It’s been several years now, Our Passive Real Estate Investment Club meets monthly to discuss and review hands-off investing. Each month, we make a new passive investment together so we can each invest a small amount without having to become landlords.
although us Historically focused on syndication, we have Increasing focus on personal partnerships. We work with smaller investment firms that do not raise capital from the public for our transactions.
These companies don’t have podcasts or YouTube channels. they are not there Trying to build a brand for yourself or Sell course or Become a “master”. them only Focus on achieving consistently high returns on real estate investments. Additionally, private partnerships Non-accredited investors allowed Because they are not securities.
This is what our co-investment club looks for when exploring private partnerships to passively invest in real estate transactions.
asymmetric returns
Ultimately, we want high returns and low risk: what a fancy type of finance calls “asymmetric returns.”
In terms of returns, generally Meaning we seek secured debt of 10% to 12% or higher invest, Equity investment of 15% or above. Because otherwise, what’s the point? If I wanted to earn 7% to 10% on stocks, I would put all my money in the stock market. if I want 4% to 7% debt investmentI will invest in bonds.
I invest in real estate for high returns, stable income, tax benefits, diversification, and low risk – most importantly.
anyone who invested Been working in real estate long enough to know That You can get asymmetric returns. An investor’s first real estate transaction comes with significant risk. But what about their 100th trade? If they’ve done that much, they’ve learned all the expensive lessons. They know how to maximize returns while minimizing risk.
a lot of Passive real estate investing Aim for high returns. Some in have equally high risks, while some have relatively low risks.
We are increasingly focused on downside risks: protecting against losses.
Why we care about risk
Rock star investor Warren Buffett famously said, “The first rule is never lose money. The second rule is never forget the first rule. The longer I passively invest in real estate, the more I appreciate how right he is. sex.
When you invest enough trades (And this That’s why we jointly invest in clubs monthly investment), returns on real estate investments follow a bell curve. Some investments will underperform, some will outperform, and most investments will fall somewhere in the middle of the curve.
Think of the bottom left corner of the bell curve – underperforming trades seriously They lost money. This is what we aim to eliminate through risk analysis.
If a trade doesn’t perform well and I make 5% instead of 15%, I’ll shrug and say, “I’ll make it up on the next trade.” What if I invest in a trade and lose 100% of my capital? ? let us only Say I wouldn’t be so philosophical about it.
In real estate investing, downside risk is everything. You have unlimited investment opportunities with a target return of 15% or higher. The trick is to find those extremely low Downside risk.
This raises a key question: How do you identify Low Risk Real Estate Investment?
We review and minimize risks
When we look at transactions, we try Look at risk from as many angles as possible. These are the main things we look at first.
Partners are trustworthy
Every investor who makes enough trades will occasionally suffer a loss. We like to talk to investors about deals that are not working against them. What went wrong? How did you handle it? Did your partner or financial investor lose money?
Better answers focus on the lessons investors learned and how they Then personal loss for Make their investors or partners whole.
Credibility is actually The hardest thing to measure about a partner or sponsor. There are no formulas, no numbers to run on. you simply Must talk to that person again and again Until you have 100% confidence in them. if you don’t Feel Have complete confidence in passing on their investment until you do (or only keep going).
Bottom line: It doesn’t matter how skilled or experienced the investor is if they take all your money and run to the Cayman Islands.
Partner experience
If someone says, “I’ve never lost money trading,” I immediately Wonder how many deals they’ve closed. That may not be enough for me to feel confident in their experience.
Consider a case study of an investor who worked with us on some investments. He is not a sponsor or a public figurehe is A private citizen, so I’ll call him Casey.
kathy flip Between 60 and 90 homes per year – some standard quick flips and some long-term flips through lease-back transactions. In addition, the company also maintains a number of long-term rental properties. Casey manages a team of 10 people, including some field assistants and some virtual assistants.
With about 300 properties in the rearview mirror, it’s enough to show that Casey knows what he’s doing. As his business grew, he expanded beyond his hometown, but only within a few hours. He doesn’t travel across America looking for the latest hot real estate market. He stuck to what he knew and only expanded cautiously.
debt
Leverage increases risk. difficult stop.
Yes, I understand that leverage can increase your return on capital. We don’t shy away from leveragee—bUte we do Hopefully keep it moderate and manageable.
Casey’s company owns about 110 properties valued at about $15.1 million. those attributes Collective leverage is 62.2%.
At one point, our United Investment Club signed a private note with Casey that carried an interest rate of 10%. He provided us with three protections, the first being a lien first A stance against one of his liberal clear-cut assets. The lien is less than 50% of the property’s value (LTV less than 50%).
Personal and business guarantees
We don’t always get a personal guarantee from the principal. But when we do it, it does make me feel better about the risks.
Two more protections that Casey gave us on that note. was personal guarantee and one corporate ensure From his company that owns all the properties. If he defaults, not only do we have recourse for all 110 properties and their millions of dollars fair, And his personal assets.
As you might guess, Kathy paid our monthly interest payments on time.
Property management risks
I particularly like investments that don’t require property management. For example, Our latest investments Working with Kathy went through many flips. These are classic short-term flips, Casey’s team simply Renovate and sell property within months – no tenants, No lease, nothing Rent Default Risk.
Likewise, we invest in a land speculator who buys large tracts of land for 25 to 40 cents on the dollar and then subdivides and sells smaller parcels of land at high premiums. He further protects against downside risk by obtaining subdivision approval before purchasing.
That said, we do often invest in properties that require management. When we do this, we look at how much property the sponsor or partner owns worked together with the property manager forward. We would like to see partnerships with many different properties going back many years.
construction risks
I love working with land flippers because there are no construction risks at all.
but Casey, for example, is at risk for recovery. So when it comes to renovation or construction, we ask the same question: How many properties have you worked with this team of contractors?
“No” is a bad answer. “Three dozen” is a better choice. Casey has worked with his team to flip hundreds of homes over the years.
Supervision risk
Tenant-friendly states and cities Continue to pass more stringent laws to regulate residential rentals. This risk has begun to spread to the federal level presidential candidate talk National Rent Stabilization Act.
These risks apply only to residential rental properties and nothing more. It does not apply to flip houses, short-term vacation rentals, storage facilities, retail, industrial, or anything else. It certainly doesn’t work on raw land, that’s one of the reasons I’m so excited Work with investors in that land.
Main main risks
this greatest The risk of working with a small real estate investment company is that key Main.
What if Casey got hit by a bus tomorrow? meeting It will take some time for his estate and company to clean up the wreckage. I’m sure we’ll get our money back, but things will still be messy.
A real estate conglomerate with 150 employees would not face the same risks. If one of the managing partners dies, there will be enough others ready to take over.
how do you prevent key main risk? You ask about contingency plans if something happens to them. Who takes over? Are they qualified to do so? Will the assets go directly to probate, or will they be handed over directly to the partners for disposal or continued management?
The risk for a healthy 40-year-old man like Casey to rattle tomorrow is small. I’m willing to accept this risk. But that doesn’t mean you should ignore it entirely.
final thoughts
From time to time, our Syndicated Investment Club reviews and invests in real estate syndicates. These have mostly gone well for us, giving us the benefits of ownership (passive income, appreciation, tax benefits) without the hassle of being a landlord. But increasingly, i found Lower private risk partnership, The returns were equally strong.
Every day, we learn about new passive real estate investments. We see them through the lens risk more than, And there’s more. but when i get Get closer to financial independenceI’m increasingly focused on downside risk—without sacrificing returns.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
