#52: The 3 Main Things You Must Understand Before Investing in Passive Real Estate

Foreign. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. Hope you've had another great week. I mean, this week was an awesome one for me. I got to spend a good amount of time with my family. The weather was great. Obviously, the world has not gone back to where it was before, but to be honest with you, it may never go back to where it was before. However, that doesn't mean that we can't take advantage of all the great things that are in our lives and we can't make the most out of what's given, especially when it comes to time. We have our time, hopefully we have our health. And it's these things which allow us to just truly enjoy life and make the most out of everything. You know that every moment that we have. So, anyways, this week is also kind of important because depending on when you're listening to this, I hope you're listening to it when this thing goes live. But there's one week left to join this class. The spring 2021 class of passive Real Estate Academy. Again, this is a course so many people have asked for this. We've had now hundreds of physicians who've been part of this course. And what we do is we teach physicians how to confidently invest in passive real estate. Now, we've done a lot of education. I do spend so much time on the blog, the podcast, wherever I can to provide education. But there's no better resource that we've created in terms of putting it all into one package in four weeks will transform you from someone who doesn't know anything about passive real estate to someone who can actually look at these deals and be able to make a good decision and hopefully avoid making some bad decisions. So that's happening. If you go to passiverealestateacademy.com you can check it out, and I hope you do. But for this episode, we're gonna spend a little bit more time talking about passive real estate. We're gonna talk about what it is really quickly, and then we're gonna talk about the three things you must absolutely know before investing in any passive real estate deal. Now, for those who aren't familiar with the concept passive real estate investing, in my opinion, it's when you invest in other people's deals, meaning that you don't have direct ownership of the property yourself. But you invest in other people's deals who are putting together these deals to purchase might be an apartment building, an office building, whatever it might be. And they're running the, you know, they're running the process, and they're running the whole system. And. And you are coming in as a limited partner. Now, when I invest in these private real estate deals, I'm still considered an owner. I just own a smaller piece of it. For example, the first deal that I ever invested In, I invested $25,000. I own 1% of that apartment building, but it was still mine. And so I got all the benefits from owning that 1%. Now, many of you might have seen deals similar to this. When you're out there, you've been approached by somebody or a friend who is investing in a deal where they get a bunch of people together, pull their capital and buy an apartment building, promise you some returns, and you say, hey, that sounds like a fantastic idea, but they're asking for 25, 50,000, a hundred thousand dollars, and you're not quite sure, you know, is this a good investment or not. You might look at some pretty pictures. There's a nice little brochure or offering memorandum that they give you. The numbers look kind of flashy, but is that good enough to make a decision? Do you have all the information that you need to decide, hey, is this a good deal for me, and will it get me where I want to be? So today, what I want to talk about is, when you look at one of these deals, there are three main things that you absolutely need to know and understand. When you look at a deal, you've got to dissect it, okay? And to understand what it's about. And I actually recommend doing it in this order. And the first thing you absolutely have to know and understand is who is running the deal. I mean, they might be called a sponsor, they might be called an operator, they might be called a general partner, a syndicator. All these names are out there, but the essence is the same. They're the people that are running the deal and presenting it to you and trying to raise money for that opportunity. And so who is running the deal makes absolute, you know, it's absolutely important. It's just like when you go to pick a physician, a surgeon, right? The surgery can be the same in a lot of ways, but it matters who's holding the knife. You know, that will change outcomes. Now, it might be the same, you know, gallbladder, but again, it matters who's actually Doing it. And the same thing happens with real estate. It may sound good, they might be apartment building, but two different sponsors may have the same opportunity and be overseeing and managing the same opportunity, but you get vastly different outcomes. That's based on experience, skill, intelligence, connections, financial strength. All these type of things factor into the success of a deal. And I've always heard it said and I think it's absolutely true, like if you get a poor sponsor, a poor operator, you, you can take a good deal and it can tank. I mean, you can get complications. You get a major issues and a good deal, which look great on paper, that should been a home run, will turn into a loss for you as an investor. And it's possible. And so you've gotta make sure that you don't work with those poor sponsors. Now, a good sponsor can take a deal that maybe, you know, didn't do so great, it wouldn't have done so great, or maybe the market kind of hit and there were some issues and some challenges, but they will be able to take those issues and solve them, work through those problems to create the best scenario for you as, you know, as an investor and for them as well. So everybody wins and honestly, they salvage a bad deal. So it's absolutely important to know who is running the deal. And I know the question that you have is how do you know? How do you know if they're good or if they're poor or these kind of things? I mean, the main thing that you can use is their track record. You simply ask them, you know, how many of these deals have you done before? How long have you been in operation, how have your