People are often surprised to find out that I am a passive investor. Most assume that I only take on active roles within the multifamily investing space when in reality, I play both sides of the field. While I spend the majority of my time acquiring and managing properties, passive investments play an essential role in my real estate investing strategy. 

Passive investing carries a wide range of benefits. The most important of which, for me, is diversifying and reaching new markets outside of my active portfolio. As an active investor, here are a few reasons you should consider also incorporating passive investments into your overall real estate investing strategy.

Diversification of Markets

Establishing yourself as a syndicator in a specific market takes a significant amount of time and effort. When we make the decision to go into a new market, it is with the intention to create a dominant position, which for us, means acquiring a minimum of 1,000 units. This takes a ton of research, relationship building, and analysis. Additionally, it takes a great deal of time to acquire enough properties to gain operational efficiencies such as property management, construction, and staffing across multiple properties. 

Knowing what it takes to dominate a market, there is simply no way that I could operate efficiently by actively investing in every town or state that interests me. As a passive investor, I am able to diversify my portfolio and invest in new markets because, well, it’s passive. Other syndicators are doing the hard work in their respective markets, which allows me to leverage their knowledge and understanding of that particular area without the need to be involved in every day operations. While it is still important to conduct market research and vet potential deals, doing a high-level analysis is an entirely different experience than running the entire show. 

For example, our team and I personally have owned and operated 17 properties in the greater Phoenix market. I’ve spent a great deal of time developing my knowledge, understanding, and relationships in this area so that we can find solid investment opportunities and create economies of scale. It took our team five years to establish that kind of presence. 

When I decided that I wanted to invest in an a market outside of Arizona and Texas, I knew that I couldn’t take enough time away from my current syndications to become an expert in that market so I looked for someone who already was. I found a syndicator in the area that I could trust and took the steps to become a passive investor. Now, I get to focus on the markets that I lead in while my money works for me through passive investments in other areas. Passive investing is a great way to dip your toe in a new market before you decide whether or not you want to pursue an active investment there.

Diversification of Asset Types

Passive investing is an opportunity to leverage the knowledge and skillset of other investors in order to expand your portfolio. In addition to diversifying your market reach, passive investing also allows you to diversify which asset types you invest in. 

Let’s say you’re an expert in multifamily, but you really want to explore mobile home parks or new construction. As a passive investor, you can. Joining forces as a limited partner with an active investor in that space allows you to diversify into those new asset types with the help of someone who has already done the heavy lifting. You should have a basic understanding of the asset type that you are interested in but you can rely on the syndicator that you choose for the nuances and fine details. This leaves you time and energy to focus on your area of expertise while spreading your investments out into different buckets.

Find New Partners 

Passive investing opens up a world of possibilities for not just new states and asset types, but new partners as well. Through passive investing, you will meet people in other markets that you may not have otherwise come into contact with. These individuals have the potential to become future business partners, property managers, capital sources, and so much more. Keep the risk factor low while exploring potential partners by only investing a small amount of your own money to explore how they run their deals and manage their properties. As you build trust, you can move on to bigger and more lucrative projects. You can learn a lot about someone by investing with them as a limited partner and seeing how they operate in the real world, not just on paper.

In a blog I published in 2021, 7 Steps To Become a Successful Passive Investor, I shared a list of questions that every passive investor should be asking of the person they are considering investing with. In fact, these are the questions I ask myself when considering investing with someone new. I’ve listed the questions below for reference. 

• Do I know this person and agree with his/her investment strategy? 

• Have they sold a deal yet? 

• What is their track record on current deals and past deals? 

• What is their track record on turning around a challenging deal? 

• Did they have any deals that didn’t perform? 

• Are they great at communication and being transparent? 

• Are they good at project management? 

• Have they passively invested? 

• Are they focused?

The key takeaway here is to make sure you have confidence and trust in the person that will be handling your money. That trust is built over time and unfortunately, you won’t fully know what performance level you can expect out of someone until you can actually see them in action. In my opinion, it’s better to test the waters with a small investment of your own money rather than the higher risk associated with using investors’ dollars and larger projects. 

Leverage Retirement Accounts 

If you are planning to use your 401k or other retirements accounts to invest, it is important to note that you can not invest that money into your own deals. When you use a retirement account to invest, according to the IRS, it has to be an “arms-length transaction,” meaning it should not be your money invested directly into your deal. While some people believe there is a fine line that can be walked, that is not something I personally recommend. It is safer and smarter, in my opinion, to keep the deal at a true arms-length. Of course, I can not stress enough the importance of speaking to your CPA about these scenarios. 

The good news is, if you have a self-directed retirement account, you can still invest passively in other people’s syndications. I personally invest a good portion of my self-directed retirement funds into passive investments. 

In this three-part series, I go into great detail about investing with retirement funds, which we refer to as “lazy money.” This method of investing takes the money you have waiting around until retirement and puts it to use so that you begin making more money while you sleep. 

Conclusion

I encourage every active investor to also consider building a passive investment strategy. Real estate investing doesn’t have to be a linear path. There are many ways to achieve financial independence through real estate investing. Expanding your knowledge and reach through a combination of passive and active investing is a great way to diversify your portfolio and increase your net worth.

If you want to learn more about passive investing and share your goals with me, feel free to schedule a free 1:1 consultation.