Do you have a goal to invest in passive cash flow real estate deals?
There are a number of different ways that you can invest in passive cash flow real estate investments, but one of the ways where many people I know including myself have done well is through friends and family real estate investments.
Your first question may be, well, what is passive cash flow real estate investing? Passive cash flow real estate investing is when you invest in a deal, but you don’t have to be that involved in the day-to-day operations of the transaction. A Sponsor of a deal shows you a deal that matches your investment thesis and meets your return metrics. Then, you can invest with that Sponsor who oversees the investment for the benefit of the investment group.
The Sponsor coordinates all the aspects related to the acquisition, financing, operations and management of the real estate, and then they ultimately decide when to sell the asset.
The Sponsor chooses the property and the location, oversees the business plan, manages the due diligence, including the hold period, and then manages the operations on behalf of the investment group thereby ensuring that the investment is passive.
A follow up question may be then what are friends and family deals? Friends and family real estate investments is effectively a passive cash flow investment where the the Sponsor of the deal is someone who you know, like, and trust.
Friends and family Sponsors are people that are likely from your background, and they could be family, colleagues, ex-colleagues who are now in the real estate industry, or they may be contacts.
Similar to a passive real estate deal, you make the choice to invest in the Sponsor’s deal and then they manage the acquisition, financing, and operations, and they ultimately decide when to sell the asset.
So what does a Sponsor do? Sponsors act as General Partners or Managing Members in the deal. They organize that acquisition of the property, which means that they source the deal and then they close the acquisition. They arrange financing for the property and they source the equity. When the Sponsor sources the equity, they gather their friends and family who have an interest co-investing in the deal.
Once the entity you invest in takes title to the property, the Sponsor coordinates all of the operations at the property. The Sponsor also distributes cash flow to all the different investors and the Sponsor handles the tax returns and the accounting related to the property including the annual K-1, which investors receive annually for input into their personal tax returns.
Friends and family deals are attractive in my opinion, because what I found is that most of my friends and family have an interest in investing in real estate. They don’t always want to have the direct responsibility of taking ownership of that asset. They don’t want to have to deal with unclogging a toilet. They don’t want to deal with management calls about how to fix a roof. So, they invest with professional investors like myself or with other Sponsors who understand the business of real estate and who do it on a daily basis.
Many of my friends and family want to ask advice about what strategies to implement and what types of properties to buy. I find that, initially, most people are solely thinking of investing in a deal on their own that they own 100%, buying a second home, or buying a vacation property. And while I think that’s great as a diversification strategy, another way to invest is to invest with Sponsors where you get to leverage your equity. Leveraging your equity means that instead of buying a $1,000,000 property entirely on your own, you may be able to buy into a $30,000,000 property where the Sponsor arranges $20,000,000 of debt and raises $10,000,000 of equity to acquire the property.
In the above example, you can become an equity holder in a cash flowing investment property rather than solely having a $1,000,000 property that may or may not produce cash flow. In that way, if you have $1,000,000 that you want to invest, you could invest that money over a number of deals rather than investing all of your eggs in one basket.
My overarching goal is diversification. I’m a big believer in taking small chunks of a number of deals. I do own some properties 100% on my own, but I also invest in a lot of deals where I might have $25,000 to $100,000 invested. Over time, those investments build up to a place where you have cash flow coming in from multiple sources. For example, you may be a co-owner of an apartment complex in Missouri, an office building in Atlanta, and a life science building in San Diego. With this diversification strategy, you get cash flow coming in from different deals and geographies.
In friends and family deals, you have a connection with the Sponsor. And I believe that when investors invest in friends and family deals, the connection becomes tighter both on a personal and professional level. You may be at a barbeque where you are just chatting with someone who you invested with. You may start talking about your real estate deal, which adds another dimension to your relationship. You can easily bounce between discussions about family, vacations, investments, and kids sports, which adds multiple layers to relationships.
Also, when you have a co-investment together and you make money together, that’s fun. It’s a lot of fun to be making money with your friends and family. That is a huge benefit in my opinion. One of the things that we have found is that people really like investing with people who they know, like, and trust. It really is basic human nature. It feels good to have that connection with people that you co-invest with.
I also have a number of investors who co-invest with my mentors. That also adds another dimension to conversation when an investor who invests with me also sees that I am invested in other deals with people they also know, like, and trust.
My personal opinion is that friends and family deals are beautiful. Not only do you have a Sponsor who you know, like, and trust, but you also have a way to build an even deeper connection. You also have the opportunity to earn passive cash flow with your friends and family while collectively, growing your net worth. And as a passive investor, you have the chance to do all of that without having to handle the day-to-day management.
Until next time, let’s continues growing our passive cash flow and net worth together!
-Robert