How To Do Your Due Diligence When Investing Passively In A Real Estate
No matter what type of investment you make, it’s crucial that you do your due diligence. When you’re considering an investment in a publicly traded stock, you probably already know the importance of looking at the company’s history, the men and women who lead the business, and the forecast of the good or service being offered. Being informed about every aspect of investment can often be the difference in successfully bringing in returns or wondering where your money went.
Passive real estate investing is no different. In order to put yourself in the best possible position to come out on top of your investment, it’s crucial that you do your due diligence. If you thought that passive real estate investing was as simple as writing a check and waiting on the returns, think again. Be sure to do your homework on any investment you’re considering.
Who Is Spending Your Money?
Knowing who is overseeing your investment is one of the most important parts of doing your due diligence in passive real estate investing. For instance, in real estate syndications, each syndicate has a sponsor (also referred to as a syndicator). A syndicator is the person who decides which properties the syndicate will invest in, how the property will be managed, and what the endgame is for your investment. More importantly than knowing about markets and property values, you should educate yourself on the trustworthiness of this syndicator.
Reputable sponsors of real estate syndications can provide a business plan or a pitch deck that shows exactly why you should invest your money with them. These business plans regularly include personal qualifications and other information to help you decide if you want to invest with that particular sponsor. If the syndicator you’re considering can’t provide a business plan or provides one that lacks the criteria you’re looking for, move on to another sponsor.
If you decide that real estate syndication is for you, you should know which questions to ask the sponsor of the syndication you’re looking into. Ask for a list of investments that he or she has overseen in the past. Find out how well those investments did when it came time to cash out. Don’t be afraid to reach out to investors who have invested with that particular syndicator in the past to find out how good they are at communicating with their investors and what sort of returns their investors received. The sponsor plays the biggest role in ensuring that you get a good return on your investment, so knowing who you’re working with is vital.
What is the Investment Strategy?
If you’re going to invest any amount of money into a syndication, especially a significant sum, you want to know the overall business and investment strategy. Syndications have an investment strategy which can either be buying stabilized or value add properties. Stabilized properties offer a lower return but are less risky as the property has already been improved and is now receiving a stable return. The value-add strategy is focused on improving a property by adding value through implementing proper management or conducting capital improvements to the property which will in turn increase its operating income and provide a higher return for its investors.
You should also decide if you want a quick return on your money or if you’re willing to invest in the syndication for the long-term. Short-term investments such as house flips may give you an immediate return, but long-term investments such as commercial rental properties can help provide passive income for years. While a rental property may not yield a positive return immediately, they provide monthly or quarterly dividends once any debts associated with the property have been paid off. Your plan for your money should dictate what type of strategy appeals to you.
Understanding the Assets
Unless you knowingly invest in a blind syndication or a fund, you should always try to gather more information about the subject properties. Blind syndications allow the sponsor to choose the properties with no input from the investors.
In order to truly do your due diligence on an investment, you should try to gather information about the property from the syndicator. Understanding what type of property it is, what the market is like, where the property is, and more can help you better grasp the long-term and short-term viability of the investment. For instance, if a syndicator shows you an apartment complex in an area with lots of young couples and strong workforce, you may feel more comfortable assuming that it’s a wise investment. The demand will be there for the property that you’re investing in.
Ultimately, the point of any investment is to turn your money into more money. In order to do that, you should know as much information as possible about the investments themselves and the people who are overseeing them. The investments you make are entirely up to you, but make sure that any investment you make is made with plenty of research and personal due diligence.