5 Rules to Investing in Your First Passive Real Estate Investment
by Christopher Levarek
“Before you talk, listen. Before you react, think. Before you spend, earn. Before you quit, try.”
- Earnest Hemmingway
The movie Fight Club is one of twists, turns and thrilling surprises and not to be missed. To summarize, this well written movie tells the story of a “normal” average W-2 earner who begins to question his life and reality while finding himself drawn into a underground fight club offering salvation from the daily grind.
The W-2 earner, Edward Norton, breaks the chains of his current reality and jumps feet first into an unknown lifestyle, void of comforts, security and, at times, reason. Luckily one of the main roles, Brad Pitt, explains not only the 8 Rules of Fight Club to him, giving structure to the chaos, but also acts as his “guide” throughout his life transition.
Now without giving it all away, let’s just say there are a lot of connections to be made with the movie and jumping into real estate investing or breaking the bonds of traditional thinking on income. Indeed for many, common thought processes are shattered and normal habits are changed by investing passively or actively. It is hard to go back once you have invested into real estate!
However, today, I offer an article with 5 rules to follow for the passive investor looking to invest into a real estate syndication or passive investment. Much like the movie, these rules will not only help soothe any fears of the first investment but also provide a level of confidence in the investment decision. Let’s jump in!
#1 - Do Your Research
If you are investing for the first time passively in any deal, fear of the unknown can be paralyzing. However, the first step to conquering the fear is doing the research. Start by understanding the investment and the investment model. Many passive real estate investments are unfamiliar because many people simply do not know about them. Change it.
If you are interested in investing into multifamily apartments, pick up a book on multifamily apartments. Preferably pick up a book that speaks about real estate syndication and apartments, if that is the goal. Listen to as many podcasts as possible on the subject. Podcasts such as “Free From Wall Street”, BiggerPockets or Best Real Estate Investing Advice Ever would be good choices for real estate investing knowledge.
Review some of our top blog recommendations on real estate and even our podcast top 5.
In brief, learn as much as you can about your chosen investment long before you commit to invest.
#2 - Ask Questions
Once you begin to familiarize yourself with the investment, questions will naturally come up. Ask them. You can ask questions in networking local meetups, online forums or with the syndication groups or people managing the investment offerings. These are all free resources to get your questions answered.
I prefer the Biggerpockets online forum, as there are millions of people with varying backgrounds, experiences and expertise just waiting to provide feedback. Ensure you verify some of the credibility of the online resources you interact with and try to get multiple inputs validating an answer to confirm it’s truth.
TIP: An easy way to verify in Biggerpockets, is by looking at the user profile for deals completed, # of posts contributed or even age of the profile.
#3 - Network
Inevitably, by asking questions you will connect with others and build your network. This is paramount to your success as a passive or active investor. Syndications are simply large numbers of like-minded investors just like you pooling resources to acquire massive apartment complexes! By connecting with others you will be able to hear success stories, failures and learn from those who’ve been in your shoes long ago.
You can use the aforementioned forums to connect or even ask sponsors in investment groups to refer you to some existing investors in their deals. This way you can hear how the experience is or was and build your network while increasing your confidence.
TIP: There are some forums and resources which vet sponsors or focus specifically on forming networks around investment types. One such group focusing primarily on real estate syndication is “LeftFieldInvestors”, a biggerpockets for syndication investors, could be worth a look.
#4 - Review Past Investments
Once you’ve found an investment offering model you like, ask to review the older investments. Ask sponsors to send you the past investment summary or offering memorandums. Try to see if you understand the lingo or how many questions come up for you now that you have done your research.
Now compare these past investments with other content provided from other sponsors. What do you like across these deals? What are the similarities? What are the things you do not like? How is the communication with the sponsor? All good questions to find out before investing to select the right deal or sponsor.
#5 - Take Your Time
At times it can feel like if you miss the one you are focusing on, there won’t be another. This can cause you to rush into the investment. Take Your Time. There are many investment opportunities at present and there will be many more in the future.
Don’t panic if you don’t feel ready. Wait for the next investment opportunity when all your questions are answered and you feel confident in your decision. Understanding the investment with research, networking and educating on the investment type are key to your success. Take the time needed to make a decision you feel confident in.
In Final
Investing into a real estate syndication or passive real estate investment is a reality changing experience. You are leaving the heavily trodden path of the passive stock/401k investor and embarking into the unknown. Yet many have done it before you and many offer assistance along the way. Not only is the journey highly rewarding, doing what others will or can not is where the magic happens.
Take the time needed, enjoy the journey and use the 5 Rules of Investing in a Passive Real Estate Investment above.
Oh, and to parody the 8th rule of Fight Club:
“ If this is your first passive investment, you have to invest " …at some point :)