My Realty Gains
Here are four factors that one should consider before choosing their path of investing.
The active investor, also called the deal sponsor, has enormous responsibilities to take care of. They are responsible for due diligence for the deal. It is their responsibility to underwrite the project thoroughly to present it for capital investment.
Experience is the key to be able to become an active investor. The ability to negotiate loan terms with lenders and selecting the type of lender that needs to be approached for heavy value add properties versus stabilized assets is a task in itself. Other than this, many attorneys and supporting staff are also involved in the confirmation of the lending. The process usually takes up to 90 days but if you plan it well it might be as quick as 30-60 days.
Normally from a personality fit someone is either active or passive, but not both, and it usually comes down to whether they want to have control or not.
2. Time Commitment
After closing, even though you may have a great team, you will still have to guide them. When something unexpected occurs, you’re responsible for making decisions and fixing the problem. Of course, it is indeed possible to automate the majority, if not all, of the above tasks. But that requires a certain level of expertise and a large time investment to implement effectively.
Passive investing is more or less hassle-free. You don’t have to worry about any of the actions described above. Once you’ve vetted the syndicator/operator and the deal, you simply invest your capital and are kept in the loop with monthly or quarterly project updates all the way up until there’s an exit/sale.
A much riskier strategy would be actively investing. Directly buying properties might leave an investor open to unlimited risk exposure through loan guarantees. However, the higher risk factor results in higher upside potential. The entirety of the deal is owned by you, which means you are the sole recipient of all of the profits, however, the burden of any losses incurred has to be borne by you while investing actively.
4. Deal Flow
In the case of passive investing, all these factors are taken care of by the sponsor. Passive investors outsource the acquisition process to syndicators who uncover quality deals. By owning a share in many properties, passive investors’ fortunes don’t rise and fall with those of any single asset, and they don’t need to answer the phone in the middle of the night when something unexpectedly goes wrong.
What you need to know:
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