In real estate investing, the term ‘due diligence’ is stressed both as a concept and a valuable practice. It involves having full knowledge of a property and its current and projected value. It also involves managing your financial risk as an educated investor.
To be a successful property investor, you must also study the property markets, running relevant numbers before investing. You should also be sure to get references for sponsors, property owners and any other investors involved. You need to ensure that all the parties you work with are completely trustworthy.
There are misconceptions about the importance of due diligence for passive real estate investing. Some people may think that if you are a passive investor, you can do essentially nothing and succeed. They assume that since you are working with REI professionals, you can leave the work to them.
Yet due diligence is actually necessary to be successful in any type of real estate investing. It is important to know, however, that there is a specific way that an experienced passive investor performs due diligence. It has basic differences from the way in which active investors perform this task.
Passive Real Estate Investing vs. Active REI
People choose to invest in property in different ways. A passive real estate investor does not assume an active role in locating, refurbishing or marketing any investment property. An active real estate investor, however, does have an active role in some or all of these aspects of property investing.
Whether a real estate investor performs one, several, or all of these primary steps in property investing, they are considered active investors. Passive investing involves connecting an investor with an individual or company owning a property. This property is fully repaired or renovated and needs no additional maintenance.
This investment property already has a managing agent provided by the owner. The passive investor then makes a financial investment in the property for the purpose of making a profit without hands-on involvement.
Differences in Due Diligence for Passive and Active Property Investors
Active REIs must know a property purchase price and its options for negotiation. They also need thorough understanding of the dynamics of the neighborhood and its comps, or the market values of surrounding properties. They are totally responsible for all aspects of a property investment and its likelihood of yielding financial profits.
Passive REIs who invest in real estate syndications have none of these responsibilities. The primary job of a passive property investor is to perform thorough due diligence on the real estate syndication companies that they work with. Without doubt, active and passive real estate investing requires two very different approaches and mindsets.
Setting Your Path to Success as a Passive Real Estate Investor
Passive real estate investors are typically interested in focusing solely on real estate syndications. Passive investors perform careful and complete due diligence on any real estate syndication company that they wish to work with. Essential steps to setting yourself on the path to successful passive property investing include the following:
Define Your REI Expectations
Start by defining your goals for passive investing and your expectations for successful investments. Then perform your due diligence and make wise choices of real estate syndication companies to do business with. By focusing on the quality of the syndicator rather than on data about available properties, you can gain profitable real estate.
Identify Markets to Meet Your Expectations
Locate markets with the strongest potential for meeting your passive REI expectations. These should have the greatest likelihood of bringing you profits and success.
Identify Quality Real Estate Syndicators in Your Target Markets
Find established and successful real estate syndication companies, groups or individuals in your target markets. Determine which ones can offer you the greatest probability of profitable investments.
Schedule Interviews with These Real Estate Syndication Companies
By arranging interviews with reputable syndicators in your target markets, you can best determine which ones can bring you the highest likelihood of REI success.
Visit Target Market Locales.
After locating one or more real estate syndicators in a specific target market, visit this location. This is a valuable part of your due diligence for deciding on a real estate syndication company, group or individual to do business with.
Features and Qualities to Look For in a Real Estate Syndication Company
After completing the previous five steps on your path to passive REI success, you should have met some trustworthy real estate syndicators. After interviewing these companies or teams, you probably have built some good degrees of trust with one or more of them. Before deciding on a syndicator, it is advisable to review certain features and qualities that good syndicators offer, including:
- They provide evidence that they deliver what they claim to provide.
- Their company team is adequate for handling their clients’ needs.
- They use superior systems for operating their businesses.
- The viewing of their example properties gives you confidence for investing with them.
- They are not overbearing or pushy about gaining you as a client.
- They do not hesitate to give you client referrals to contact as references.
- They do not require you to pay a deposit fee for a consultation or to join their property viewing list.
You should now be ready to decide whether or not a real estate syndication company is right for your passive property investing. You should be able to determine which provider in a locale is best suited for making your passive investments profitable.
