079: Passive Investing FAQs Made Simple

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Have you ever been afraid to ask a question? 🤔 We have, and we know that sometimes you just really need answers.

We are scared to ask questions all the time! But we don’t want you to be afraid, or worse, to not have the answers to questions that every passive investor wants to know.

FAQs are there but not frequently answered.  Passive investors want to know more, so yes, frequent questions deserve frequent answers.

Let’s get started and dive in. 🤓🤓

FAQs

• • Are all passive investors really rich with millions of dollars in their bank accounts?
  • Can I do this without money? 
  • How to get over a barrier to sending $100K, $200K, $500K to strangers?
  • Does passive investing really work?  Is it risky? Is it safe?
  • Why passive investors don’t have any control over their investment?  Can passive investors help out in the deal?
  • How often do we get to hear from the sponsorship team?
  • Why passive investors are getting a 70/30 or 80/20 split?
  • Why now?
  • What happens if the deal doesn’t close?
  • I’m so used to doing everything myself, can I buy my own apartments?  

You’ve Got Questions, We’ve Got Answers

That was a lot! And we can’t wait to tackle these and learn together. These are all great questions to ask and will help you become a more informed passive investor. Let’s get started with the first one.

Do all passive investors have to be really really rich with millions of dollars in their bank accounts before they can invest in apartment syndication?

Absolutely not!  You don’t have to be Elon Musk to begin the process. When we first started you better bet we didn’t have millions of dollars sitting in our bank accounts.  

Apartment syndication is where a group of investors pull in resources – time, capital, energy, relationships, expertise, etc. and go after big apartment complexes.  We highly recommend anything that is over 65 units and above due to the economy of scales.  And no, you don’t need to have millions of dollars.  That’s such a myth! As a matter of fact, the minimum for many investment opportunities is not as high as you might think.  Some have a minimum of $50K, while others are around $75K-100K.  ✨✨

That brings us to our next question:

Can I do this without money? 

The short answer is NO!  We know that’s not what you might want to hear, but we promise there is good news here. We understand we all are in a different season of life.  Some of you just started your job, while some of you’re highly successful high-level entrepreneurs.  😊😊

Apartment syndication is a place to take your retirement/investment portfolio to the next level.  But it won’t solve your retirement issue if you don’t already have some capital – again you don’t have to have millions of dollars here.  It’s similar to how you need to have talent to be playing in the NBA.  You don’t really really thrive or survive there unless you have talent, and a lot of it.

The beauty in all of this is you can invest your money alongside other investors to go after the bigger deals, which tend to be more profitable due to working with a team of experts and economy of scale.  Apartment syndication makes it so that ordinary people like us have access to deals that otherwise go to hedge funds, or ultra-wealthy people.  😌😌

This brings us to our next question, which is:

How can I get over the barrier to send $100K, or $200K  or $1M to strangers?

First of all, we hope that you don’t invest with total strangers.  If you’ve followed us, you know that we believe you have to know, like, and trust your sponsorship team. Not a negotiable!

Our favorite question to ask when vetting someone is: would we want to drink wine and share a charcuterie board with them? 🤔🤔If the answer is no, then no it is, for everything..  

For many of you, who have been listening to our podcast, follow us on Instagram @thekittisisters, and who’ve been on the calls with Team Kitti Sisters, we definitely aren’t strangers.  You’ve seen us and know us because you take us everywhere you go – dropping off your kids in the morning, folding your freshly cleaned laundry, going on a walk etc.  But, again, you got to feel that connection, if you don’t then why on earth are you going to wire over $100K, $500K to this person right?  It doesn’t add up.

We can’t stress this enough. THE most important task a passive investor should be doing is due diligence on the sponsor. Can the sponsor actually pull off the business plan?  It’s one thing to put together a slide deck with a business plan and some pretty pictures while sharing projections and some basic data. But can the sponsor actually execute the plan???

