BPI Episode #3: The Realities of Active Investing: Risk, Reward, and Responsibility

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create financial freedom through passive commercial real estate investing. Your host is Wayne Courageous iii, a seasoned investor and founder of CREI Partners, a leading commercial real estate investment company. He spent nearly two decades navigating and educating others on the commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, intentionally short, easy to understand, and packed with insights that help you grow your income and protect your capital without becoming a landlord or sacrificing your time. If you're ready to learn fast and invest smarter, you're in the right place. Let's get started.

Welcome back to the Building Passive Income Podcast. I'm your host, Wayne Courageous iii. I'm excited today to talk to you about active investing. It's not active investing in the sense that you have a portfolio of real estate and you're looking to diversify. It's more so of being the one who's sourcing deals, getting deals under contract, doing the due diligence, raising capital or bringing your own funds, getting the closing, selling, signing on the loan, taking all the risks. We're taking a lot of that risk from a loan side and then going in, into operating the asset, dealing with tenant issues, dealing with management issues, dealing with maintenance, dealing with things that are out of your control, whether it's a busted pipe or a weather event. And then you're trying to have a smooth landing year three, year four, year five, where you're exceeding or hitting the returns that you had initially underwrote. That's a lot of work and not everybody's excited to do that. But to do this, like if you're learning about passive investing, the last episode talked about what a passive investor is. Right? And a lot of that work for a passive investor is done up front, evaluating the deal and all that. And we're going to go. I mentioned that before, we're going to go through all that. But you have to understand, similar to what the last podcast was like, are you active or passive? And if you're unsure, the purpose of this episode is really to go through the steps of what an active investor does and if that is even something you're interested in doing, and if not, great, you're in the right place. This passive investor podcast will educate you and we're going to go diving into through the next episodes of the passive investor process and evaluating and making decisions that works best for you. But let's go back to an active investor so as you all know, I'm an active investor. That's what I've been doing for, you know, 17 plus years. And it's what I know and what I love doing. I wouldn't want to do anything else. If someone asked me and someone has asked me, like if you have a limited amount of money in the world, what would you be doing? And I would still be buying and operating real estate. Right. But with that, when you are on the active side, it's your responsibility to build a lot of relationships with brokers. It's your responsibility to go out and maybe source off market deals. There's a lot of work to even just to get one deal that pencils out because you're underwriting many, many properties to get one potential and then that one potential, you then have to negotiate the contract. You have to come up with terms, of course, the price, but also the earnest money that you're having to put into to the table. And then once you get the deal under contract, you get that earnest money, typically 1% of purchase price on the commercial side. So if it's $11 million deal, it's 110,000, you know, earnest or 100,000. So you know, 10,000 or a $10 million deal, say it's 100,000. So there's quite a bit of upfront capital just day one. And then you are spending money on due diligence and time on due diligence, walking all the units, walking all the, you know, whether it's retail walking spaces, whether they're occupied or vacant, or the multifamily walking all the units, doing the roof inspections, doing the plumbing inspections, running camera lines, doing the electrical work. You know, of course you'll have people that are experts at that, but you're paying for that. And again, it's time, you know, so you're, you're doing all the due diligence and then you're like, okay, well this checked on underwriting, it's checked on price. You know, we got under contract for X and I was comfortable with the earnest. And then you're like, okay, well now you gotta do due diligence. So now that you're past that and now you have to go through the loan process and then you also potentially have to raise capital or bring your own capital. And if you're bringing your own capital, it's a lot more risk because you're putting a lot more of your net worth into one deal instead of where a passive investor can split their investments into multiple deals because they don't have to be the ones who come out with the main check, right? So you get to all that is in the equity getting the debt, which is always a process. And then you, you close and it's an exciting day. It's a daily, you want to go out to dinner and be like man, I found that property did all those things as an active investor and then oh by the way, you have to operate it. And if you don't have any experience in operating commercial real estate, let me tell you, it is hard. It is days where you