All Forum Posts by: Randy Smith

Like many investors, I struggled with the dilemma of active versus passive investing the first few years of my investing career.

I’ll admit that the thrill of “taking down” a deal, the excitement of getting your hands dirty rehabbing the “ugly house on the block,” the challenge of learning the various aspects of the process, and the pride of seeing the amazing transformation from all your efforts were certainly rewarding. Unfortunately, all the items listed above were not the goals of why I got into real estate investing in the first place. I got into real estate investing to help reduce my dependance on my W-2 job so someday I could exit the 9-5 and be able to live on the passive income I had generated from my investing.

About two years ago, I chose to go down the path of passive investing through the syndication model versus active investing in single family rentals. Here’s just a few reasons why I chose to do that:

1. Expertise – I was not an expert at the BRRRR model or even the Turn Key Model, and I didn't have the systems in place to scale a business that could successfully collect 100+ deals I would need to hit my financials goals. Passive investing allowed me to simply pick the expert in the space I wanted to invest, and they would do the rest.

2. Time – A lot of investors will tell you that single family rentals are passive income after you get them set up and run by a property manager. This was simply not my experience. I had to have regular phone meetings with my property managers, I ended up flying to Atlanta multiple times to meet with contractors, realtors and property managers, and the amount of time that was spent looking for new deals was exhausting. After you do your due diligence on the operator, passive investing takes little, if any, time after the initial investment.

3. Passion – I found out very quickly that I am not passionate about all the nuances of the active investing business, and I believe you must be passionate about everything you do to be successful. I am, however, passionate about amazing monthly returns that give me the freedom to do what I want, when I want and with who I want after just a few short years of investing passively in real estate syndications.

4. Cash Flow – $100/month is the basic rule of thumb that many active investors use when calculating whether they’ll do a new single family home rental. Yes, $100 per month per house. A very quick calculation will tell you that you need a humongous amount of SFRs for this model to allow you to leave the rat race.

These are just four of the reasons to consider looking at adding passive investing through syndication to your financial tool belt. Your unique situation will likely uncover a few more. Let’s connect to see if it makes sense to hold just a small portion of your investments in this space.

You’ve learned a lot since you started the journey of investing in your first passive real estate deal: you’ve weighed all the differences between asset classes, zeroed in on your ideal geographic market, and put on your investigator’s hat to get comfortable with a few operators. Now, you need to review the deals these operators put in front of you and choose which one is the best place to allocate your funds. In this article, we’ll review the main items you’ll want to review before making your decision.

Does the opportunity meet your investment needs?

Investment opportunities come in all shapes and sizes, so it’s important to compare the investments to your specific needs. You’ll want to know if it is this a cash flow deal, a deal geared more towards growth, or a deal that has a healthy mix of both. If it is a cash flow deal, how quickly will it start providing cash flow and specifically, how much cash flow will it provide?

When I first started investing in this space, I didn’t know what questions to ask, but I found out very quickly that all deals are not created equally, and operators have very different strategies when it comes to providing distributions to their investors. There’s not necessarily a right or a wrong way to pay distributions, but it is important to make sure the deal provides the cash flow or growth opportunities you need to meet you investing goals.

How is the debt structured?

The financing of the deal can have a tremendous impact on the overall returns and hold period of the investment. You’ll want to get a good understanding of the type, terms, and prepayment options associated with the loan as you do not want your operator to be forced to sell before they’ve been able to perform the complete business plan if it is not in the best interest of the investors.

Some items you’ll want to acquaint yourself with are the difference between bridge and traditional loans, prepayment penalties or defeasance fees, interest only periods, rate caps, and refinance options available for the specific loan your operator is leveraging. This might seem a little overwhelming, but it’s not necessary to become an expert on all these items. Simply knowing at a high level what they mean and the impacts they can have on the deal are often enough to weed out the bad deals.

What is the operator assuming in their financials?

You’ll often see a section in the investment presentation that covers the assumptions that are being used in the development of the financials and the pro forma. Be sure to understand these assumptions and give them a “gut check” to make sure that they make sense. As an example, if the operator assumes that rents are going to go up 5% per year without any added value, it’s safe to assume that the expenses will also go up at a proportionate amount. I also like to see some type of relevant stress tests on the deal as well that provides a few if/then scenarios as the performance is not likely to hit on all estimated metrics throughout the hold period.

As always, there are many other areas that you can investigate in your due diligence process, but you can feel confident with just the items above if you’ve done all the work up to this point. The next big item is submitting your “Soft Commit” for the investment and getting ready to wire your funds. We’ll discuss that in a future article.

What is Passive Investing through Syndication

If you hang around the real estate investing community for any amount of time, you are going to hear a lot about investing through syndications. For those of us that have been doing this for any amount of time, this terminology is about as normal as discussing the news, weather, and sports. But for those that are new to real estate investing, it can be a little overwhelming and intimidating at best. In this article I’ll discuss what passive investing through syndication is and how it can be a great tool to have in your investing tool belt.

