Passive Investors, Who Are They?

Passive investment is a type of long-term investment in which assets are bought and held for a relatively long period. Passive investing takes advantage of the almost inevitable upward trend of the real estate, rather than seizing the day with frequent trades. Passive investors do not engage in the day-to-day running and/or operations of the property. Passive Investing is also referred to as passive management, and passive investors in multifamily syndications are usually known as limited partners.

Compared to Active Investing, Passive investing is relatively straightforward since it avoids the hassle of understanding the day-to-day nature of the market, in a bid to make sporadic or over the odds returns. Many potential investors do not fancy the idea of being a landlord or having a property to worry about. As a Passive Investor, you simply invest your money on real estate deals you may not be able to afford, individually, through the crowdfunding nature of Syndications, many passive investors can now participate in those types of opportunities. Usually, you receive a share of the profits every month, quarter or annually (in cash flow). Also, general partners (Syndicates/Sponsors) keep Passive Investors abreast on the value and performance of their assets through monthly or quarterly reports.

One of the best platforms for passive investing is multifamily syndication. By becoming a passive investor in a syndication deal, busy individuals can avoid having to manage the property, as that is taking care of by the Syndicator of the deal. You have the freedom to engage in other ventures while generating monthly, quarterly, or annual income passively.

While this is a great way to build long-term wealth and is a popular investing philosophy among the wealthy, potential passive investors should understand the financial terms of any deal before they get involved, particularly because the Syndicator decides how and where your money is being spent. Sometimes, the experience is an added advantage to Sponsors and may determine their success rates.

Passive investors should check the profit splits details to enable them to understand the financial benefits of a deal. It is also important to consider various factors such as demographics, the location of the property intended to purchase, and to thoroughly check the Sponsor’s plan for the property and understand if these plans are short term or long term. Ask pertinent questions like, are these plans feasible? Are the profit splits well understood? Does the Sponsor have a good background (as an old investor) or a good prospect (as a new investor)? Is this right market? 

The legal documents are also important in any Syndication deal, are also very important. The Operating Agreement of the Limited Liability Company (LLC) is one of the documents a potential passive investor should familiarize with, as well as the Private Place Memorandum (PPM). These documents expound on the protocols and principles guiding the company and the syndication deal, they also highlight the potential risks involved in the deal. Sponsors are already mandated by securities laws to provide passive investors with the document of the deal (offering) that explains the terms of the deals and the risks of the deal, so passive investors can make good use of this right. You should also get the services of a real estate attorney and/or a financial adviser.

Passive investors have a wide range of deals to choose from, and various ways to profit from these deals, they are also part of the Limited Liability Company (LLC) along with other investors and they are shielded from loan liabilities or legal issue attached to these properties. These are some of the reasons passive investing is becoming an increasingly popular investment strategy. If you feel you are a fit to become a passive investor reach out directly and connect with John Fortes: become a passive investor.

Disclaimer: The views and opinions expressed in this blog are provided for informational purposes only and should not be interpreted as an offer to buy or sell any investment or course of action.