Build Wealth as a Passive Investor

The Boring and Completely Effective Way to Build Wealth: Passive Investor

How many times have you felt like this?

The Boring Wealth BuilderYou get an email from your property manager and you  immediately feel your stress levels going up even before you open the email.

Here is a sample email that I just received.  True story.

‘The current tenants lease is up for renewal.  They are great tenants and since last summer are now paying above average market rent with the market still softening up. They would like to stay, but with a reduced rent.  You’ve received a couple emails like this before; both times asking $200 lower in rent.  This time your current tenants are asking to have their rent down to $1,200/month at renewal and a one year lease.’

Do you feel your cortisol levels rising?

Having property managers are nice but really they are a mediator between you and your tenants.  You are still the CEO of your properties and that means you have the joy of making hard decisions like lowering rent, approving large repairs, approving tenants, etc.

Sure, being the boss is great, but real estate thing is your ticket to an easier life, not a more stressful one.  Plus, you have other jobs to worry about: you’re the CEO, CFO, chef, parent, and caretaker of your household.

Some days, it gets exhausting, overwhelming and draining – especially if you have a growing real estate portfolio.

I get it. I know first hand how this feels because I’ve lived like this for years.

Simplifying Life – The Passive Investor

Wouldn’t it be nice if you could dissolve all your landlord duties to another investor and leverage their time, talents and skill in exchange for a return on your money?

Doesn’t that sound kinda dreamy?

If you can find the right real estate partner that has time and talent, there is tremendous opportunity for profits.

The hardest part is finding the right partner with the right talent and experience that you can trust handing over your money.

To do this, you need to be proficient in analyzing people and their real estate deals.

Be Like a Shark Tank Investor

BUT don’t be desperate to invest your money for the sake of investing your money.

Be like the shark tank investor and be savvy about both good and bad deals.  Bad deals can sound tempting if you don’t know what to look for.

Here is a great video of one of the  worst shark tank pitches ever to reemphasize how a bad deal looks like.

Do you catch why this pitch is so bad?

Here are some of my takeaways from this video:

  • The inventors weren’t clear on how to make money
  • The deal had too much risk and no mitigation plan, which means losing a lot of money
  • The deal was filled with uncertainty because this is not a proven and tested model
  • The inventors had no clue that the bottom line is profit.
  • The investors kept using buzz words to look credible but in reality, it set off red flags to the Shark Tank investors.

To be a good passive investor, think like the Shark Tank Investor and learn to analyze deals.

The Boring and Completely Effective Way to Build Wealth

There is a sweet spot to buying active real estate investments and building wealth where enough is enough.  As years pass by, time becomes increasingly more precious and more valuable than money.

If you feel you are at that breaking point and decide to become a passive investor (aka silent money partner), here are a set of questions to ask yourself and the potential active partner:

  • Are you comfortable being around this partner?  Can you see yourself having a beer with this person?  Entering a joint venture partnership could last years depending on the type of real estate deal.  You need to be sure that you can last those years.  A partnership is like a marriage: you need to be sure you’re making the right decision.
  • Does the partner have proven experience with the property type?  Every property type  (commercial, starter family homes, multi-family homes, etc) has their own quirks and processes. If the investor can’t demonstrate proven experience – it is time to move on.
  • Can the partner demonstrate a proven profitable model?  Questions to ask are: how profitable is the business, how realistic are the returns and what is the track record for these returns?
  • Does the partner have successful experience with a particular real estate strategy?  For example, if the investor is trying to put together a rent-to-own deal, how many rent to own deals has the investor done in the past with proven results?  And check the investor’s references.
  • Does the investor have several backup plans for getting your money back? And more importantly, how often has the partner had to use the back up plans and were they successful?  For example: If a rent-to-own deal is presented to you, ask how many of them have fallen through where the tenants walked away from buying the property.  When this happened, did the property carry itself as a rental and give you a decent return – AND what was that return?
  • Has the partner ever dealt with a negative experience and how did the partner deal with it?
  • Has the partner ever lost someone else’s money and what did they do about it?
  • Does the partner have good relationships with past clients and has a good reputation?
  • Is the investor fully dedicated to this full time thing or doing this part-time?
  • What kind of team does the investor have and how many years have they worked together?
  • What systems does the partner have for record keeping and on going reporting (including book keeping/accounting)?  Is the partner transparent with their processes?
  • When you ask questions, is the partner easy to get ahold off and professional in their response?
  • Does the partner present you with professional and realistic estimate in their proforma sheets?  Often times, proforma sheets are ambitious with unrealistic vacancy rates and missing costs.  Click here if you want to read proforma sheets like a pro.
  • Is the partner transparent with their past real estate deals (with proven numbers) and open to sharing their references?
  • What is your gut feeling telling you?  Can you trust this person?
  • How reputable is this partner?  Is there a professional looking website and business model explained online?
  • Will you have to finance the deal as well?  If so, you might have more bargaining power in the real estate deal.
  • Is your money secured against the real estate property?  If anything happens to the partner, this can be a good or bad thing because you might own another property and it might be a dumpy location.  Be prepared to conduct your due diligence on the property using this simple model: Aligned to your Lifestyle

In Summary:

Before you hand over the money, make sure you do your due diligence and verify the answers.  When it comes to money, some people will say whatever they need to say to get you in the door.  So don’t be afraid to act like the ‘Shark Tank Investor’ and put your active investor through extensive scrutiny.

 

3 Comments

  • Alexander
    Twitter:

    Reply Reply June 1, 2016

    I have always been scared to invest in a partner with real estate only because I find it hard to trust people for such a long period of time. If I could find a way to partner up for a short term gain then I would be very interested.
    Alexander recently posted…May 2016 Net Worth UpdateMy Profile

  • That Shark Tank clip was just brutal to watch. Social media…social media…uhh, social media? You’re right, those buzz words didn’t do anything to support their pitch.

    Great tips and crucial questions you listed for any silent money partner. Though do you still find yourself managing the manager on your current properties, which you are not the silent partner? Or is there a future goal to hire someone to manage your portfolio and make your investments truly passive at some point?
    OB – Out of State Investor recently posted…My Monthly Cash Flow Report – June 2016My Profile

    • Hi Out of State Investor,

      I believe there is no such thing as a passive investor, everyone wishes to be but you really always have to watch your investments even over joint venture partnerships. That is still work. For example, I invest in private equity funds, I still have to monitor them, evaluate deals on an ongoing basis -> is that truly passive? Even with my stocks, I still have to monitor them, trade them once in a while and buy more. Any investment you make requires work if you care about mitigating risk and protecting your assets. To answer your question, yes, you do have to oversee the manager of your properties. Imagine yourself owning a company where you are the chairman, you still have to sit and review quarterly reports, make decisions, it’s the same with properties and any investment. To truly make it completely passive is to hand it over to my kids who will make the decisions:)
      Financial Nirvana Mama recently posted…The Boring and Completely Effective Way to Build Wealth: Passive InvestorMy Profile

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