Intro to Passive Investing
If you’re anything like us, you’ve driven around town, looked out at all the buildings lining Main Street and wondered to yourself – who owns all these? The offices, the retail stores, your local Starbucks. Or maybe on the other hand, you’ve thought about buying a home or two and renting it out, but think the idea of being a landlord and answering broken toilet calls at 2am isn’t necessarily the most enticing proposition.
Well that’s where passively investing in multifamily syndications comes into play. First, by investing passively, we can gain the benefits of owning a rental property, without actually having to be a landlord ourselves. And by investing in multifamily, we can join dozens of other investors to collectively own and operate the apartment buildings in various communities around the country.
So to get an idea of how this works, let’s start with the concept of a syndication. We’ll dive even deeper in a few videos, but to keep it at a high level, this is when multiple investors, oftentimes 30 or more people, come together to collectively buy an asset. This group of investors comes together to put a down payment on a property, just like you would on a home. Then, a lender provides the group with a loan for purchase, again…just like buying a home. In essence, a syndication is a way to buy an asset, just like a single family home, but allows investors to come together to invest in larger and more strategic opportunities.
In our case, that asset is apartment complexes. By buying such a large property, we are buying a business, not just the underlying asset. In purchasing multifamily properties that are struggling and not keeping an eye on their competitors, we can turn a complex around, provide great value for tenants, slowly increasing the value of our initial investment.
Syndications are organized by the deal sponsors. This is the group of investors who will make the decisions and run the property. Also known as the General Partners, this group ranges in size from 3 to maybe 7 people, and is made up of professionals who bring a diverse background of expertise, ranging from our asset manager who handles the day to day, to data analytics and marketing professionals who help keep an eye on the surrounding market and ensure our competitiveness with nearby properties.
The majority of investors in a syndication are the passive investors, known as Limited Partners. Limited partners aren’t involved in the decision making process, but get to benefit from all the aspects of owning a real asset, like paper losses such as depreciation, or the cash flow that is generated by rental income. And that part is key. Oftentimes referred to as “mailbox money”, cash flow is the income you receive, typically on a quarterly basis. As a passive investor, every quarter you would receive your share of the property’s profit. Let’s say you invest enough that you end up owning 5% of the entire property. Well if the property clears $100,000 for the quarter, you would receive a check for $5,000.
Now how do you end up owning 5% of a property? Varying investment amounts are always accepted, with typical minimums ranging between $50,000 – $75,000.
And this brings us to our favorite aspect about being a passive investor: the total transparency and communication involved with an investment. Every month, you’ll receive an email from the property’s General Partners. This email will detail everything about the property, ranging from ongoing construction, to lease up efforts. Supply chain issues are even covered – you’ll hear about incoming shipments for roofing tiles, or the new stoves being installed in all the units. You’ll hear about it all, the good, the bad and the ugly – but as a passive investor, you don’t have to worry about taking care of any of it in the middle of the night. And if you’re a numbers person, the monthly financials are always provided so you can keep a close eye on how things are progressing.
Passive investing is a fantastic way to invest in America’s Main Street. Buying a real asset, without any of the hassle of managing it yourself.
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