In less than three years, I’ve invested passively in around 3,000 units, spread all over the U.S.
No, I’m not rich. I invest $5,000 at a time in passive real estate investments through SparkRental’s Co-Investing Club, so I’ve invested in around 30 deals and have reviewed hundreds of others behind the scenes.
Despite having only organized an investment club for three years, I’ve been investing in real estate for over 20 years. Here are a few lessons I’ve learned after several decades in real estate investing, financing, and education.
1. The Middle Class Buys Directly; The Wealthy Invest Passively
Stop the average person at the grocery store and ask them their thoughts on investing in real estate. Most will assume you mean buying rental properties and becoming a landlord.
Do you think the wealthy own single-family rental properties? Think they take on the headaches of landlording, from dealing with tenants to contractors, permits to inspectors, property managers to clogged toilets?
Think again. They invest passively in real estate, so they can simply wire the funds and then sit back and enjoy the cash flow, appreciation, and tax benefits.
Don’t assume that “passive real estate investing” only means “real estate syndications,” either. Our Co-Investing Club also invests in private partnerships, private notes, debt funds, and equity funds. We’ve gone in on house flips, partnered with developers on spec home construction, invested in land-flipping funds, and dozens of other deals.
Our investment club aims to invest like the wealthy—but that doesn’t mean only wealthy people are welcome. Many of our members are non-accredited investors, and making sure they can participate in deals is a core value of ours.
As a final thought, the wealthy don’t just love real estate, but they plan to add more of it to their portfolio in 2025. Check out the latest UBS study on billionaire investing habits.
2. Asymmetric Returns Exist—Spotting Them Is the Trick
When my partner and I review potential investments, we look for asymmetric returns: low potential risk, high potential returns.
And they absolutely, positively exist. The trick is identifying those investments out of the rest of the stack that comes across our desks.
For example, consider the house flipper who we partnered with. His company does high volume, 70 to 90 deals each year. Of those, 93.5% of them are profitable, most of them highly so.
To protect us against the risk of that other 6.5%, the owner signed a guarantee for a minimum floor return of 8% for our investment club. His portfolio includes $15.2 million in long-term real estate with over $6 million in equity, so that guarantee means something.
As another example, the current deal we’re investing in as a club is an industrial seller-leaseback. The industrial company—the tenant—is a commercial welding and machining company whose largest client is the U.S. Navy, and other clients include Caterpillar, SpaceX, and Teco Westinghouse. The deal timeline is three to five years, and the company already has a backlog of orders through the end of 2028. It’s hard to imagine a scenario where the company folds in the next three to five years.
And so it goes. As you learn passive real estate investing, look at how to spot and protect against the most common risks and identify low-risk, high-return investments.
3. Debt Has a Disproportionate Impact on Risk
In my experience, real estate deals fall apart for one of two reasons: The operator either runs out of time or runs out of money. Debt impacts both of those.
Operators run out of time when their debt comes due. They must then either sell or refinance, even if it’s a terrible market for doing so (like, say, 2023).
Operators run out of money when their cash flow turns negative and stays in the red for too long. That often happens when operators take on floating-interest debt with no protection in place against rising rates. Plenty of deals have fallen apart since 2022 because of that exact scenario.
Before you screen a deal for any other risk, check the debt. How long is the loan term? What protections are in place against loan payments rising alongside interest rates? If you don’t feel absolutely confident that the deal can ride out bad markets, don’t invest.
4. Cash Flow Isn’t Just Nice—It Protects Against Risk
In a recession or a buyer’s market, operators shouldn’t sell. Cash flow is what allows them to ride out those markets with a shrug instead of a panic attack.
Even if a recession strikes this year, I don’t see that industrial welding company missing a beat.
Consider another example: We invested in a multifamily property where the operator partnered with the local municipality to set aside half of the units for affordable housing. In exchange, they received an abatement on their property taxes—which saves them far more in expenses than it costs them in lost rent from the designated units.
Here’s the thing, though: Those units set aside for affordable housing have a waiting list a mile long. In a recession, they’ll become even more coveted. So not only did the operator create an instant leap in cash flow, but they also protected against downside risk in recessions, with half of their units invulnerable to vacancy. The property will cash flow, even if a nasty recession hits.
