What to Expect During Your Passive Real Estate Investment

You have made a decision to invest in a passive real estate investment syndication that offers great returns and with a team that you know, like and trust. You have been bored to tears by their mounds of paperwork including the Private Placement Memorandum, the Operating Agreement, and the Subscription Agreement. It was 150-300 pages of legalese that you obediently read and understood. You wired your $50,000 minimum investment from your self-directed IRA to the operator’s bank account. You received an official confirmation that all paperwork was in order and that you were officially one of the many limited partners of a multifamily project that you believe in.

Now what?

The passive real estate investment adventure continues. Will it be a bumpy ride, or will the syndication team execute every aspect of their business plan flawlessly? Welcome to the world of passive real estate investing.

Upon Closing

I once participated in a passive real estate investment syndication that had its closing delayed by factors out of the sponsor’s control. This was during the 2020 pandemic when everything was plagued by disruptions. But the sponsor persevered and kept all of us abreast of the latest developments. They never went radio silent. Communication was key then, as it is now. All syndication teams should offer this level of reporting at a minimum. Exceptional operators will keep their investors informed of developments and milestones all along the way.

As soon as the project closed, I’m sure everyone on the syndication team breathed a sigh of relief. I know I did. We immediately received an email telling us that the escrow had closed and that we were all the new part owners in a large apartment complex.

Included within that note was a high-level overview of what to expect moving forward and answered some frequently asked questions, including the one about the timing of our first cash flow distribution. It also addressed the first few onsite repairs to be made. In this case, the previous owner of the property had left water leaks un-repaired, adversely affecting the net operating income, and by extension, the value of the property. By fixing these leaks and avoiding the uber high water bills, the syndication team will be able to immediately add about $1,000,000 worth of value to the property. This is forced appreciation at its finest, and underscores my faith in the team to make my passive real estate investment passive real estate investment grow.

Progress Updates

You should expect monthly progress reports of the syndication project via email. These might include topics like the current occupancy or vacancy, the number of units that have been renovated that month, tracking status with the business plan, and hopefully some photos of the latest improvements. There should also be some clearly defined priorities or goals for the next few reporting periods, budget status, upcoming situations or market conditions to address, and even recent resident activities.

If a significant challenge arises that all the limited partners should know about, a good syndicator will not wait until the next monthly update or newsletter to bring it to your attention. They will get on it right away, and they will tell you how they are solving the challenge. These are unexpected events that come up and must be dealt with immediately. An example might be that the property was flooded and that residents are being moved to hotels until the water subsides.

Financial Reports

Every quarter, there should be some detailed financial reports sent to you via email or made available to you on the syndicator’s investor portal. While the monthly passive real estate investment progress reports are relatively high-level overviews of the various ongoing initiatives at the property, the financial reports should be very detailed, showing where in money came in or went out. There should also be some kind of comparison of the actuals versus the pro forma numbers that were presented to you before you invested. Ideally, you would want to see that the operator under promised and over delivered, and that renovation projects are under budget and/or incomes have been better than projected.

You should be presented with a rent roll, a document that shows the rental income potential, rents that are due and rents that have been collected, as well as which units are rented and vacant. It only shows gross rent collected, not the net rent after expenses. This information is found on the profit and loss statement (P&L).

The P&L is usually organized into the trailing 12 months, and is sometimes referred to as a T-12 (for trailing 12 months). Overall, this is a line-by-line breakdown of exactly how the property is doing financially. This large spreadsheet will account for every dollar spent at the property. Some people find these boring, but I like to look at a T-12 to see if there are trends in spending that can be averted or taken advantage of.

Cash Flow Distributions

Finally, the whole reason you got onboard with passive real estate investing in the first place, the distributions. I like to think of this as mailbox money, in that I do not have to do anything on a project other than making that initial investment, and money ‘magically’ appears in my account every month or quarter via direct deposit.

The amount distributed will likely vary each time and will be directly affected by the amount of money there is available to distribute, as well as if there is a preferred return, or how any profits are supposed to be split. It is not uncommon for distribution in the first year of a syndication to be minimal or nonexistent. This is usually the time period where the value-add business plan is being executed, and there is a lot of capital expenditures.

