595: Transitioning from Active to Passive Real Estate Investing

February 7, 2022bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 595: TRANSITIONING FROM ACTIVE TO PASSIVE REAL ESTATE INVESTING

There comes a time in many real estate investors careers where they no longer want to be active investors. In this episode, personal finance expert, author and real estate investor Rachel Richards shares how and why she quickly built a significant real estate portfolio, retired at age 27 and is now transitioning from an active to passive investor.

What You Will Learn

Why Rachel is transitioning from Active to Passive investing
How Rachel grew her portfolio so fast
An effective strategy to get much higher cash flow from rental properties
Why Rachel and her husband self-managed all their properties
What the two stages of syndication due diligence are
Why weekly rentals work or don’t work
When interviewing a syndicator, what questions you should ask
What red flags you might receive while doing your due diligence on a potential syndicator’s deal
11 questions to ask every potential syndication sponsor, and 9 more even tougher questions just for the operator him or herself

About Our Guest

Rachel Richards

At the age of 27, Rachel Richards quit her job and retired. She is now living off $20,000 per month in passive income. Rachel is the bestselling author of “Money Honey” and “Passive Income, Aggressive Retirement.” She built a real estate portfolio of 38 rental units by the age of 26. She is a former financial advisor, and has been featured in CNN and Business Insider. She makes the topic of money management fun, entertaining, and simple for her 250,000+ millennial followers. Rachel helps women feel excited, capable, and confident about their financial future.

Rachel has a Bachelor of Science in Financial Economics from Centre College. She has held roles as a financial advisor, a real estate analyst, and a senior finance analyst.

Rachel is based in Colorado with her husband and dog Chloe.

Old Dawg Podcast shows where Rachel has appeared include:

Here’s an article Rachel contributed to the Old Dawg’s blog:

These 4 Misconceptions About Wealth Will Change Everything

More About Rachel

Rachel and her husband built a rental portfolio consisting of 6 buildings/38 doors/units
She clarifies that:
- She’s not a trust fund baby
- She never made 6 figures from a job or career
- Listen to episode #433 to find out how she did it
In 2021, they decided to sell off a lot of their properties
- They sold 3 of their largest buildings (in Louisville, Kentucky) – comprised of 34 units/doors
  - One was a duplex, one a triplex and one a quad
  - But, because they rented by the room and there were many rooms in each, that had many more tenants
  - They were large “Boarding House” type properties – “rent-by-the-room”
    - Flat rate paid WEEKLY
      - Typical renter stayed for 6 months
      - Some stayed for much longer
      - Minimum lease agreement for 12 weeks
    - Rent-by-the-room
    - Affordable housing
    - Tenants share common areas like kitchens and bathrooms
    - Fully-furnished
    - Utilities paid
    - Free Wi-Fi
  - They self-managed and they were a lot of work
  - At the time, they both had full-time jobs and Rachel was writing her books in the evening
  - For a while, they both were working 80-hour weeks “to make their dreams come true”
They decided to take a lot of that money from the sale of the properties and transition it into real estate syndications

Why the Transition?