5. You Can’t Predict the Next Hot Market
Imagine it’s June 2022, and you’re looking around at “hot” housing markets. You get super excited when you look at Austin, Texas. Everyone and their mother is raving about how awesome Austin is, all the cool Californians are ditching the Bay Area to move there, it’s the new Silicon Valley, yadda yadda yadda.
In the previous 12 months, median home prices skyrocketed 21.3% to $635,069. You see an elevator that’s only heading upward, and you start snatching up investments there.
Then, the market collapses. Today, median homes in Austin sell for $513,622, a 19.1% drop from their peak.
Our Co-Investing Club doesn’t play the game of trying to predict the next hot market. We simply diversify across the U.S., knowing that some markets will overperform, some will underperform, and most will fall in the middle of the bell curve.
6. You Can’t Time the Market
The smartest, best-informed economists in the world can’t predict market movements or even recessions. If they can’t do it, you certainly can’t.
In hindsight, market movements look predictable because you can look back and explain a narrative of what happened. But at the moment, you can’t tell which of a hundred narratives will prove the prevailing one that determines the future.
So what should you do instead?
Practice dollar-cost averaging with both your stock investments and real estate investments. I set my robo-advisor to pull money from my checking account every week to keep plowing money into my investment portfolio. And I invest $5,000 every month in a new group real estate investment through SparkRental’s Co-Investing Club.
The market goes up, the market goes down. I keep investing. Over the long term, I know I’ll come out ahead. It’s one of many ways in which easing my grip on control has improved my investments and my life.
7. Beware of Chasing Hot Asset Classes
In the Great Recession, only one real estate asset class went up in value instead of down: self-storage.
Investors interpreted that to mean that self-storage is a recession-proof investment. And there’s a kernel of truth there: In recessions, a lot of people move into smaller homes or move in with friends and family (a phenomenon known as household bundling). They didn’t have room for all their stuff, so some rented storage units.
But storage operators flooded the market with too many storage facilities, and the asset class has struggled with oversupply for years now.
Again, be careful of getting “clever” in your investments. Every time I’ve tried, I’ve gotten burned. Today, I practice diversification in my real estate investments: geographic, asset class, operator, and timeline diversification.
8. The Operator Does Matter More Than the Deal
Invest passively in real estate long enough, and you’ll hear someone utter the cliché: “It’s the jockey, not the horse.” They mean that the operator—the sponsor, general partner (GP), syndicator, or fund manager—matters more than the specifics of the individual deal.
Clichés, like stereotypes, exist for a reason: There’s truth in them, even if they don’t always tell the whole story.
A good operator can salvage a deal that goes sideways. A bad operator can mess up a perfectly good deal (or run off with your money to a third-world country).
Our Co-Investing Club prefers to invest with operators who have done at least 10 deals and, depending on the investment type, sometimes far more. One operator we invested with a few months back has done an eye-popping 135 syndication deals over several decades. They made all the rookie mistakes 20 years ago, and today, they know what they’re doing.
This is actually great news because you can do your due diligence evaluating an operator once, and you don’t have to spend as much time combing through every line item in each new deal as they come along.
9. Start Small With an Operator, Then Expand
One of the many reasons I like being able to invest $5,000 at a time is that I can start small with an operator the first time and then invest more after they earn my trust.
I’ve written about how much of your net worth should go into each real estate investment. Ultimately, you want to invest a small amount with unfamiliar operators or investments—then scale that up as you build confidence, trust, and knowledge.
That might mean $5,000 the first time I invest with an operator, $15,000 the next year, $50,000 the next year, and so forth as I see them shepherd my money well.
As a final thought, active investors can’t do this. Despite what the gurus will try and tell you (before pitching on their $2,000 course), it typically takes $50,000 to $100,000 to buy a property yourself, between the down payment, closing costs, initial repairs, cash reserves, and so forth. The same goes for investing in passive real estate investments yourself.
But when you go in on passive real estate investments with other investors, you can invest small amounts. That lets you dip your toe in the water with an operator before investing more.
Start low and go slowly and steadily, and you’ll come out ahead in your real estate investments.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.