In recent years, Our passive real estate investing club meets monthly to discuss and review hands-off investments. We make a new passive investment together each month, allowing us to each put in a small amount without becoming landlords.
meanwhile we Historically we have focused on syndication. Increased emphasis on private partnershipsWe work with smaller investment companies that don’t raise capital from the public to make deals.
These companies don’t have podcasts or YouTube channels. it’s not There Trying to build my own brand or sell course or Become a “master.” They just Our focus is on achieving consistent, high returns on your real estate investments. Further private partnerships Allowing non-accredited investors Because it is not a security.
Here is what our co-investment club looks for when seeking a private partnership to passively invest in real estate deals:
Asymmetric Returns
Ultimately, what we want is high returns with low risk — what the financial world calls “asymmetric returns.”
On the return side, usually Requires 10% to 12% or more for secured debt investment, For equity investments, it is at least 15%. Otherwise, what’s the point? If you want to earn 7% to 10% on stocks, just invest all your money in the stock market. if I was hoping for 4% to 7% on debt investments.I would invest in bonds.
I invest in real estate because of the high returns, stable income, tax benefits, diversification, and most importantly, low risk.
Anyone Who invested? I have years of experience in the real estate industry. that You can get asymmetric returns. For any investor, making your first real estate deal involves a lot of risk. But what about your 100th? Investors who have been through that many deals have already learned all the expensive lessons. They know how to maximize their returns while minimizing their risks.
Plenty Passive Real Estate Investing Aim for high profits. Those Some carry similarly high risks, while others carry relatively low risks.
We have become increasingly obsessed with downside risk, protecting ourselves from losses.
Why focus on risk?
Rock star investor Warren Buffett famously said, “Rule No. 1 is never lose money. Rule No. 2 is never forget rule No. 1,” and the longer I invest passively in real estate, the more I realize how true his words are.
If you invest in enough trades (And this Our co-investment club Invest monthly), real estate investment returns follow a bell curve: some investments will fall short of expectations, some will exceed them, and the majority will fall somewhere around the middle of the curve.
Imagine the bottom left corner of a bell curve. Terribly They lose money, and that’s what our risk analysis aims to eliminate.
If a trade falls short of expectations and I only make 5% instead of 15%, I would shrug and say, “I’ll make it back on the next trade.” What if I invest in a trade and lose 100% of my capital? here we go just I would say not to be so philosophical about it.
Real estate investment is all about downside risk. There are countless investment opportunities that can earn you 15% or more. Very low Downside risk.
This raises an important question. Low-risk real estate investment?
Risks we examine and minimize
When considering a transaction, we try out Consider risk from as many angles as possible. These are the main things we look at first.
Partner Reliability
Any investor who has done enough deals has lost money from time to time. We love talking to investors about deals that didn’t work out. What went wrong? How did you address it? Did your partners or financial investors take losses?
A better answer would be to explain the lessons investors have learned and how they have after that took the loss personally In order to Fully compensate investors and partners.
What is reliability? actually Partners and sponsors are the hardest things to measure. There is no formula or number. you simply I need to talk to that person Again and again Until you feel 100% confident. If you don’t feel If you have complete confidence, you can pass on your investment until you do (or just move on).
Conclusion: It doesn’t matter how skilled and experienced an investor is if they just take all your money and run off to the Cayman Islands.
Partner Experience
If someone says, “I’ve never lost money in trading,” immediately You want to know how many deals they have done, as that’s probably not enough to give you confidence in their experience.
Let’s consider a case study of an investor we’ve partnered with on several investments. He’s not a sponsor or a public figure.he Since he’s a civilian, we’ll call him Casey.
Casey Flip They sell between 60 and 90 homes a year, some as standard short-term flips and some as longer-term flips with lease-buyback arrangements. Additionally, the company holds some long-term rentals. Casey runs a team of 10 people, some of whom work face-to-face and some who are virtual assistants.