You should expect the investor portal to allow you to see your investment account balance as well as the overall value of your investment shares, just like you would when you visit your bank account online. You should also see recent account activity regarding distributions. These notifications should be very granular and include amounts of return ON capital versus return OF capital.

Schedule K-1

You can expect to receive a Schedule K-1 every year during tax season that should be attached to your tax return, and shows your share of income, deductions, and credits. This will likely show up in March or April, but can be delayed for various reasons. This is common. If this happens, you will it is advisable to file for an extension so that you do not get hit with a failure-to-file penalty. Estimated taxes still have to be paid at this point, so you might need to contact the operator and ask for draft K-1s. This will help you determine your estimated tax liability (if there is one). Uncle Sam always wants to get paid.

IRS Form K-1 1065 Passive Real Estate Investing

Final Word

It can take a bit of set-up effort to get to the point where you are investing passively in syndications, but once you become a limited partner on an investment, your work is basically done – except for tax time, but you will likely pass the annual K-1s over to your tax preparer and be finished. I really like the idea of my money growing without my involvement with day-to-day management decisions. I like being part of the cheering section on the sidelines. It gives me time to focus on other things in my life – like exercise.

Helpful Link

EquityMultiple

This article is not a substitute for professional, legal or financial advice. Please read Disclaimer.

Many of the links on this website leading you to products or services may be affiliate links from which I may receive compensation. These commissions help keep this website operating. I only promote products or services that I feel will truly deliver value to you. Thank you for your continuing support!

Bryce Cannon Witcher
Bryce Cannon Witcher
Bryce is the founder of Actively Passive. He has over 20 years' experience in real estate investing, and began flipping houses in the historical districts of Phoenix, and also held rental properties for the long term. He believes that at our current level of technology, passive investors can now take part in opportunities from their couches in the comfort of their own homes. Bryce is passively invested in 82 apartment units across the US, and as a general partner, will soon be offering investment opportunities to friends and people within his personal and professional network.
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
SHARE

Download

Definitions to the industry terms used on this website.

5 1 vote
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
Categories

Start Here

Just getting started? This article will map out your learning experience.

Population Growth and Migration – What Does This Mean for Your Investment?

Population Growth and Migration – What Does This Mean for Your Investment?

Looking for places to invest, and looking at multifamily syndication investment opportunities? Seek out opportunities in high population growth. Growth in population creates demand for housing and helps keep rents maximized – and your investment.

Read More
How Much Real Estate Should be in Your Investment Portfolio?

How Much Real Estate Should be in Your Investment Portfolio?

Blindly following traditional rules of thumb can leave the investor more exposed to unnecessary risk. The right allocation for you will depend on your risk tolerance, time horizon and additional factors specific to your unique situation. Let’s take a look at some things you might want to consider.

Read More
Good and Bad News on Using a Roth IRA to Invest in Real Estate

Good and Bad News on Using a Roth IRA to Invest in Real Estate

One of the coolest things about using a Roth IRA for investing in multifamily commercial real estate is that you do not pay any taxes on any gains. Find out how.

Read More

The Split – 2 Profitable ways to Share in a Project’s Return

When looking at different multifamily syndication investment opportunities, you need to be aware of the split. An offering will generally specify the percentage of profits and where they go.

Read More

5 Tips for Preserving and Increasing Your Net Worth

Throughout all of his many investments over the years, and gaining investment momentum, a friend of mine has adhered to some guiding principles that he feels other people could use as well.

So… What are the tips?

Read More
Passive vs. Active Investments

Passive vs. Active Investments

Learn the differences between investment styles within active and passive investing, from day trading in stocks and options trading to multifamily syndication investing. There’s a vast spectrum in effort needed to succeed in each and everything in between.

Read More
Tax Benefits of Multifamily Syndication

Tax Benefits of Multifamily Syndication

There are a number of powerful tax benefits that come with investing in real estate. It’s likely the number one benefit that are the massive deductions. Why do apartment investors get all of these great tax benefits? It’s because of government incentives.