Owning real estate (rental properties) is not passive unless you have a property manager
Chances are, most people don’t want to quit their full-time jobs to become a full-time landlord
That’s why most investors hire property managers to deal with the day-to-day duties of managing the rental properties
But, even with a property manager, you still have to “manage the manager”
- It’s not fully 100% passive
- However, it is more passive than a 9 to 5 job
There were a three reasons why they decided to sell
- The market was great for sellers, getting top dollar for their properties
  - She sold them all privately
  - For Sale By Owner (so didn’t have to pay commissions)
  - She’s also a real estate agent, and even though she didn’t take the commission, she at least didn’t have to pay someone else’s commission
    - She felt comfortable representing herself
    - She also had an attorney draft up the contract
- For piece of mind
  - She was always stressed out about these houses:
    - Lots of tenants in such close quarters
    - A tenant caused a kitchen fire and, even though they had asset protections in place (LLCs, umbrella policy, etc.), it made her very concerned about the liability
- She views the real estate investing journey as a “time vs. money” trade-off
  - When they started investing, they were broke – they didn’t have a lot of money
  - They were willing to do all they could, by investing their time and “sweat equity”, to make a lot of money early on
  - They knew it would pay off big later on
  - Today, as they have made a lot of money, they prioritize their time more and more
  - They now want “true” passive income
  - Therefore, they are selling and transferring the cash into real estate syndications and other investments that are even more passive
The properties served them well while they were hustling and building their “empire” but today, they no longer align with their goals anymore because they prioritize and value their time so much more now
They realize that, by investing in syndications, they will make less money on the return but it’s something that’s truly passive at this point
They sold the three properties in 2021
They have three other properties but they are going to hold on to those
- 2 single family
- 1 duplex
They now live in Denver (they moved there from Kentucky)
- They want to invest in Colorado but only as a silent partner or a long-term rental (no more boarding houses or weekly rentals)

How A Syndication Works

How the syndication process happens
- An investor finds an apartment complex, for example, that costs $10,000,000
- They form a syndication to raise funds from private investors
- The investors are not just lending money to the buyers – they become “equity owners”
  - This means that the investors are entitled to a share of the profits
  - They invest as “Limited Partners” or LPs
    - They can earn monthly or quarterly dividends (part of the cash flow)
    - Plus, they also earn a part of the profits if the property is re-financed or sold
  - The investors also get the same tax benefits that any buyer would have as owner of any rental property
    - You can deduct depreciation
    - You get a K-1
This is the most passive way Rachel has ever found to own real estate
All you have to do is send the money in
- You don’t have to manage tenants, oversee renovations, etc. because the syndication team (General Partners) are managing all that
It’s true “mailbox money”
Investor Qualifications
- They couldn’t have done this early on in their real estate investing careers because they didn’t have any money to invest
  - Investment amounts, generally start at $25,000 but many are $50,000-100,000
- For most syndications, you also need to be an Accredited Investor
  - An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities.
  - The SEC defines an accredited investor as either: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
  - Or you could qualify if you are a person whose individual net worth, or joint net worth with that person’s spouse or partner, exceeds $1,000,000, excluding the person’s primary residence.
- EDITOR’S NOTE: If you don’t qualify as an “Accredited Investor,” you can still invest in syndications as a “Sophisticated Investor. A Sophisticated Investor is an investor that qualifies under the Securities Act of 1933 and related Securities and Exchange Commission regulations and is defined as one having sufficient knowledge and expertise in financial matters to weigh the value and risks of an investment. The qualifications are more open because of that definition and not as stringent as for an Accredited Investor. Also, you can still invest in syndications without being a Accredited nor Sophisticated investor through crowd funding for as little as $10 per investment.
Rachel’s Syndication Portfolio
- They have invested in 8 syndications so far
- She currently invests in multifamily, self-storage and mobile home parks
  - She thinks mobile home parks and self-storage are especially great areas to invest right now
    - Because there is a shortage of both right now, the demand is huge
  - She understands multifamily best because that is where she has been investing and she knows what looks good and what doesn’t look good. Also calculating returns comes easier with multifamily
- She wants to invest in at least 5 more in 2022
Projected returns
- Syndicators provide you with a “deck” with pictures, numbers, tables, pro forma projections
- The deck can say all kinds of projections
  - That’s why you have to do your own due diligence to double-check the numbers and look at it from your own perspective
  - A lot of the decks project 13-17% IRR (Internal Rate of Return – that number includes cash flow and the profit on sale) for their apartment syndications
  - Some will state a “preferred return,” of say 8 or 10% that you should earn annually
    - Or they may show how it grows over the years, maybe starting at 3% and growing to 1o% in the later years
- With some syndications, you may not receive your first check until 6-12 months after you make the investment
Her Criteria
- She currently invests in multifamily, self-storage and mobile home parks
  - She thinks mobile home parks and self-storage are especially great areas to invest right now
    - Because there is a shortage of both right now, the demand is huge
  - She understands multifamily best because that is where she has been investing and she knows what looks good and what doesn’t look good. Also calculating returns comes easier with multifamily
  - An exception was a laundromat, which she says has a great return – 13% – (their first syndication)
  - She also invested in a triple-net-lease commercial industrial syndication
    - She was not 100% comfortable with it because it is an area she does have direct experience with, even though she spent a lot of time on its due diligence
    - She’s making good money on it but doesn’t recommend others to invest in syndications they don’t fully understand
- Most syndications may have a hold period of 3, 5, 7 or 10 years so you have to wait to find out what your true IRR really is
  - She prefers a shorter time horizon because she wants to get her initial investment back sooner because that lowers their risk
  - If they’re not going to get their capital back until 10 years out, that’s too high a risk for them
  - They look for a re-fi event or sale in 3 to 5 years
  - It’s currently hard to find a 3 year hold but easier to find
- Rachel says she is earning approximately $1,400 per month in distributions for the 7 syndications she is currently investing in
- She has not invested over $50K in one syndication and wouldn’t feel comfortable investing $100K in one deal
  - It’s about diversification – She would rather invest $25K in four different deals than $100K in just one deal
  - There is real risk here and that’s important to remember
    - If one deal goes poorly, she would only lose $25K instead of $100K in one deal
    - She has even asked syndicators who have $50-100K investment minimums if they have
- She won’t invest in a syndication where there is no distribution or cash flow income
  - That’s why she does invest in new construction or ground-up builds because you don’t get your money back until it sells
- 506 (b) vs. 506 (c)
  - 506 (b) allows Sophisticated Investors with Accredited Investors and cannot be advertised
    - With Rule 506(b), the issuer must be able to prove an existing relationship with an investor before the deal is presented to them
  - 506 (c) is only Accredited investors and can be advertised