With nearly 300 listings under his belt, it’s safe to say Casey knows what he’s doing. As his volume has grown, he’s expanded his operations to include locations within a few hours of his hometown. He doesn’t travel across the country in search of the hottest new housing markets; he sticks to what he knows and expands carefully.
debt
Leverage increases risk. difficult Stop.
Yes, I understand that leverage can increase return on capital. Don’t avoid leveragee—but we I want it to be unobtrusive and manageable.
Casey’s companies own about 110 properties valued at about $15.1 million. are used collectively The answer was 62.2%.
At one point, our investment club did a private investment with Casey at 10% interest, and he gave us three protections. beginning He created a lien against one of the unsecured properties, and that lien was for less than 50% of the property value (less than 50% LTV).
Personal and corporate guarantees
You can’t necessarily get a personal guarantee from the principal, but having a personal guarantee can give you peace of mind about the risk.
The other two protections that Cayce gave us are Was Personal guarantee and One Enterprise guarantee From his company that owns all the real estate. If he defaults, not only will we go after the 110 properties and their millions of dollars; Fairness, But his Personal assets.
As you might expect, Casey made regular monthly interest payments.
Property Management Risk
I especially love investments that require absolutely no property management. for example, Our latest investment Casey and I were partners on a few flips. These were typical short-term resales, and Casey’s team simply The property will be renovated and sold within the next few months, but there will be no tenants. No lease, Risk of non-payment of rent.
Similarly, we invest in a land flipper who buys large parcels of land for 25 to 40 cents on the dollar and then subdivides them into smaller parcels to sell at higher prices. He protects himself from further downside risk by getting approval for the subdivisions before he buys.
That said, we often invest in properties that require management. In that case, we will check the number of properties owned by the sponsor or partner. Worked together With the property manager in front. We want a partnership that will last for many years across a variety of properties.
Construction Risk
Partnering with land resellers is great because there is no construction risk involved.
but For example, in Casey’s case, there is a risk of rehabilitation. So when renovation or construction is involved, we ask the same question: How many properties have you worked with this team of contractors on?
“Zero” is a terrible answer. “Three dozen” is a much better answer. Casey has worked with teams for years and has flipped hundreds of homes.
Regulatory Risk
Tenant-Friendly States and Cities The risks are beginning to spread to the federal level as governments continue to pass stricter laws regulating residential rentals. Presidential Candidate I’m talking about National Rent Stabilization Act.
These risks only apply to residential rental properties. They don’t apply to other properties. They don’t apply to home flips, short term vacation rentals, warehouses, retail, industrial, etc. They don’t apply to undeveloped land. Here’s one reason why. I’m very excited Partner with the land investor.
Main risks
of maximum The risks of partnering with a small real estate investment company are: key Major.
If Casey gets hit by a bus tomorrow, Probably. It will take some time for his estate and company to sort out the wreckage, and I’m sure the money will be returned, but the mess will remain.
A real estate syndication firm with 150 employees doesn’t have the same risk: If one managing partner dies, there are enough others ready to take over.
How do you defend yourself? key Major riskAsk about contingency plans if something were to happen to them. Who will take over? Are they eligible to do so? Will assets go directly to probate of your estate or will they pass directly to your partner for disposal or ongoing administration?
There is a small risk that a healthy 40-year-old man like Casey could die tomorrow, and I’m willing to accept that risk. But that doesn’t mean I should ignore the risk entirely.
lastly
Our co-investment club vets and invests in real estate syndicates one month at a time. They usually work out well, allowing us to get the benefits of ownership (passive income, property appreciation, tax benefits) without the hassle of being a landlord. But increasingly, I found The risk is low for the private sector partnership, And the returns are just as strong.
We learn about new passive real estate investing every day. We see them through a lens risk On top of that, Other. But when I Approaching financial independenceI have become more and more receptive to downside risk without sacrificing returns.
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BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
