How to Invest Wisely As a Passive Investor
The 1st time I invested passively in an apartment building, I simply trusted in the investor and invested. I didn’t know anything about the specific business plan and I never even looked at the underwriting for the property. I’m a little shocked at how little I looked into the investment. I didn’t know what I didn’t know.
Later, when I became part of the ownership group of apartments, I did not put my name on a deal or raise equity for a deal until I knew all about the business plan.
If you want to invest passively in an apartment building as a limited partner (an LP), you need to ask the general partner (GP) for a few pieces of information. 1st, you want to see the “pitch deck” to make sure that you understand the business plan. You need to see in that plan how they will be able to raise the Net Operating Income (NOI), which in turn raises the property value. That is where your return on your investment is made. Part of understanding the business plan is understanding how the GPs have structured the deal (ie. lending) and what safeguards they have in place.
2nd, the pitch deck will tell you about the “sponsorship team” or the GPs who will be running the business plan. Do they have an experienced team who have had successful apartment investments in the past? What does their culture seem to be or what do they value most? Do they put the investor 1st?
3rd, you need to see the underwriting for the property. Does the underwriting show reasonable rent increases or do the hoped for rents seem unreasonable?
Also, ask the GP where they got their organic rent growth numbers?
Organic rent growth numbers should come from an industry data source.
If the business plan looks good, if the sponsorship seems to be solid and like they are good people, and if the underwriting seems reasonable, you should be safe to invest in the property.