Finding Good Syndication Partners

Trying to find good syndication partners has been quite a learning process
The syndicator/sponsor is key
You need someone who has:
- Knowledge
- Experience – They should have done and exited several syndications successfully
- and they clearly know what they are doing
You need to do more due diligence on the syndicator than you do the project or property
She’s heard of too many people who have wired money to a so-called “syndicator” only to run off with all the investors’ money
It’s easy to get scammed
Make sure you are personally introduced to the syndicator by someone you know well, someone who has invested with the syndicator and has had a good experience
Rachel said she would be happy to make introductions to syndicators she knows and has invested with
Don’t just invest with someone you meet on Facebook or LinkedIn

Getting Educated on Syndications

Before Rachel started investing in syndications, she read a book called The Hands-Off Investor by Brian Burke, published by Bigger Pockets
- She loved the book
- It’s very technical but if you read it, she says you will become an expert on investing in real estate syndications
She learned that their are important stages of due diligence
- Meeting With the Syndicator
  - It starts with connecting with a syndicator – they should want to meet with you or have a call with you
    - If they just want to send you deals without meeting you first, she feels that’s a red flag
  - With Rule 506(b) syndications, the issuer must be able to prove an existing relationship with an investor before the deal is presented to them
  - They will ask you questions
  - You should have a list of questions for them too. Questions you might ask include:
    - What kind of syndications you have done?
    - How much money have you raised in the past?
    - How many deals have you exited?
    - How many of your exited deals underperformed compared to pro forma projections?
      - Why did they underperform?
      - What did you learn?
    - Have you investors ever lost money?
    - Can you send me financials for any of your current deals?
    - How has Covid affected any of your current investments?
      - How did you manage through Covid?
    - Who manages investor relations on your team?
  - After they feel comfortable with you, they put you on their deal flow mailing list
    - They will email you potential syndication deals when they come up
- What Rachel does next
  - When she sees a deal she likes, she will analyze it, take notes and ask questions
  - Before investing, she’ll contact the syndicator with a list of 20 questions about the specific syndication opportunity
  - If the syndicator is not interested in educating you and answering your questions, it’s another red flag
    - They should be giving you all the time you want to get your questions answered
    - You are about to send the sponsor $25-50K or more
      - That’s a lot of money
      - You’re placing a lot of trust in them
      - They should not make you feel like they are impatient or that they don’t have time for you
  - She will also ask a ton of (EVEN TOUGHER) questions
    - What do you see as the greatest risk of this investment?
    - What happens if you don’t raise the funds you need for this investment?
    - Have you walked every single unit in this project?
    - What is the break-even occupancy?
    - When does this close?
    - When will you send out the first distributions?
    - How often will you send out your distributions?
    - How much of your own money are you investing?
    - Have you done background checks for everyone on your team and can you send them to me?
- Rachel spends more time doing the due diligence on the operator/sponsor/syndicator than on the project itself
  - If she spends a total of 5 hours on due diligence for a syndication deal, she recommends spending 3-or 4 hours on the syndicator and 1 to 2 hours on the deal