feel like you've been kicked and days where you're on high, you're just, it's just a roller coaster. And one of the things that I know I've proven to myself and our team but I see it in some others and I see it in, when I and I see it, I don't see it in some places too where that grit of every day going in and showing up and being consistent, leading the on site teams like that is a lot of work. And then you have to deal with things that you know are out of your control. You know, whether example Covid or if there's a weather event or a busted pipe, corroded pipe, whatever it is that could cause a damage, an issue, maybe a boiler went out, you know. And so even if you have a third party management company, you've got to make sure that on the third party management company that they are executing the business plan on a day to day boots on the ground mindset, where you're sitting as a helicopter pilot, just guiding them and making sure that they are on the right path. My point all this is that it's a lot of work and it's a lot of risk. On a limited partner side, say somebody invests 50,000, that's their risk is that 50,000 if the deal goes south, if the property gets sued, whatever it is, that's, that's the risk from a limited partner. Whereas on an active investor you're signing on the loan right there may, even if it's a non recourse or recourse loan, you're still signing on the loan. There's still potential risk just on that piece. And so on top of that you have all these other investors potentially unless you're the sole investor that your fiduciary and responsibility is to take care of their investment. That is something I hold very true to me and my every day we're in the office and we're working hard because we have a fiduciary responsibility to Pay back and give returns to those investors who trusted us with their capital. So from a passive investor side, again, we've already talked about the differences, but if you're still on the fence of like, what do you want to do, whether you want to go active or whether you want to go passive, is this what you, you know, based on what we're talking about here, from finding a property or sourcing a property, getting property under contract, going through due diligence, going through the equity debt raise or the capital stack, then closing and then having to execute the property, do the investor communications make investors happy, make the property residents or the tenants happy, et cetera, so they can refer people that they stay in the property. This is a full time job. Whether you're investing in a small property or not. If you're actively investing, you are giving up your time. And in theory, some people might say, well, I'm giving up time so that way I can get the bigger profit. But what we're going to talk about in future episodes is sort of how some, how the splits work. We won't do that on this episode, but on future episodes we'll do that and you'll come to realize that sometimes I'm like, I even think to myself like man, I should be a passive investor. Because the amount of time and the effort, I'm like that it is good. Unfortunately I have the, the, I don't say it's unfortunate, but I just really enjoy what I do on operating and I don't know anything different. Right. So that's kudos and benefits to you as a passive investor that you have someone like me who's sick enough to be like, okay, let's do all this dirty work, operations, getting it into, you know, growing the business plan, et cetera, to hit investor returns. But you don't have to do that. So aha moment here is, you know, similar to last one, choose if you're a passive or active investor. And now that you know what a passive and active investor is, we're going to be going now into our next topic, furthering and adding to the steps of passive investing and getting you on your way to being fully knowledgeable and excited to take that next step and diversifying into passive income. Definitely want to Recommend Checking out passiveinvestorcoaching.com if you haven't already or if this is the first time listening in. It's a great free program that I created. There's no upsell or anything. It's just providing a lot of information all at once. Through many videos, but definitely check that out and also, you know, subscribe and tell your friends about this podcast. I'm hoping that you're getting something out of it and every day makes you feel more confident about passive Investing and excited to hopefully connect as well. Like we are a team here based in Texas, but we love to do phone calls, we love to get to know prospective investors and our investors and so definitely check out passiveinvestorcoaching.com and let's get you in our circle as well. But hopefully over the last two episodes or if you just came on this one, check out that last episode I did on passive investing and what the differences between a passive investor and active were on that one compared to this episode. So you can make a choice what's best for you. Excited to go to the next episode and keep this rolling. Thank you for listening. Thank you for your time. Again, these podcasts are going to be short 10 to 15 minutes, maybe less. Just to give you enough aha moments where you're like, okay, I'm ready for the next. I'm ready to learn more and keep keep things going. So hope everybody is doing well and we'll talk soon.

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