Passive Doesn’t Mean Inactive

Here at Walk of Wealth, we talk about achieving financial freedom through passive investing. You might be wondering, how does  investing in real estate lead to financial freedom? Before answering that, let’s face reality first, having a job is great.  We get to have a high salary, however we sometimes crave ways we can earn money while being free of responsibilities.  This is possible by  creating multiple streams of passive income which exceeds your monthly expenses. Once you have achieved financial freedom you don’t have to rely on your work or career to pay for your expenses. 

Passive investing and financial freedom go hand-in-hand. Why do you ask? The only way you can free your time from your 8 hour job, tight schedules everyday, pressure in generating high income etc. is by creating passive income. In the aspect of real estate, passive investment means getting percentages of profits and cash flow directly into your pocket. Meaning finding a property, getting a loan from the bank, insurance, managing the property, communicating with tenants, fixing issues, selling it, refinancing and working with lenders to refinance the property.  Whew! That was a lot! However, like the saying goes, “It will be worth it in the end”! That is true and most importantly, you don’t have to use your most valuable asset or commodity of all which is your time. 

You can always make money, but you can’t make more time. Even if you have lots of money, you can’t find a store or person that sells time. As you can tell there is an active side with passive investing. This is not just a set-and-forget it type of thing.  There are four main areas that are paramount for you to be involved in when passively investing.  If you want to consistently get great returns and great results without loss of your hard earned invested capital, these four should be present in your checklist as you embark on the world of passive investing. 

Sponsor

If you aren’t looking for the responsibility of the day-to-day operations; finding the property, managing and implementing the business plan at a property level, you are looking for a sponsor.  Whoever is responsible for all of those actions is vitally important to the profitability of this investment. It is very important that you are thorough in seeking a sponsor as it could make or break your investment. 

I’ve created a guide that contains key things you should look for when choosing a sponsor.  You can download the Vetting a Multifamily Real Estate Sponsor Checklist to assist you in choosing the right sponsor.  In addition to reviewing the guide, ask yourself the following questions:

• Do their core values align with mine?”

• If so, can our core values be integrated in the investment thesis?

Choosing a sponsor is a critical thing to do and as well as foremost cause they will be the foundation of our passive investment.

Choosing the market and submarket

There is great migration from the left and right coast of the United States and as they move closer to the southeastern and southwestern states, states like Texas and Florida have had massive growth, as well as Georgia, Carolinas, Colorado and Arizona. Why is that happening? Affordable housing, lower state taxes, better climate, as well the presence of different job opportunities are some factors for the migration. People follow jobs, when looking to invest follow the job growth. This results in the demand for units, either apartment or condominium, which create rent growth. Rent growth creates profit and higher net incomes, which translates into higher profits for investors. What you want to do is to make sure there are as many tailwinds or leads for your investment as possible. 

Keep a pulse on general trends, which will help you tremendously in multifamily real estate. Additionally, it is important to keep your eye on sub markets as well.  For example, if you bought a property in booming Northwest Houston, you can ask yourself some of these questions: 

• What does Northwest Houston look like? 

• What are the rents in that area? 

• Are things growing in Northwest Houston?

 After asking these questions, the next step, complete a submarket due diligence analysis to look at competitors’ rents, the absorption rates of apartments in that submarket, etc. These will be key indicators in telling you about the health of a submarket and the potential for growth.  

Asset

Looking at things like T3s and T12s and entering this data into basic underwriting models, which are available for free all over the internet, will at least give you a basic idea of the property’s financials. You can then enter conservative assumptions and look at your own custom-made proforma.

From there, you should compare your proforma to that of a broker or the seller and obviously reconcile any major differences. Utilizing the proforma will help you gain an understanding of the property.  It will also act as a nice check against what the broker or the seller is presenting to you.

Tracking of sponsor’s report

This is an additional key takeaway during the investment as a passive investor.  Usually sponsors give you a report at least quarterly.  Many sponsors will give updates monthly.  As a passive investor, you should always read and absorb these reports and understand the key points.  The key points will serve as performance indicators which will show if your money is growing or not.