Passive property investors are an important aspect of your multifamily syndication deals. Unfortunately, it can be a significant challenge to attract passive investors, and retaining the investors that have already signed on adds to the challenge.
While many people think that the primary concern of passive investors is their return on investment, many investors are more concerned with their money being in reliable, trustworthy hands. Likewise, they want to ensure that they receive frequent updates regarding the status of their investment, and they want a hassle-free experience. Each of these specific concerns could play a role in your ability to attract passive investors and to keep them.
Generally, a passive multifamily investor may be offered a comparable return on investment from different opportunities. You can expect an investor to weigh the ROI into his or her decision-making process.
However, because ROIs may be relatively comparable, you may expect other factors to be equally important to the investor. Because there may be far more variation on these other factors, they could make or break an investor’s decision to invest with you.
1. Provide Peace of Mind
First, investors want to know that you will make intelligent decisions with their funds. Your investors want to know that you will not lose their money. With this in mind, an investor’s money should ideally be used as a down payment for the investment, for closing costs, or for renovations to the property.
The unfortunate reality is that no legitimate syndicator can guarantee that money will not be lost. This is because you cannot foresee all factors that may affect the property or the market conditions.
However, there are a few steps that you can take to decrease the likelihood that investment capital will be lost. These steps, which may also be referred to as the immutable laws of real estate investing, can also be used to optimize investors’ returns.
First, avoid buying a property solely for appreciation. This is because there is no way you can know with certainty if the market will go up.
When you buy for cash flow as an alternative, you are more likely to achieve the numbers you present to potential investors. The caveat here is that you can count on forced appreciation, which is appreciation caused by some value-add activities. These activities may include renovations, increasing income, or decreasing expenses.
Next, take out a long-term mortgage. For example, if you plan to hold the property for 10 years but you take out a five-year balloon mortgage, you inevitably will need to sell or refinance the note.
On the other hand, if you take out a 20-year mortgage, your exit plan will be executed before the debt is due in full. Because there may be various situations when your business plan does not pan out, you may need to hold the property longer than necessary to avoid a loss. When you choose long-term debt, you are avoiding a scenario where you may need to sell or refinance before it is financially advantageous to do so.
Finally, avoid being forced to sell. The first two principles feed into this one. If you are forced to sell before you are ready to do so, you may run the risk of selling for a loss.
With these principles in mind, you must have a solid financial background in order to attract passive investors. This should include both hands-on experience and education. If you lack experience, you could overcome the challenge by bringing on a broker, a property management company, or another party who has sufficient experience.
Even if you assemble an expert team for your current syndication, it is important to continuously refine your knowledge and to accumulate experience in multifamily investment. In addition to being knowledgeable and experienced, you also should be trustworthy. You may find that it is easier to attract investors if you know them personally, through online platforms, or because of other shared interests.
2. Maintain Consistent Communication
This takes us to the second factor that can help you to attract passive investors. While passive investors are hands-off investors, they still want to know that their capital is being properly used and looked after.
You can and should be a responsive communicator and respond to inquiries promptly. You also should reach out when an issue develops. You should communicate what the challenge is and what approach you are taking to resolve the situation.
By communicating effectively and in a timely manner on established syndication projects, you may find that it is easier to convince your passive investors to continue investing with you on future projects.
As a rule of thumb, you should keep them informed with quarterly financial statements and with monthly updates related to capital expenses, renovations, rental rates, occupancy rates, outstanding issues, and more. Your investors should always know the status of their investments.
3. Make the Process Hassle-Free
Finally, passive investors want a hassle-free experience. While passive investors want to be kept in the loop, they are not responsible for the daily property operations. Generally, these are investors who may be busy with various other projects and responsibilities, so they want to contribute as little time as possible to the management of their investment.
These investors expect to send you an initial sum of investment capital. Then, they expect to see a return and to receive regular updates on their investment. This should be the extent of their efforts in the deal. For the convenience of your investors, you may even consider setting up a direct deposit for investors to receive their distributions.
The ability to attract passive investors and to retain their interest for future deals is crucial for your success with multifamily syndications. Whether you are putting together your first syndication or you are managing existing syndication, these are important rules to live by.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.