On this episode of the Engineering Passive Income Show, Joseph discusses whether you should invest solo or invest with a partner or as a team. Joseph talks through the pros and cons of both and provides some questions he recommends you ask your sponsor to ensure you make the best decisions. Don’t forget to subscribe and leave a five star review if you enjoyed this episode!
HIGHLIGHTS:
0:00 – Intro
0:36 – Joseph states that this episode will cover the topic of if you should invest solo or with a partner or a team
0:43 – Joseph mentions how he started investing solo
1:40 – Joseph speaks about how he was trying to manage from abroad and was failing but thought he was doing great
2:53 – Joseph explains some hurdles you may run into if you try to invest solo
5:31 – Joseph recaps on the three hurdles and states that if you answered no to any of them then you should consider investing with a partner
5:40 – Joseph shares some ways in which you can invest with a partner
7:12 – Joseph provides some questions you should ask your sponsor to help you with your decision making
7:51 – Joseph explains why you want your sponsor to have five years’ experience
8:51 – Joseph advises you to at least ask to view your sponsors projections from a prior deal they have done if they don’t have five years’ experience
9:31 – Joseph states that you want to ask what market your sponsors properties are located in
11:06 – Joseph talks about how you can learn so much just by being a passive investor and just by going through the motions with another syndicator throughout the process
11:19 – If you liked what you heard don’t forget to go ahead and subscribe and leave a five start review
TRANSCRIPTION:
Welcome to the engineering passive income show, where engineers and other professionals come to learn how to generate passive income, grow their wealth and get their time back. Your host is Joseph Bramante, an accomplished civil engineer, oil and gas professional, multifamily investor, an industry speaker. Learn about investment alternatives, the same types of investments that he used to achieve Financial freedom himself broken down like only an engineer can. Now here’s your host, Joseph Bramante.
Welcome back engineers. On this episode, we’re going to discuss whether you should invest on your own, or if you should invest with a partner or a team. I actually started my career in investing solo and intimately familiar with this topic.
As an engineer, we are naturally DIYers. We like to do things ourselves to learn something and then do it. We don’t need anybody’s help. And I took that same exact approach. When I started, I read, you know, half a dozen books or so multifamily. This was before podcasts and then jumped in and purchased my first property.
Now, let me tell you how that went. It started off great as things usually do. It takes a few months for problems to show themselves. Now, mind you, I was still working about 50 to 60 hours a week overseas and 13 hours ahead in Papa new Guinea.
So when I would wake up in the mornings, it was already 5:00 PM in Houston, and I didn’t get an update for what had transpired for that entire day and respond after hours. So I was, you know, they’re already gone for the day and I’m responding. I was trying to manage from afar and failing miserably. But I thought it was actually doing a pretty good job. And the reason I thought I was doing a pretty good job, was because I was so busy at my day job that I didn’t have time to notice the terrible mistakes I was making and all the issues I was having. Managing the property was an afterthought, because the amount of passive income I receive from it was so small compared to my W2 income that I failed to give it the attention it needed.
After six months, all my errors came ahead and that property was negative cashflow. On top of that, I got laid off from my job. So obviously this was the extreme worst case scenario. And more typically what I see in today’s market is that when an investor makes some mistakes like this, maybe they try to buy apartment complex by themselves, maybe 10 to 12 units or so. And you know, when things don’t go quite right, typically the deal is just don’t cash flow or they don’t pan out like they had hoped and they just end up exiting, making little to no money, rarely do people find themselves in that extreme scenario. But what can I say? I’m extravagant like that.
So, how do you decide if you should, you know, try to take on a deal by yourself or partner with the team? Well, the obvious first hurdle is capital. You need to have enough capital to take down the investment and the investment needs to be large enough to support professional third party management. This last part is something that I missed and many others miss on their first deals. They find the first deal they can afford regardless of how small it is and they go in and take it down.
Well, the problem with that is, below about 75 units Multi-Family is too small to afford professional third-party management and you ended up having to manage the deal yourself. Well guess what? Property management is a full-time job. So congratulations engineers, you just added another 10 hours a week to your work schedule. Plus you have to deal with residents and trust me, engineers are the last people you want dealing with residents. So that handles that first scenario.
The second hurdle is experience. Now, do you know how to handle the intricacies of the particular investments you’re considering making? For a multi-family, Do you know how to underwrite the deal and negotiate the purchase agreement contract and negotiate the loan terms, execute on a renovation, manage operations, maybe deal with emergencies, maybe a building burns down and then the exiting the deal as well. Would you know how to handle all that successfully?
A common mistake is to oversimplify the industry. Imagine if somebody decided to invest in building a road, because they spent their entire life driving on roads. On the surface, it might seem simple enough. You just clear the ground, pour some concrete, paint a few stripes, but in practice we all know it’s much more complicated than that. And while doing those steps may result in a road, it probably won’t be the one that lasts that long. Well, the same is true for investments.
