If you’ve spent any time on the Prevail website section for real estate, you might be familiar with our perspective on investing with a group in off-market real estate transactions.
We think that they are a very powerful addition to an investor’s portfolio and can’t wait to share about them so that more people have an opportunity to learn about these kinds of passive investments.
We also know that real estate investments are a big commitment and may not be the perfect choice for everyone. So, here are the top four reasons why someone should NOT invest.
You can’t take your money out at will.
Investing in these kinds of deals means you agree to the terms and projected hold time. Your invested cash is illiquid for the duration of the deal until the asset is sold. And, these kinds of passive investments have longer hold times. Say the targeted hold time is 5 years, then you should plan on leaving your money invested for at least 5 years if not longer.
Other investments like stocks or mutual funds are more flexible and typically you can decide when to sell and get your money back fairly quickly, sometimes within minutes. By contrast, these real estate investments do not allow you to make withdrawals at all.
When you enter this kind of real estate transaction, you will sign a Private Placement Memorandum (PPM) that spells out and commits you to the hold time, liquidity, and other details. If you have any reservations about investing $50,000 and not having access to it for 5 years, don’t do it.
Reasons to NOT Invest In Off Market Real Estate Transactions: You have to invest a LOT of money.
Typically, the minimum investment on our deals is at least $50,000 which is a lot of money for anyone. That cash could fund a car, pay for school, pay down your mortgage. Lots of other ways that cash could be used.
Our advice? Don’t put $50,000 into a real estate transaction until you are sure that this is how you want to use the cash.
A little more advice? Don’t you dare put $50,000 into real estate if your savings account only has $51,000 in it?
Since you can’t get the cashback for several years, you need to ensure you have plenty of cash available for emergencies, additional short-term goals, and enough to cover, well, life in general. Go with your gut on this one.
You have to learn a new process.
Buying your rental property work pretty much like the game of Monopoly. Check out a property, buy it, rent it out, collect the rent.
Investing passively in sponsored real estate transactions is, frankly, very different. Most investors never set foot on the property, don’t know the lender or the management team, and will never talk to the tenants.
You invest in the property when it’s on its way to closing, all the prep work is done by others. It’s called passive investing for a reason….because you are not involved in day-to-day work and you get time freed up to work on other projects.
Reasons to NOT Invest In Off Market Real Estate Transactions: You have to give up control.
The last big difference with passive investing is the level of control you have over daily decisions made on the property, renovations, and tenants. In regular real estate investments, you retain creative control over improvements, screening tenants and whether you are planning to sell, when and for how much.
With passive real estate investments, all of these daily hassles are handled by management and put you in the passenger seat. It could be frustrating for you if you enjoy controlling aspects of the property. Developing a level of trust in the sponsor team is imperative.
If you don’t think you can handle allowing a team of professionals to make decisions for you, it would be best to cross passive real estate investing off your list now.
It’s no surprise that every deal sponsor yells from the rooftops about how great their deals are and true, they could be fantastic ways to grow wealth. Be careful, no investment vehicle is perfect and definitely no single investment style is for everyone.
If any of these top four reasons to not invest triggered you, maybe passive real estate investing is not for you. That’s okay.
Pick what is right for your situation, your family, and your financial goals, and be serious about making those decisions. Be honest with yourself and follow your instincts about both deals and teams.