Red Flags for Passive Apartment Investing
by Dan Handford,PassiveInvesting.com
M any investors have asked how to make sure they are investing with a “good” operator when placing capital into passive apartment investing. I am currently invested in 21 different passive real estate syndications and this list was developed for my own personal investments. Feel free to use this list for your own investments and if you want to chat further feel free to email me directly at dan@ passiveinvesting.com. SUCCESSFUL BACKGROUND IN BUSINESS One of the sponsors of the syndication must have a successful background in business. The key word here is “successful” since I know people who know how to run a business, but they know how to run it into the ground. I want to invest with an operator that can successfully run a business even when times get tough like we are seeing with the COVID-19 pandemic. The reason why this is important is that when we are buying a large $20mil+ asset, it is more like we are a buying a fully operational business that just so happens to have real estate attached to it. The operator must know how to manage people, put system, procedures, and processes in place, and also be
able to set proper key performance indicators (KPIs) in place to monitor the performance of the asset on a consistent basis.
MUST PROVIDE PREFERRED RETURNS Every deal must have preferred returns for the limited partners (investors). The preferred returns align the interests with the investors so that the investors get the preferred treatment. The preferred return allows the investor to receive 100% of the cash flows and sale proceeds first up to a certain return amount, typically 6-8%. The deal could not be done without the investors and the operator should be willing to provide the preferred returns to maintain a successful relationship. SKIN INTHE GAME – EVERY TIME! Last but certainly not least, the operator must have skin in the game. I really like to see 10% of the equity required invested in the deal alongside the limited partners. However, some operators cannot invest that much so at a minimum I want to see $100k invested from the operator. I want to make sure that the operator is making the best decisions and they have money to lose so I can ensure they make the best decisions for all of us in the deal. •
FULLTIME OPERATOR This is a full-time business and must be treated as such. There are many people that are getting into the apartment syndication business, but they want to keep their W2 income. I have worked hard for my money and do not want someone who is not all-in to manage my investment. This type of business cannot be run like a hobby in the nights and weekends. I demand full time efforts to watch my investments. MORE THAN ONE PARTNER My preference is to have at least 2 partners (ideally 3 partners) on the project. You should NEVER invest with an operator if there is only 1 partner. I know an investor personally that invested $200k of his own money and he also brought in $200k of his friend’s money to deal where the operator went ghost on them after 6 months. They cannot find the operator and they can’t get their money back. The likelihood of a group of 2-3 managing partners going ghost on you is highly unlikely.
INVESTOR REV I EW : : 11
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