Easier said than done, right? Anybody can put together some pretty pictures and a pitch deck, but not everybody can actually execute on that. That’s probably the number one thing that a passive investor needs to do – do the due diligence to find out the level of experience of that sponsor. Not only in general, but more specifically; do these people actually have the track record and experiences in apartment investing?  We promise it’s truly passive, once you have done the work up front, you can enjoy the economy of scale by investing with the same team over and over. Do your homework, it will pay off! 🙏🙏

Apartment syndication is true passively.  You don’t have to give input, think about how to execute A-B-C, and you don’t have to attend the board meeting, you just let the team handle everything.

This goes hand in hand with our next question, which is: 

Is passive investing risky? Is it safe?  Does it really work?  

Personally, for us, yes, it’s working.  We were able to replace our income from our fashion manufacturing, single-family house flipping business through apartment investing.  😉😉

I’m sure you’re thinking, that’s great, but iis it risky?  For sure!  If anyone said otherwise, I have one word: RUN!  We get it, not all of us are born risk-takers. Some of us like our routines and follow the rule of “nothing good happens after midnight” and we are in bed promptly by 9 pm. 

When it comes to investments though, you might need a mental shift. Investments that have high returns tend to be at higher risk. Conversely, investments that have a lower return tend to have a lower risk. 

Either way, if you slice it, there will be some level of risk involved. 

As passive investors, you must have some ground rules set up to make sure you maximize your gain and minimize your downside risks.  This is not the time to invest in just any deal but the right deal. 😉😉

First and foremost, you need to establish your internal investment criteria and set clear goals that you are looking to hit. It all goes back to prioritizing and not being overwhelmed by all the options out there.

For more on this, check out episodes 👉 EP005 The Quickstart Guide to Apartment Investing & Apartment Syndication, and EP017 the 9 Numbers You Need to Know. 

Let’s cover another ground rule before taking the deep dive to invest– you have to understand the market cycle and learn how to navigate it successfully.  Like any relationship, there are ups and downs, and our relationship with the market is very much the same. 

We’re definitely not relationship experts but we do have a soft spot for the economy. Learn more on episodes 👉 EP041 Beat the Recession: How to THRIVE in Uncertainty and EP042 Protect Your Peace with a Solid Retirement Plan. 

Next up is finding your people, which we have built-in oh-so-conveniently for you through the Kitti Freedom Club, a passive investors club for everyday people like you. You see, here at the Kitti Sisters we focus on a risk mitigation strategy.  

We’re big fans of the term calculated risk because we know just like in life– apartment investing has its fair share of risk involved. 

We’ve also learned how to pull the trigger on deals through a combination of competence and confidence because we learned how to manage risk. 

So what does “managing risk” look like? By doing effective and conservative underwriting and focusing on locations that have high barriers to entry. 

Another thing to consider is proximity to major thoroughfares, and if the location has a healthy supply of well-paying jobs. All these factors can help you weigh the cost of risk.

The main thing we want you to hear is this: you can do this. If you know our story, two girls who grew up in an overworked immigrant household who went from fashion manufacturing to investing in real estate, YOU can do this too. 

The timing of this opportunity is now, 🤩🤩 so if there’s a part of you that has made timing an excuse as to why you haven’t invested, we can’t be more clear: it’s go time.

So you’ve decided to take the plunge. But…

Why don’t passive investors have any control over their investment? Can passive investors help out in the deal?

Two words: asset protection. As a passive investor or limited partner this is huge. You’re usually limited in terms of how much you can lose on the amount of investment. For example, if you write a $100,000 check, that’s generally the most you could ever lose. But the minute you start inserting yourself into the management decisions, and demanding that you should be consulted – now you’re making decisions and that asset protection piece wanes away. So as a passive investor, you don’t want to be involved because you want that limited liability.  That’s why you’re generally called a limited partner. 🤓🤓

Now that we understand asset protection, there’s one question you should be asking your sponsorship team: 

“How often are you going to communicate?” 

