Let’s face it.
Passively investing in real estate is not for everyone.
Some people are ready to start investing and go guns a blazing into their first passive investment without a second thought. Others are overly cautious and may take years before they ever invest, or ultimately, they never invest.
Who has the right approach though?
Is there some happy medium?
If you have done enough research into investing in real estate syndications, you will have found out that there are several reasons that you should not invest in a real estate syndication (at least right now). If you find yourself not wanting to passively invest because of one of those reasons, then you are probably right. The best thing for you to do is to not invest. The reality is however, that many of us don’t have a good reason not to invest.
Maybe you think (or have been fed the lie) that real estate investing is for men and you have fallen into the real estate investing gender gap. If not this reason, maybe you could be a victim of analysis paralysis – the feeling of not being able to decide to move forward on a passive investment because of the propensity to overanalyze a situation. Whatever your reason may be, the reality of the situation is that the underlying root cause to many of these reasons come down to fear and uncertainty.
Quickest Way To Overcome Fear and Uncertainty In Passively Investing In A Real Estate Syndication
One of the fastest ways to overcome fear in a passive real estate investment is trust. That’s effectively what we are looking for when we ask people for referrals or look at reviews online before we make any major transaction.
There may be large companies doing great deals and offering sizeable returns but if you have never invested in a passive real estate investment it could be nerve racking to think about writing a check for 50k-100k to someone you’ve never met before. What if it’s a scam?
What if they run off with your money?
If you have known this person for a while however, it becomes easier to trust them as a fiduciary of your investment. When the syndication team is led by a longtime friend from college, work, or another social circle you will be more familiar with this person and have a better idea of their character. You can tell if this person is consistent, if they are a person that sticks to their word, handles adversity well and have shown themselves to be diligent and successful in other endeavors in their life. The better your relationship with this person the more likely they will give you greater attention and guide you along the investment journey so you could be more comfortable and rest assured.
Most of your fears will slowly start to subside once your distribution checks begin to direct deposit into your bank account. Investments do have risk though and you could lose your money. If things do go wrong, you will know that you have someone you can trust at the helm. Someone that will be a clear communicator and will work to the best of their ability to help preserve your capital investment at a minimum.
Finding A Passive Real Estate Investment Sponsor That You Can Trust
Invest with a friend you can trust. I know, great advice but easier said than done. Not everyone one of us has a social circle filled with friends that are leading real estate syndications. If you are not lucky enough to have a rolodex of friends to choose from you can do a quick google search, talk to friends who may be investing in real estate with someone they know, or attend meetup groups, conferences, and other networking events with real estate investors.
You may not meet someone on your first time out but remember this isn’t speed dating; passive investing is a long-term relationship, and it will take time to find an investment group that is a good fit for you. After you have found a few syndication sponsors, you can build a relationship with them over time and decide if you would like to invest with them or not.
Assuming you do find someone you can trust – what about your other fears?
Fear Of Not Enough Money – “What If I Lose My Money In A Passive Real Estate Investment?”
Losing your money is a real risk in investing in general. If losing your money is your biggest fear, then perhaps investing in general is not for you. Before you ever invest you should come to terms with the fact that you can lose all your money that is invested.
Fortunately for passive real estate syndication investments (unlike some other investments) the only thing you would lose is your invested capital. Due to the many capital preservation aspects, and multiple ways real estate pays you., it is likely you would not lose money but at worst break even. Given the alternative of the miniscule interest that you obtain from a savings account this may be a risk worth taking.
If you don’t have enough money or can not handle the risk of losing all your investment, then you should not invest until you reach a point that you are ok with that. If the investment amount is too much as a percentage of your overall cash on hand, then perhaps you can invest with a group of friends so your individual share is smaller or seek other investments that have a smaller point of entry while you work on other ways to accumulate money to invest in real estate.
Fear Of Time Horizons And Life Changes – “I Don’t Know What Will Happen In My Life”
No one can predict the future. Investing in general is an act of predicting the future. You are laying out capital today for something that you think will provide you more money in the future. That could be a correct prediction or a wrong prediction. Similarly, in your life you never know what can happen. You should not invest cash if you know that you definitely will need the money within the next year. Real Estate syndications typically range from 5 – 10 years’ time frame. (Multifamily syndications can often exit much faster between 18-36 months however for the purpose of investing you should invest with the expectation that the investment would be held for the full term of the investment business plan.)
If investments are hard to predict, your life is even harder to predict. Whether its marriage, kids, a sick parent or job relocation, all of these things could happen in 5-10 years and you would never expect it today. Your head may spin just thinking about it all. Investing today helps prepare you for financial security and retirement in the future. If your fear of “what if I need that money” is greater than the desire to secure your financial future, then investing (at least in real estate) may not be the right move for you.
The truth though is you will always have some thing that potentially may happen in the future and may require that you have some additional money to weather the storm. A better approach would be to build a rainy-day fund so you can sleep easily at night knowing that you truly don’t need the money invested.
Worst case scenario if you do need the money you can always exit the investment and sell your stake. Granted – this is not like the stock market where you can sell a stock in a few minutes, but most syndications will buy your share if you wish to exit. Syndications can have “lock up” periods of 6 Months to 1 year after investing before you are permitted to sell your share. Be careful to read the investment documents to understand what the requirements are to exit the investment and what the minimum hold period is before you can sell your share.
Fear Of Market Uncertainty – “What About The [Fill In The Blank] That’s Happening In The Market?”
If you have found a competent syndication team you can trust, then they have probably already considered [fill in the blank] situation that is happening in the market. Whether it be unusually high inflation, phases of the real estate cycle, expected changes in interest rates, valuations in the future or any other market change it would be built into their deal analysis.
As seasoned investors know – you can always invest no matter what is happening in the market. A good syndicator will have specific metrics they use to analyze what would make a good investment. Their strategy may change slightly based on the current market conditions but the core principles and investment theory for the syndicator should stay the same. If you are investing with a friend, they will likely be glad to break this down for you at length. If you are investing with someone else, you could always ask them as well. In the grand scheme of things however, if you trust the analysis and competency of the investment syndication team you can feel confident that they considered these things.