5-Step Guide to Becoming a Successful Passive Investor

Updated: Jan 9

Many passive investors would like to participate in real estate deals, as they know that good real estate investments can generate lucrative returns over time. There’s no question that investors believe that real estate investments will help build wealth. The only question is how does one become a successful passive investor?

I’ve put together this 5-step guide to show you the steps to take that can help you become successful as a passive investor. There are no guarantees, of course, but by following these steps you will have a good chance of having things working out just the way you would want them to.

Step 1:

Educate Yourself

Education is the foundation for just about every endeavor, and real estate investing is no exception. As a passive investor you’re not expected to come into real estate deals with extensive knowledge and experience - that’s why most passive investors are part of a syndication. The Sponsor brings that knowledge and experience to the table, while you bring money to invest.

But having a good understanding of real estate investing fundamentals can help you evaluate and analyze deals and have enough knowledge to do your due diligence when a deal is presented to you.

How do you educate yourself? Read books, listen to podcasts sponsored by successful Sponsors and investors and even enroll in a program designed for passive investors. There are also conferences where you can get essential information, meet syndicators and mingle with other passive investors to hear “market chatter” about different real estate investment opportunities that are happening in your area.

Step 2:

Decide on Your Investment Criteria

Every real estate investor has specific market criteria that they like to look for when considering real estate deals. Passive investors are no exception. So how do you define your investment criteria?

You start by determining the specific markets you like as potential investments, and why you like those particular markets. You also need to determine what returns you’re hoping to achieve, a 15% IRR, or a 6-8% CoC for example. You’ll also need to decide on whether you’re after preferred returns or not.

Personally, I believe that preferred returns are the way to go for passive investors, because all profits in a real estate project a first given to preferred investors. Preferred returns work for the sponsor of the deal as well, as he or she can show other investors that they have exceeded the percentage return that was originally promised.

There’s another criteria to select, and that’s whether or not you want to do “value-add” deals. This scenario is when you purchase a property that requires work and rehabilitation, or repositioning. And while it costs money upfront to do the work, you will receive higher returns on your investments once the work is completed.