Passive investment is where you provide capital to another party, who then uses that money to finance a business venture. The key word here is "passive" because, as a passive investor, you are not actively involved in the day-to-day activity of the business itself.
For example, you can be a limited partner (LP) in a real estate syndication. The syndication's sponsor (general partner) will find, purchase, and manage the property. You, as the LP, provide capital for the down payment and upfront repair costs, known as Capital Expenditure or CapEx. In exchange for your capital, you will receive a share of the monthly/quarterly cash flow and a percentage of the profits when the property is sold.
What are The Benefits of Being a Passive Investor?
There are several benefits of being a passive investor, which include:
1) You can get started with less money than if you were an active investor. For example, if you wanted to buy a rental property by yourself, you would need enough money for the down payment as well as reserves for any repairs and vacancies. However, as a passive investor in syndication, you can often get started with much less money since you are leveraging other people's time, money, and expertise.
2) You have less risk than if you were an active investor. For example, if you own a rental property alone and your tenant stops paying rent or damages your property, you are on the hook for all the expenses. However, as a passive investor in a syndication, your risk is limited to your initial investment since the sponsor is responsible for finding and managing the property.
3) You have more diversity since you invest in multiple properties rather than just one. This diversification helps to reduce your overall risk since not all properties will perform equally at all times.
4) You can get started without experience since you rely on the sponsor's expertise in finding, analyzing, and managing properties.
5) You can still make a lot of money even though you are not actively involved in the business's day-to-day operations. Many people choose to be passive investors to make money without having to work more hours since they already have full-time jobs or businesses.
6) You can sleep well at night knowing someone else is responsible for managing the property, which can often be stressful and time-consuming.
7) You get to use other people's money which essentially magnifies your returns while minimizing your risk! For example, suppose you invest $100,000 in a syndication, and the property generates 7% per year in cash flow after expenses. In that case, this equals $7,000 per year or $583 per month cash flow deposited into your account without having to do any work! And since other people's money was used in the capital stack to purchase the property and the bank financed most of the purchase price, your capital is working harder than if you buy the property all cash. So if the property was sold after five years, your total cash on cash returns would be $35,000. If the property increased by 35% over the five years hold time due to forced appreciation or natural appreciation, you could double your initially invested capital. This is why many intelligent investors choose to be passive investors in multifamily real estate syndications so they can make great returns on their investment with little work required!
Conclusion: As you can see, being a passive investor has many benefits, including making great returns on your investment with little work required!
If this article piqued your interest in investing in real estate, then congratulations:
Download your Operations Manual Here. In the Operations Manual, you will learn how passive investors leverage syndication to create Passive Income to grow their wealth for their future generation and create the ability to make an impact!
For more information on getting involved in a value-add multifamily syndication deal, don't hesitate to contact me at Hutch@HSquaredCapital.com or Dr. Heath Jones at Heath@HSquaredCapital.com. You can also visit our website at www.HSquaredCapital.com. We'd be happy to answer any of your questions and help get you started on the path to financial success through multifamily investing!