Active Vs. Passive Investing

First, let’s discuss the difference between active and passive investing. Active investing in real estate is what most people think of when they think about real estate investing. Imagine HGTV’s many, many shows that show the very glamorous life of buying the “ugly house on the street” and then turning it into the “prettiest house on the street” in just a few short weeks with a couple of funny interactions with the construction crew the TV personality just happened to find walking the isles of Home Depot.

There are many different versions or variations of active investing (wholesaling, buy and hold, BRRR, short term rentals, and many others), but what these shows do not share are the razor thin margins, the cutthroat world of acquisitions, and the many unglamorous aspects of the business that make it very tough for the average active investor with a W-2 to be successful with this as a side hustle. As someone who has played the active investing game while trying to show up and perform 100% in a W-2 job, it's not really all that it's cracked up to be.

Passive investing by design is very boring compared to the high energy, high stakes, and high rewards that are portrayed by the active investor community. On a normal day as a Passive Investor, you might receive some updates via email on your investments, receive some solicitations from new operators that are trying to earn their way into your passive investment portfolio, and you’ll likely get to confirm that the disbursement deposits are hitting the correct bank account on the predetermined date.

Passive investing is simply, picking the right “jockey,” and then watching the jockey run around the track. Sometimes my jockey finishes in first place, and other times he comes in 2nd or 3rd, but if he doesn’t break his leg, we move on to race another day and he only gets stronger and faster.

What is a Syndication

Now, let’s define what a real estate syndication is. A real estate syndication is an investment structure that allows you to bring a group of investors together to invest in a specific real estate opportunity. This type of structure can be used to invest in almost anything, and some of the most common syndications include apartments, mobile homes, self-storage, land, development and even ATM machines or bit-coin mining.

Roles in Syndications

Next, let’s discuss the two main roles in syndications: General Partners and Limited Partners

General Partner – The General Partner is the “jockey” that is in control of the day-to-day operations of the business. They are responsible for finding the deals, doing the due diligence, setting up the financing, raising the capital, creating and executing the business plan, dealing with the operational challenges that can come up 24 hours a day, managing the cash flow, and ultimately distributing the profits to all of the partners throughout the hold period.

Good General Partners have been involved in the business for years, and they have perfected their business procedures to make sure the business plan is executed as effectively as possible. The success of the syndication will often rely on the skills and experience the General Partners bring to the deal.

Limited Partner – The Limited Partner is the individual or the individuals that are bringing the liquid capital to the syndication deal, and these funds are usually used for the down payment or the rehab of the real estate being purchased. In return, the Limited Partner generally receives some type of quarterly or monthly distribution as well as an additional return when the business plan is successfully completed at some point in the future. The Limited Partner is not involved in the day-to-day activities of the business plan, and they don’t have to deal with the issues that arise throughout the period that the business plan is being executed.

The main responsibilities of the Limited Partner are to complete due diligence on the General Partners (the “jockey”) and the specific deal, review the regular communications from the General Partners that provide updates throughout the hold period, tell everyone you know every time you get a deposit into your account without doing any active real estate activities, and continue to earn good money from your W-2 or other business activities to keep feeding the passive investing machine you are creating.

Whether you determine that Active Investing or the Passive Investing is the best route for you and your needs, syndications are a great model to consider if you are interested in maximizing your returns while also taking advantage of scaling faster by combining your efforts with other investors and professionals in the space.

My wife and I were able to 11x our monthly passive income through the syndication model in about the same amount of time as it took to build a small single family rental portfolio. As a result, our focus will be to continue investing in real estate through the passive investment model with syndications.

I'm considering investing with Asym Capital's ATM fund through Prestige.  has anyone invested with Asym Capital or Hunter Thompson or have any experience with ATM fund investing?

Hi Bob Berland,

I'm invested in 4 deals with Zach and his team.  I've been very impressed with them on every aspect:  on-boarding, regular communication, returns, and deal flow.  I would highly suggest investing with Zach and Rise 48 Equity.

Best,

Randy

@Jason Dillard.  Thanks for the note.  I was planning on paying our realtors as they brought the deal together, and I suspect they would not connect us if they aren't getting anything for the transaction.  Have you had any experience with this?

In regards to the funding, I don't think I want to fund the rehab, I just want to fund the purchase of the house.  My concern is that I don't want to be out of pocket even more on this property as I've already lost quite a bit on it.

I own a home free and clear that is on the market currently. The home is likely a tear down and I’ve had multiple offers fall through because the numbers are very tight in the current market.

Question: I have a buyer that is very interested but just had hard money lender pull out. Is it possible for me to sell to this investor and act as the hard money lender? I.e. ask for $x down and x% interest on the remainder until he refies out or sells? If so, could a realtor right that contract or would I go to some other professional? Also, what fees could/should I charge? 10% down with 8-10% interstate on remainder?

@Paul Gutierrez. I’m in a similar situation considering investing in fund 3. Can anyone share their experience with fund 1 or 2?

@Bobby Shell. I just spoke with Mike at ODC as well and I’m considering moving forward. Can you share any details of your experience over the last 6 months?

@Brenden Mitchum. See above.