past deals gone, how many deals full cycle have you gone? That means where you have a deal and then you actually sell it at the end. And any good sponsor should supply that information to you. In fact, they should be. I'm sure they get asked this all the time. The best sponsors have it on a nice spreadsheet, PDF, whatever it might be. And, and they say sure, they just ship it off to you. And what it'll show is the investments that they made, the opportunities. And it'll also talk about the length of time that the investment, you know, was held and then ultimately what the investment resulted in in terms of a return for their investors. And that's something you gotta absolutely ask for. And they need to have full transparency with it. A big red flag for me for, you know, when I talk to a sponsor is, is when they seems kind of squirrely with their track record. You know, if they Say, oh, you know what, there's some confidentiality issues and you know, we can't disclose all of that. To me, that's a, that's a big no. No, I mean, I say I move on. They should be forthcoming with their track record. They should be in fact proud of it. Now if they're sometimes, you know, on those track records you might see some losses, some smaller losses or things that happen along the way. I'm okay with that actually. It's not like I, I look for, you know, perfection, to be honest with you. Sometimes people who have gone through or companies that have been through a few issues but then have shown that they've been able to demonstrate a good track record after the fact, you know, they've oftentimes learned some things from that. And like, you don't want to be the one that's investor, unfortunately that's in the learning process. But if you come after the fact and they've kind of fixed problems and solved solutions, then it actually can be great for you as an investor to be on the backside of that. And so I look for people who have track records, that have long track records, who have been through multiple up and down, right, real estate cycles. I look to look for people who have track records in the same type of building or same type of operation that this deal is taking part in. For example, if it's like a, you know, like a multifamily property, an apartment building that they're fixing up, I want to see that they have a track record of buildings that size that they've been able to take from the beginning and then create a great return for the investors. You know, the other way to find out with these sponsors is to talk to other people who have invested with them. You know, are their communications good? You know, did they say what they promised? You know, this, these kind of things are they were they totally, completely professional and these kind of things. I think it's important and I think I consider this kind of a, a team sport in a way where this investing, I mean, it's not like me versus somebody else when it comes to investment like my, you know, my friend or colleague. We can both invest together and both do well together. Now if we can share information, if we can share resources, we can share experiences, then we'll be even better. So I think it's very important for people to find communities to be able to share this kind of stuff and not just pick up an opportunity and just say, hey, I'll go for it. It's nice to have some sort of personal reference when it comes to things. And I always look for that. Now, the more you network and connect with people out there, the better chance you're gonna have of meeting someone who's actually invested with that particular sponsor. But that is a important part of my due diligence. And typically I don't invest with somebody that I don't have some sort of connection or reference or long standing history with. That is the most important part of the whole vetting due diligence process. I would say if there is a sponsor that I'm just getting to know, I probably will spend 75 to 80% of my time, energy and effort actually figuring out who's running the deal. And that's versus doing, you know, looking at the deal itself, looking at the numbers, looking all that. I kind of look past that and I look at Start, the sponsors. But the number two thing that you absolutely need to understand is the deal itself, right? You got to understand what the numbers are, you got to understand the returns. What is this thing called irr or internal rate of return? Like, what does that mean? Right? You have to understand that. You have to understand why they're projecting a 13 to 15% IRR. Anybody can flash these numbers. And one thing you'll learn as you invest in more of these, that these numbers on this, what they call you, the pro forma or offering memorandum, they're just projections. It's just they're guessing in a way or making assumptions for what will happen in terms of the way they can operate the building and then what the market will be like when they go to sell. These are all projections. I mean, I could tell you right now in terms of projecting, like, hey, I can do an investment for you. I can project 150% returns. Because I think this place, you know, the building will cost this much and it'll sell for that much. Anybody can come up with numbers that look flashy and that look good. It's your job when you get this investment, is to understand what are the numbers and then what are the assumptions that they are making to get those numbers. And you believe that story. And not only do you believe that story, do you believe that they can pull that off? You know, do they have the track record again, that goes back to that, to be able to make that happen. And so these are all the things that are going through my head when I look at a deal again, I look at the numbers, I have a good understanding. And this comes with experience, that is for sure. And I'll Be honest with you. It took me, honestly, multiple investments. It took me, I would say, years to feel comfortable with looking at a deal and being able to dissect it out. I mean, I think that's part of the reason it's nice to have a course and community that we have now because we really shorten that, the learning curve on that. But again, for some people, they want to learn how to do it themselves. And I think that's a great way to do it as well. If that's, you know, you're okay with that timeline and you're okay with kind of hitting