For us, we do monthly communication with our passive investors.  While we know other sponsorship teams do it every quarter, we prefer to communicate as often as possible because we know our passive investors want to get property updates. Like in any relationship, communication is key.

Why are passive investors getting a 70/30 or 80/20 split?

First of all, this is awesome! Your input is close to zero and your output – you’re getting a 70/80% split!  

But how much time do you actually spend throughout the hold period? Maybe 2-3 hours upfront?  The typical hold period is 3-5-7 years, right?

The truth is as passive investors most of your work is done upfront.  You’ve got to get in front of the right sponsorship team, get to know, like, and trust them.  Sometimes over a charcuterie board and wine, of course.  

Once you’ve done your due diligence on the team, and the investment opportunities, and funded the deal, you just sit back and relax and watch your money make babies. 

We love a good money baby! Honestly, we think that’s why people love passively investing so much.  In life we’ve been told “you got to trade time for more money!” but not if you learned to leverage your money to maximize the profit! 😍😍

Think about it – you insert 1-2% of your effort, and you’re making 70-80% of the profit!  That’s insane!

The best part is that while your general partners have to build relationships with the brokers/sellers, source the deals, underwrite the deals –sometimes 10s of deals before they win one, fly around and tour the properties, hire the right property management team, build relationships with passive investors, raise the capital, put together a sound business plan, negotiate with the lenders to put the right kind of debt on the asset, close the deals, and be at risk with their hard deposit (for the deal size we do that’s usually over $1M upfront)…iif for some reason we can’t close the deal, we risk losing that $1M for free.  

Not to mention, we get to operate the asset for the next 3-5 years – executing and pivoting so that the business plans make sense, all to increase the net operating income.

So why now?

Why not? First and foremost, inflation is at a 40-year high. But this isn’t something to be scared of, especially if you’re investing in the right assets. Multifamily apartments are one of the best inflation hedges within commercial real estate because lease structures in multifamily apartments are far better positioned to benefit from an increase in inflation than any other asset type.

Other commercial real estate assets might have lease durations of five, seven, or even ten years. While multifamily leases can reset at 6, 9, or even 12 months. And when leases reset, that gives us the opportunity to re-price rents, as prices increase. 

Which is huge. Think about how much rent has increased in the last two years alone, talk about putting yourself in the middle of the cash flow! You could be reaping some of those major returns. 

On top of that, if nothing else, right now there is a great opportunity in real estate overall. 

That includes us! Back in July 2022, we closed a $71 million deal, 312 units, class A, in Houston, TX. Plus, the seller gave us a $3 million discount although the appraised value is $78 million.

Yep, the property value had already gone up by $10 million on day 1 of ownership. 

Of course, no one has the crystal ball 🔮 to tell you when that will be, right? So take advantage of what you have now, and you are far likely to get better terms. Who knows, you might only need 100k instead of putting all your money on day one! 

Next, keep the fundamentals solid. Or, keep it simple.

What you might not know is that rent growth and occupancy are still at an all-time high. There’s still a big gap between home affordability and the cost of rent in apartments.

These are some of the reasons for why now.  For more why now answers, check out 👉 EP065 The Real Discount in Real Estate.

But what happens if the deal doesn’t close?

If the deal can’t close for some reason, which we’ve heard some GP teams have experienced, passive investors will get the notification and your money will be returned.  It’s rare, but it can happen.  This is a good question to ask!

All this is great, but I’m so used to doing everything myself, can I buy my own apartments?  

Simply put, the answer is of course!  However, you need time, team, talent, and relationships on your side.  If you’re making 70-80% of the total return while you’re asleep, resting, and playing, why trade more time for more money?  We love leveraging, and have our money work for us, not the other way around.

Thanks for all these questions; asking questions is always a smart move! As our friend Benjamin Franklin said best, “An investment in knowledge pays the best interest.” 🙌🙌

 

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