Practicing Ongoing Due Diligence as a Passive Investor
There are valuable ways to continue practicing due diligence throughout your passive REI career, including the following:
Communicate Often with Your Real Estate Syndication Company
Since your real estate syndicator is the most important entity in your investing business, refrain from being too passive. Stay in close communication with the syndicator. Only by being in close contact can you stay updated on your investment properties. At the same time, your syndication company needs to be up-to-date on your investing goals and concerns.
By maintaining a strong working relationship with your real estate syndicator and the company staff, you will build greater trust. You will be completely at ease investing in their properties. You will trust them with your money and value their advice concerning all aspects of each property investment.
Evaluate Your Property Portfolio and Profitability Goals
You should take time to evaluate your REI portfolio periodically with either your syndicator or a portfolio advisor. This is the best way to assess the overall performance of your real estate syndications. It also enables you to reassess your passive investing financial goals.
Strengthen Your REI Education and Investing Skills
Staying well informed on property investing as a passive investor enables you to accurately assess the trustworthiness and quality of real estate syndication companies. It helps you to avoid scams and being taken advantage of on investment deals. It also equips you with the knowledge to communicate with your syndicator and other investors as an equally qualified player.
Staying updated on current offerings, trends and strategies with continuing investment education is essential for successful passive investing. Gaining knowledge on new technology and emerging markets can give you a cutting edge advantage. By reading new literature and subscribing to passive REI podcasts and blogs, you can grow a profitable portfolio of properties.
Creating Significant Leverage with Passive Property Investments
In basic language, leverage in real estate investing is the use of resources to multiply your financial return. When you buy a home, you make use of leverage. You make a down-payment and then borrow funds from a bank or other financial institution.
This enables you to buy a larger property than you could otherwise afford. In passive real estate investing, there are ways of using massive leverage to make a stronger investment for the goal of a greater profit. Effective ways to use leverage to your benefit in passive REI include the following:
Leverage Education and Experience
To acquire expertise in any field takes time and effort since you need knowledge and experience to succeed. By learning about passive property investing from experienced professionals, you can leverage their advice and experience.
This can accelerate your own skills and rates of capital returns in your real estate investments. It is also helpful to join groups of like-minded people focused on learning about the same subject. By joining investment clubs, REI organizations and social media groups involved with property investing, you can lean along with others.
You can also gain valuable knowledge by taking verified real estate investing courses. The best of these will guide you through your first-time investments.
Leverage Financial History
To acquire real estate, you most likely need to obtain a loan. When applying for your loan, your financial history and credit report are needed for borrower acceptance. Building a solid relationship with a trusted lender enables you to borrow more funds as you buy larger properties.
While building your property portfolio, you can also get approval for borrowing at better interest rates. As you borrow and repay successfully, you can also win approval for longer-term loans as needed. This enables you to withstand fluctuations in the market as you invest.
Gain Leverage from a Good Team
By building a strong team, you are empowering your path to passive REI success. Your team should include an experienced agent, lender, property manager and insurance agent. You need to ensure that all of the members of your team are fully qualified and trustworthy.
If you invest through a top-rated professional sponsor, you can leverage their quality team. You can evaluate their overall track record to determine the team’s levels of success. This saves valuable time that you would otherwise have to devote to searching for the best people to work with.
Leverage Group Capital
When you invest with a syndication, you fund only a fraction of the total investment. You are investing with other investors and a sponsor, which enables you to combine funds to buy a larger property. You can take part in purchasing a more upscale property than anyone in your group could buy alone.
Leverage Valuable Time
Investing as a passive real estate investor and using sponsors and syndication lets you leverage valuable time. Although you spend time getting started, it will pay off. The many years of passive income that a lucrative investment can bring is well worth your earlier time and effort.
Rather than trading time for a moderate amount of profit, you are leveraging time. This enables you to receive years of passive income from your initial time spent. You can then enjoy quality time doing the things you value most while spending more time with your family and friends.
Conclusion
As you perform due diligence and master the art and craft of passive real estate investing, your investing will improve. Your rates of profitability and quality of life will be greatly enhanced. By learning from and working with knowledgeable and experienced experts in this innovative field, you will gain expertise as well. You can then continue building and following your own path to success as an accomplished passive property investor.