your investment.

• Asset Class - There are as many options in real estate asset classes as there are ticker symbols in the stock market, so it’s important to identify an asset class that historical has provided the type of returns you are hoping to get with your next investment. Some of the most common asset classes in this space are apartment buildings, single family rentals, short term rentals, industrial, retail, office, self-storage, and mobile homes. If you can buy it, it’s possible to invest in it.

• · Market - As Robert Helms from the Real Estate Guys Radio Podcast says, “Live where you want, and invest where the numbers make sense.” It’s important to invest in a good market that has excellent economic dynamics. A great property in a bad market will likely be a bad investment over time.

• Operator - My analogy about “betting on the jockey” is likely getting old if you’ve been reading all my articles, but I believe the jockey is the most important factor to consider when choosing an investment. A good operator can make a bad deal go great, and a bad operator can make a good deal go bad. Choose your jockey wisely!

• · The Deal - Good deals exist in almost all markets and all asset classes, but it’s critically important to understand the specifics of the deal you invest with. It’s easy to get stuck in the minutia of the details, so it’s extremely important to have clear criteria on what you are looking for to help sort through all the options available.

We’ll dig into each of these areas in more detail in future articles, but this overview will give you a good idea of where you’ll need to spend your energy. If you can improve your comfort level in researching and identifying your preferences in these areas, you will be well on your way to choosing an amazing investment.

@Leo R..  Really great point.  I'm glad you added that to this discussion!

@Percy N.I've included a link to the file that I use here - https://docs.google.com/spread....  It's not pretty, but it does the trick and gives you a spot to track all of your deals and results.  Feel free to provide any feedback as this is a living document that seems to adjust monthly:)

In regards to COC, I'm seeing results between 4% and 7% in year one on Class B Value Add in appreciating markets. This, of course, is not a static number but simply a reflection of a point in time during this cycle. The bigger challenge is that I'm seeing a lot of operators stop paying distributions or not paying them for the first 12-18 months with the added cash flow constraints we are seeing with increased interest rates up against rate caps. In addition, I'm really starting to watch closely the monthly cash flow on these deals as we see reserves getting eaten up by the higher interest rates.

As a passive investor, my favorite time of the month is when the distributions start flowing into your bank account or your self-directed IRA (SDIRA) custodian account. It's kind of like payday for a W-2 or the first of the month as an active investor when your tenants pay their rent, but it's even better: YOU DON’T HAVE TO DO ANY WORK TO GET THESE DISTRIBUTIONS other than the due diligence on the front end before your initial investment. This month, I had four new distributions start hitting my accounts, and I can’t tell you the excitement my wife and I had when we saw the totals on the right of our tracker.

In this brief article, I’ll outline what my monthly tracking process looks like, and when you can expect to receive your distributions.

How I Keep Track of My Investment Distributions

First, it’s important to note that each of your operators will likely give you a portal to manage your specific investments with them, but I’ve not found a good online solution to capture all of this information for multiple operators so I’ve created my own manual tracking process.

Each time I make a new investment, I capture the investment details in a simple tracker in Excel. I list the operator name, investment amount, anticipated returns, hold time, estimated first distribution date, last distribution date and amount, and total returns. I also have a notes section to capture specifics that could be important later.

As I receive monthly or quarterly email communications from my operators, I update the tracker with anticipated payment dates and amounts, and then I verify when those deposits hit my checking account or my SDIRA custodian account.

That’s it! A few simple tasks each month to verify everything is going as planned, and you can leave the rest to the operators.

When Should You Expect to Receive Distributions?

It’s important to ask the right questions on the front end of the investment. Transparently, I didn’t even know to ask these questions early on, and I’ve learned a few lessons from those errors.

In my experience, most operators pay either monthly or quarterly distributions. Personally, I prefer monthly distributions because it is easier to manage cashflow now that I’ve left my W-2 employment. What seems to vary the most is how quickly you will start to receive distributions. I have some investments that I’ve not received a distribution in in over eight months and others where I received the first distribution within six weeks of my wired funds.

There is not a right or wrong way for operators to schedule their distributions, but it is important to know what the planned distribution schedule will look like for each investment. It's also important to note that the timeliness of your distributions will also impact your internal rate of return (IRR).

Whether you choose to use a tracker like mine or not is up to you, but I suggest that you have some type of strategy in place and use it regularly. Over time, distribution time will become more and more exciting as you continue to decrease your dependence on your W-2 and shift a larger portion of your traditional investments over to this space.