4 Important Factors Often Overlooked By Passive Investors

In fact, here at Blue Lake Capital, we have many different types of investors all the way from single mothers who are doing real estate as a full-time business to young and ambitious millennials who want to retire early all the way to high-net-worth individuals and even other multifamily sponsors. We have a very diverse client base. However, we only work with accredited investors. So, you will have to meet the requirements for being an accredited investor if you would like to invest with us.

If you are thinking about investing in real estate then there are a number of best practices that you should be aware of. We incorporate all of these best practices at Blue Lake Capital in order to generate the best possible returns for our investors. Here are the best practices for real estate investing that are often overlooked by passive real estate investors.

1. Discipline

Many real estate investors just want to go out and buy as many properties as possible in order to start renting them out and generating passive income. This is true for multifamily sponsors as well. Part of the reason why multifamily sponsors want to buy as many properties as possible is because they are paid an acquisition fee every time they buy properties.

But, buying properties too quickly and too frequently can result in mistakes being made and the wrong properties being purchased. If you are a passive investor using a multifamily sponsor to make real estate investments for you, then it is crucial that you choose to work with a sponsor that is picky with its investments and does not just rush out to buy as much real estate as possible.

The reason why this is important is because not all real estate investments are equal. You only want to be investing in properties with good numbers and where your ROI is going to be pragmatic, with returns that are stable and consistent throughout the holding period. Investing in deals with bad numbers or where something is just off or feels questionable can result in major losses and should be avoided by conservative investors.

2. Diversification

Just as with stocks, bonds, commodities, or other investments, diversification is also important when it comes to investing in real estate. The reason why diversification is important with real estate investments is because if you invest too much of your money in one market, in too few properties, or with just one sponsor, then you can lose a significant amount of your investment if there is a problem.

Diversification insulates you from risk. It acts like an insurance policy protecting you in case there is a sudden problem with one area of your real estate investment portfolio.

If you are going to invest with multiple different sponsors, you should take certain precautions to make sure that you choose the right sponsors. For example, you should do your own due diligence. One question that you can ask potential sponsors is whether or not they will be investing a significant amount of their own capital in the deal. If the answer to this question is “yes” then the sponsor is more likely to choose their investments carefully, because they will have skin in the game. Blue Lake Capital invests its own money in every single one of its real estate deals. Also, be wary of sponsors who never put any of their own money into the deals.

This can be a major red flag and a cause for concern.

You should also look at the sponsor’s track record and previous deals to try to get an understanding of how well its investments tend to perform over time. You should also be asking how much does the sponsor pay its investors, do they pay investors on time, do they pay throughout the COVID pandemic, how have their properties performed, etc.? The goal is to get an understanding of whether or not you can really trust the sponsor because at the end of the day, it is your hard-earned money, and you don’t just want to give it to a sponsor who will not take good care of it.

3. Tracking Performance

It is not only important to vet sponsors before you agree to work with them. Even after you start working with a real estate sponsor to passively invest in real estate, you need to track the returns. Make sure that the sponsor is living up to their projections, or communicating very transparently if they are not.

Unfortunately, some real estate investors are content to just see money coming in consistently from the sponsors and they don’t actually keep track of the returns and make sure that the cash-on-cash returns are as high as the sponsor projected they would be.

In other words, even though investing money with a multifamily real estate sponsor is a passive form of investing, you still want to make sure to keep track of your returns to verify that you are still getting good bang for your buck with your passive real estate investments. Keeping track of your real estate investments will keep your sponsor honest and it will help you to achieve peace of mind knowing that your money is in good hands.

If at some point, you discover that the returns have dropped off or that they are not as high as the sponsor said that they would be, then it might be time to start looking for a new sponsor who you can trust more. 

4. Speaking to Some of the Sponsor’s Other Investors

Some multifamily sponsors will allow their prospective investors to speak with some of their current investors. Speaking to current clients for a sponsor you are thinking of investing with is one of the best things that you can do before you decide to invest with the sponsor.

The reason why this is such a good idea is because the person you speak to will be able to give you a much better idea of whether or not the sponsor performs and can be trusted. They will most likely be significantly more honest and candid about the strengths and the weaknesses of the sponsor.

The SEC prohibits sponsors from offering kickbacks or bonuses to clients for referrals. So, because of this, you can rest assured knowing that the investors you speak with will not be financially motivated to provide a false positive review of the company. Most likely, therefore, the review of the company that the investor gives you will be accurate and honest.

Final Thoughts

Even if you plan to invest in real estate passively, you still need to adhere to best practices in order to reach the highest possible level of success. Some of the most important best practices that you should strongly consider sticking to if you are going to invest passively in real estate are discipline, diversification, tracking performance, and speaking to current investors for a sponsor you are considering.

If you’d like to learn even more, click here to listen to our latest podcast episode of me talking about this topic with Jeannette Robinson, the Director of Investor Relations, at Blue Lake Capital.

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