The Advantages of Passive Real Estate Investing

Investing in real estate can be highly rewarding, but it also comes with its share of challenges. While many are drawn to the idea of becoming a DIY landlord, the reality often proves more demanding and complex than expected. Here's why investing through partnerships, syndications, and funds may be a wiser choice.

1 – Headspace and Mindshare Last Tuesday, in the middle of a client meeting, I received a call from my property management company. They asked me to approve a $2,314 charge without any context. It turned out a tenant had damaged a sewer line with their lawn mower. Resolving this issue took up a significant amount of my mental energy and time. As a passive investor, I have never received such calls. The operator manages everything professionally, allowing me to focus on my core activities.

2 – Time (Up to Close) Finding and managing deals in single-family real estate is time-consuming. It requires market research, underwriting, negotiations, and securing financing. Once I vet an operator, investing in their deals takes less than an hour. The process involves filling out a form, scheduling a call, joining their investor club, reviewing opportunities, submitting a commitment, filling out the PPM, and wiring funds.

3 – Time (Post Close) Managing single-family rentals is not as passive as one might think. I used to spend an average of 90 minutes per property per week, which would amount to nearly two full-time jobs if scaled up. In contrast, passive investments require minimal time. I only spend a few minutes each month reading investment updates, while distributions are automatically deposited into my bank account.

4 – Risk and Liability Active investing comes with personal liability. If things go wrong, you could lose not just the property but also your other assets. Passive investing limits your liability to the capital you invest. Typically, the asset is held in an LLC or LP, and the sponsors bear the liability.

5 – Economies of Scale Active investors are limited by their own capital. For example, with $50,000, you might buy a $250,000 house. In a passive deal, the same amount allows you to participate in larger assets with pooled resources. This leads to cost savings on management, materials, and services, reducing overhead and maximizing returns.

6 – Valuation Single-family homes are valued based on market conditions and speculation. In contrast, larger commercial properties are valued systematically. For instance, a 100-unit property with a $200/month NOI difference per unit can increase in value by $4.8M at a 5% cap rate. This systematic approach offers more predictable and significant value increases.

7 – Diversification Active investing often means focusing on a single market and asset class. Passive investing allows diversification across different markets and asset classes without starting from scratch each time. Personally, I am invested in 15 different passive investments across five states, 11 cities, and various classes of multifamily apartments.

8 – Risk Single-family rentals are either occupied or vacant, with no middle ground. In contrast, a 200-unit apartment complex can still cover expenses even with 60-90 vacant units. This flexibility reduces risk and ensures more stable returns.

9 – Team As an active investor, you need to build a team of brokers, property managers, handymen, accountants, lenders, and inspectors. As a passive investor, you benefit from the expertise of the sponsor's team, who are already experts in the market and have established operations.

10 – Capital Investments Active investors must handle insurance claims, emergencies, and repairs, requiring additional funds. In passive investments, I've only made the initial investment, with no additional capital needed over two years in 15 projects.

11 – Back Office Paperwork and Taxes Active investments involve heavy paperwork and bookkeeping. Passive investments typically require signing a single PPM. At tax time, you receive a Schedule K-1, summarizing your income and losses, with no additional paperwork.

Join Frohman Capital At Frohman Capital, we offer various passive investment opportunities designed to minimize hassle and maximize returns.

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