some bumps in the road, but that's not a problem. That's how I did it. But you have to understand how to look at that deal, dissect those numbers again, and then understand where the risk is. Now, to be honest with you, a lot of the risk has to do with debt and with leverage. So that's one of the main key places to understand how are they actually getting money to finance the deal? Whether it's from investors, whether it is from the bank, and how does it all come into play to create that nice opportunity? The other thing you absolutely have to understand is how are you going to make money? I mean, meaning that, how are they going to pay you as an investor? Meaning that, you know, a. Are they going to pay you last? Are they going to pay you first? Are there fees? Are there. What is this thing called a waterfall structure where, you know, when the profits come out, how are they going to distribute this thing? Does it go to you first? Does it go to return your capital next? What split between you and the sponsors? I think these are all important things to look at when you actually invest in a deal, because you have to understand how the money comes back to you. I'll give you an example. When I invested in my first syndication deal, um, I, I, you know, I was investing because I wanted to learn how to invest in these type of investments. But I also expected some cash flow, right? I expected a yearly return. And then I invested. And I remember sitting there about six months later, I kind of, like, forgot about it. Because these are past investments. You invest and you forget about it. And you should be just receiving checks or distributions. But in about six months later, I was like, where? I haven't heard anything. I mean, in terms of, like, distribution, I wonder when something's gonna hit my bank account. So I actually remember calling them up and they were like, oh, well, actually, you know, this is a heavy renovation project. So just so you know, we're gonna be using a lot of the cash upfront to actually renovate the property. So there isn't gonna be a lot of distribution for you. It'll catch up later. But just expect in about 18 to 24 months, your first distribution. And so for me, again, you're in the deal, so there's nothing you can do about it. But. But it really. I wish I had that expectation going into the deal so it would kind of change the way I look at things and maybe even plan. And the more and more of these investments that you make, and the more that you start to multiply your returns, compound your returns, and then you start to live off a lot of these, the cash flow. It's important for you to know in the deal when you can receive your distributions, when they expect to return distributions to you, and how that all goes. And then the last thing that you absolutely need to know when you invest in a deal, I would say, is the market. You've got to know the deal. Yes, but what market does it live in? It matters. Real estate is absolutely local. We hear stories of the real estate market is hot. It's not, you know, that kind of thing, but it matters, like where exactly you're at. I mean, you probably know you live in a certain area across the neighbor, across the street. Prices are this much based on school district or maybe in a certain town. They're all dependent on one economy. And so it does matter what market it's in. What are the key market drivers that allow for, you know, potentially there's like, you know, the winds are working with you, right, instead of against you when it comes to these investments. And it's important for you to understand how to do the due diligence on that. You know, where you can look to see some of these key economic factors and see key metrics that'll help you to decide, hey, not only is this property like a good deal, the sponsor is a good deal, and it's in a good market that gives, you know, a good chance of this property doing well no matter what. And so I spend a good amount of time on the market as well. Now, the more you look at these and the more you do it, you start to be able to kind of key in on the key things on these markets really, really quickly. Again, a lot of that has to do with job diversification, population growth, you know, these kind of things. And what is like the renter versus buyer, you know, ratio and these kind of things. And once you start learning that, you start to really figure out where you want to invest based on your goals. So anyways, that was a quick recap of the three most important things you have to know when you look at a deal. I would highly recommend, you know, before you jump into the passive real estate game, before you start investing in some of these opportunities, definitely educate yourself, right? Educate yourself on these things before you make those investments. Because all the work on these investments is done up front. You spend all the time doing the due diligence, making sure it's a good investment. Then once you invest, it's a beautiful thing right at that point because you just wait for dividends and returns and you don't have to put any more time into the opportunity, but you gotta put the time up front to make it worth it. And that's why I think it's truly passive. Cause the work is done up front and the dividends pay off a lot later. But so many people go into these investments without any sort of knowledge, without willing to do any sort of work, and then ultimately they, you know, they might end up with poor results and they wonder why. So please, there are books on the subject, obviously on my blog, the podcast, I spent so much time. For those of you that are interested, the course is available as well. Either way, find that community of people as well who can help you to learn, share resources, help you make good decisions. When it comes to this, again, we're all on the same team. We're all trying to do well and create that financial freedom, create that cash flow so we can all just really, truly enjoy our lives and really have that control that comes, in my opinion, only with financial freedom. But anyways, I hope this was helpful. I hope you have an awesome week and we'll talk again soon. Thanks. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you a part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group PassiveIncome Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.