And last, do you even have the time to actively manage a property? Like I mentioned the example about investing in the small property, the ones that are generally below 75 units, you’ll need to commit about 10 hours a week to managing those investments, depending on their size, complexity, and location. Larger investments are generally easier to manage than smaller ones. Stabilize investments don’t require as much sophistication as value add and local investments don’t require as much travel and meetings as non-local, but regardless, they’re all going to require some portion of your time to actively manage.
Now, just to recap on those three hurdles, capital experience and time, if you answered no to any of those, and you should strongly consider investing with a partner. There are two main ways to do this. One is through crowdfunding platforms like real crowd and crowd street, which market deals from a list of sponsors, who they have vetted extensively and put them up on their public websites. Essentially, these platforms are middlemen to the deal and exchange for their vetting of the sponsor. They charge a small fee either to the investor or to the sponsor, which if to the sponsor ultimately gets passed on to the investor. So really it’s paid for by the investor.
The other option is to invest in a syndication, which is a direct investment into the deal. It has the least amount of fees, but does require investors do their own vetting of the individual investment and more importantly, the sponsor, or shall I say equally as important, the sponsor. You can also join groups like the 506C group, which is a platform only for passive investors, where they provide reviews and referrals for syndicators that they’ve invested with themselves. When starting out it’s best to leverage referrals as much as possible to get started as fast as possible while educating yourself along the way.
Now, investing directly with the sponsor through syndication is like betting on the jockey versus the horse. If you focus on picking the best sponsors, you won’t need to worry so much about underwriting the deal, since the sponsor will have a track record of choosing good deals. And to help you in your decision-making, here’s some questions you probably should consider asking them.
So regarding experience, you should ask the sponsor or at least one to know, when did they buy their first apartment complex. You were looking to see that they have at least five years of experience, which starts from the day they close on that first deal. The reason it’s important you’ve got to ask when they buy that first deal is because, you know, some people will try to count the time leading up to that first acquisition and maybe use some other kind of funny math. So it’s important that you always ask, when did they bought it and you can do the math from there. And the reason for five years is threefold. You want five years’ experience because number one, it takes 10,000 hours to master anything, right? That’s been tried and true. It has been stated in numerous places, five years working full-time is roughly 10,000 hours.
You also want to see the returns for the deals they’ve sold. And a typical deal has a whole period of about five years. So coincidentally, if they’ve got five years’ experience, more than likely they’ve exited a deal. So you can see what the returns were like on that deal. And then the third reason is because 45% or close to 50% of businesses go under within the first five years. And so you want to know if that syndicator has been around for the last five years. So you know that they’re going to be around, at least for the next five years. You want to know they have some staying power.
Next, you want to see their track record. You want to see the returns for the deals they’ve exited and the projections versus actual for their recent acquisitions. So this is particularly true. Maybe if they don’t have the five years, because maybe you’re not listening to this advice. And you’re saying, you know what? He’s only got two years, but I’m going to roll the dice. In that scenario, at least look at their projections for a prior deal they’ve done. You want to see that that projection pretty closely, you know, within say 20% to 30% matches what the actuals are.
If they’re much more than that, then they’re really just guessing and they don’t really know. And this comparison just to build on that, you want it to be on a month, over month as compared to the Performa. You don’t want to look at year over year. You want to see month over month, how they’re doing.
Next, you want to ask what market their properties are located in. Some will have a concentration in certain markets while others may be spread out nationally. Those with the concentration will tend to be less risky simply because they’re investing in their own backyards and accumulating a portfolio in a single market would indicate that the market is rather stable. You know, to do that same thing, you know, in general, you’re not going to be able to do that in a market that’s not stable. So it speaks well for both of them and the market.
A national syndicator, someone who’s spread out nationally will tend to be a little bit more risky simply because they’re not investing in their backyards and tend to be chasing trends for hot cities. It is like buying stocks at the top of the market, you pay a premium on the way up in the hopes that it continues to climb, but could also get dinged pretty bad once the hype is over and if that market were to go back down.
These are the three main questions, experience, track record and market that you should be asking the sponsor. Now there are some deal vetting that you could choose to do, but if you get these first three right, the chances are, the deal is probably just fine. When you invest outside of these three, then you have to get more hands on with the underwriting to make sure that everything checks out.
So engineers, which are you? An active or a passive investor? Both are perfectly fine options so long as you know what you’re getting into. And you can certainly start off in one and transition into the other. Me personally, I wish I’d have started off as a passive and then transitioned into active after a few deals. You learn so much just by being a passive and simply going through the motions with another syndicator throughout the process.
Well, that’s it for this episode engineers, I hope you learned something. And if you liked what you heard, please go ahead, and hit that subscribe button and give it a five star review. See you on the next episode of engineering passive income. Bye for now.
This was another episode of Engineering Passive Income with Joseph Bramante, download resources and join our private investor group at www.engineeringpassiveincome.com. Then be sure to leave us a review on apple podcast. Thank you for listening. And we’ll see you on the next episode.