As an expat and recovering landlord, I love hands-off investing. I’ve invested in over two dozen real estate syndications as a limited partner (LP). I effectively become a silent partner and fractional owner in a large property, getting all the benefits of ownership—cash flow, appreciation, and tax advantages—without becoming a landlord.
But syndications aren’t the only way to invest passively in real estate. I’ve also invested in most of the major real estate crowdfunding platforms, including Groundfloor, Fundrise, Streitwise, Ark7, Arrived, and more. Some I like. Others, not so much.
Even the ones I like still don’t offer exciting returns, however. I invest a little money with them for diversification, and to have firsthand experience when I write and talk about them.
So, as a passive real estate investor, what am I excited about investing in right now?
Why We Like Private Partnerships
My co-founder at SparkRental and I organize an investment club for passive real estate investors. Every month, the Co-Investing Club gets together to discuss and vet different passive real estate investments.
Often, that means real estate syndications. But we look at everything—including partnering with private real estate investors on their deals.
We’ve been working with a private real estate investor in the Midwest for almost a year now, getting to know him and the kinds of investments he makes. Next month, we’re planning to partner with him on a few of his flip deals.
He’s not a syndicator or public figure, so I’ll call him Casey to preserve his privacy. Casey and his team of five employees have done hundreds of house flips. His win ratio is 93%, and his average cash return is 25% to 30% on short-term flips; higher for his long-term flips.
When he brings in partners to provide the bulk of the cash, he pays them a cut of the profits. Nothing unique there—but where it gets interesting is that he also offers a return “floor” for partners. He signs both a corporate and personal guarantee that he’ll pay partners a minimum return of 6% to 8%. On the rare flip where he earns less than that, he eats the loss as a cost of capital.
Good luck finding a real estate syndicator willing to do that.
Oh, and one other thought: These private partnerships allow non-accredited investors, since they’re not registered with the SEC.
Private Funds
Some private equity funds that are never advertised work similarly, just on a larger scale. These word-of-mouth funds let investors buy into a pool of single-family rental properties operated by a small, highly experienced team.
We’re looking to invest with one such team later this fall, where they specialize in lease-option partnerships. They find a renter-homebuyer first, and a property for them to move into second. They buy the property, the client moves in and pays rent, and then buys the property within three years for a predetermined price.
Again, there are occasional misses and losses. But the longer this small company has been in business, the fewer and farther between those have been. They’ve done hundreds of these deals, in many different market conditions. We’ll go in with them on a pool of dozens of properties, and I’m confident the profits from the wins will more than offset the inevitable loss here or there.
That’s one example of many private, unadvertised funds that are word-of-mouth only. I consider it my job to find all the most reputable and experienced of these private citizen investors, in addition to having relationships with the 50 or so syndication sponsors worth knowing.
Low-Risk, High-Interest Private Notes
Don’t think low-risk, high-return investments actually exist? You haven’t been in the game long enough. In fact, there’s a term for them in finance: asymmetric returns.
The first time I lent a private note, it was to a friend who earned money almost as fast as he blew it on fancy dinners and cars. For collateral, I demanded he sign over the rights to repossess his 1957 Porsche—along with the keys. He paid me back, if a little later than promised.
More recently, our Co-Investing Club lent a private note at 10% interest (paid monthly) and a rotating six-month term. We can terminate the note at any time, with six months’ notice.
I realize 10% may not sound impressive, but the risk was asymmetrically low. To begin with, we got both a personal and corporate guarantee from a professional real estate investor who owns 112 rental properties. He also secured the note with a first-position lien, at under 50% loan-to-value ratio (LTV).
The only downside is that in the unlikely event of default, the onus would fall on us to hire a foreclosure attorney to recover our money. But I have no doubt that we would, along with any legal expenses.
A Surprise About Syndicators
Over the course of several dozen real estate syndication deals, our Co-Investing Club has found something surprising: The sponsors with big brands and reputations have largely underperformed the smaller mom-and-pop sponsors.
When we first started networking with sponsors to find the most promising ones to invest with in our investment club, we asked around among other passive investors. Often, the same names popped up again and again: sponsors who had done dozens of deals and enjoyed sterling track records and reputations.
Then, interest rates surged in 2022 and disrupted the entire real estate industry.
The two worst deals we ever invested in were with big-name sponsors. You’d know their names if you’re in the syndication space. We’ll never invest with them again.
Meanwhile, the smaller syndicators we’ve met and invested with over the last few years have performed significantly better.
Why is that?
The Risk of Big Brands
In my experience, the big brand-name sponsors focused too much on scaling and branding, and not enough on operations.
Many of them run training programs for novice sponsors. They earn millions by selling five-digit courses and programs. Know what they’re not focusing on while they’re running their high-profit training programs? Operating their existing properties and delivering returns for their investors.
The mom-and-pop sponsors we’ve invested with mostly raise money through word of mouth among friends, family, and other small sponsors. They aren’t interested in buying $100 million apartment complexes. They know their narrow niche well and how to earn consistently strong returns in it.
Rather than spending the bulk of their efforts marketing or raising money or selling educational programs, they focus largely on finding the right deals and then executing on operations. They earn money for their investors—many of whom are immediate family and friends.
Big Returns with Smaller Investors
It’s a lot harder to find small operators who spend little or no time marketing, but who are open to taking money from partners and investors. It’s even harder to vet them. Unlike big-name sponsors, you can’t get instant feedback from other investors on forums like BiggerPockets about them.
But those partnerships are pure gold once you establish that the investor knows what they’re doing and will reliably grow your money. In some ways, these bring you full circle back to smaller properties, including single-family homes.
Sound like a lot of work? It can be. But it’s still far less work than building a side business to buy properties yourself. And you don’t have to do it yourself, either—you can always join an investment club.
Most people think of private equity real estate syndications when they think of passive investments. I like syndications, but they’re simply one of many types of passive real estate investments you can make. Consider going beyond the obvious big-brand syndicators as you explore passive investing.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