Thoughts on Syndicator Funds

More and more syndicators prefer to raise money for their projects through specific funds
- Rachel has looked into various funds and have considered them a lot
- The struggle she has with funds is that they are not as clear-cut as investing in a specific syndication project
  - She likes when she can look at a syndication, understand the project (for example: an apartment building), the markets, the rents, the strategy and the specific building
  - She’s very logical and mathematical person and her investments have to make sense to her
  - When she sees a fund
    - There’s not always a clear enter and exit date
    - It’s often on-going
    - They might buy assets throughout, sell
    - There are different periods where they are raising money
    - There are different periods when you can get out of the fund
  - Funds are harder for her to analyze
    - Could be 10 different assets
    - There are always assets they are buying and assets they are selling
    - Everything’s blended
  - That’s why it’s been harder for her to take the leap into funds
- However, self-storage investment opportunities are often in funds
  - If she wants to get into self-storage, she may have to invest in a fund

Advice for Old Dawg’s Looking at Syndication Passive Investing

She knows it’s easy to feel overwhelmed with syndication investing because there’s a lot to learn
But so can getting into your any first real estate investment
She recommends:
- That you start with networking
  - Reach out to real estate investors that you know or people you may know who are syndicator investors or know syndicators
    - Start talking with syndicators
    - You’ll start to know the questions to ask, the language/terminology
      - She felt a little silly starting out because she didn’t know the “language/terms” and things to say
      - But the more she started talking to people and asking them questions, the more comfortable she felt and the more she learned
- Read the book: The Hands-Off Investor by Brian Burke
- Don’t fell pressured to invest in your first syndication – syndications will always be around
- Rachel will help you with introductions to syndicators if you need help (see her contact info below). Bill will too
Take your time and get educated before you invest
Also, don’t get hung up on a syndication’s projections or “Pro Formas”
- She personally would rather invest with a syndicator who projects lower returns
- She prefers syndicators who under-projects and over-performs

Syndications and Inflation

Rachel feels syndications are a great place to invest when inflation is high
Inflation was at 7%
The best place to invest during inflationary times is in real assets — like land and real estate
Housing is a supply and demand issue – not a bubble
Bubbles are driven by fear and a lot of nothing
The population is continuing to grow and has been outpacing available housing
- It’s an issue of supply and demand
When she invests in real estate, she invests for cash flow, not appreciation
- That’s the smarter, more conservative way
- If you invest in a cash flowing asset, it’s not going to matter if the market goes down
- A cash flowing asset will make it through a down market
- If you invest in appreciation, you’ll lose your money in a down market

Where to get Rachel’s Books

Money Honey by Rachel Richards
Passive Income Aggressive Retirement by Rachel Richards

Get a Free Passive Income Starter Kit

Here: MoneyHoneyRachel.com/PassiveIncome

How to Reach Rachel

Email: Rachel@MoneyHoneyRachel.com

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