Read More
Using Retirement Funds for Real Estate

Using Retirement Funds for Real Estate

Learn about putting your retirement funds to work in this highly informative discussion. By some measures, real estate has historically performed better than stocks, bonds and mutual funds.

Read More
Should you invest in Apartment Syndications or Single-Family Homes

Should you invest in Apartment Syndications or Single-Family Homes?

Many people who have full-time jobs are lured in to the idea of passively owning rental homes and the promise of “mailbox money.” Which is better: Apartment syndications or single-family rentals?

Read More
opportunity zone

Opportunity Zones – How to Defer or Eliminate Capital Gains

Using opportunity zones to re-invest our unrealized capital gains into projects that help local communities, we can defer and sometimes eliminate taxes on capital gains. Opportunity zones are designed to spur economic development and job creation in distressed communities.

Read More

Start Here

So… You want to invest in real estate but your time is limited and you do not want to have to manage tenants, toilets and trash.

Read More
• The Top 16 Commercial Real Estate Terms That You Need to Know NOW

The Top 17 Commercial Real Estate Terms That You Need to Know NOW

Average Annual Return (AAR), Capitalization (Cap) Rate, Cash-on-Cash Return (CoC), Cost Segregation Study, Depreciation, Due Diligence, Forced Appreciation, Hurdle, Income Statement (T-12), Internal Rate of Return (IRR), Net Operating Income (NOI), Offering Memorandum, Preferred Return, Rent Roll, Schedule K-1, Value-Add Property

Read More
Liability Protection – CYA – Cover Your Assets.

Liability Protection – CYA – Cover Your Assets.

I think you can interpret what I’m saying here. When you start investing in apartment complexes, you can expose yourself to needless risks in the form of tenant lawsuits. It is wise to do it the right way. Luckily, most syndications can offer several layers of protection.

Read More
Accredited Versus Sophisticated Investor – Which Are You?

Accredited Versus Sophisticated Investor – Which Are You?

Syndicators always ask their investors if they are accredited versus sophisticated investors, because it is required by law in the United States. Syndicators have to follow certain regulations set forth by the SEC in order to operate legally. There are 2 main categories of private placements, 506(b) and 506(c). Within these are certain restrictions affecting the kind of investors they can accept. This article will help explain which one you are.

Read More
8 Ways to Find Syndicators This Week

8 Awesome Ways to Find Syndicators This Week

Many investors who hold well-paying careers or operate successful businesses, pick investing passively with multifamily syndicators. If you are one of those people, you are likely to have already found some sponsors, or you need help connecting with some. Let’s discuss how to find syndicators.

Read More

Quiz – Winner or Dud? – Choosing the Right Investment

Once you make your connections with lots of good syndicators who have met your screening requirements, you will start receiving offers to participate in investment opportunities on a regular basis. I seem to get several each and every week in my email inbox. Most look too good to pass up, but with so much to choose from, you need to exercise discipline and only choose the best of the best.

Read More
Underwriting 101

Underwriting 101

Underwriting in the context of commercial real estate simply means researching all the extenuating factors of an investment and mitigating its risks by allocating resources appropriately. In English: Doing your homework… Learning everything you can, leaving no stone unturned, and figuring out what the cash flows will look like based on the available evidence.

Read More
How to Pick a Syndicator Getting to Know the Sponsors to Invest with Them Directly – Ask the Right Questions

How to Pick a Syndicator to Invest with Them Directly – Ask the Right Questions

Knowing how to pick a syndicator is a skill that every passive investor needs to hone. Before you evaluate syndication deal opportunities, you first need to evaluate the actual syndication teams. Good teams will usually have good deals, so if you are looking for opportunities, finding the team is the higher priority. But then, this article will show you what needs to happen next – the interview. Ask the right questions.

Read More
find syndicators SEC EDGAR database

Finding Sponsors by Looking at SEC Filings – a Tutorial to Find Syndicators

Now it is time to put on your detective hat to find syndicators. All syndicators in the United States are compelled to file their offerings with the Securities and Exchange Commission (SEC). This filing is a Notice of Sale of Unregistered Securities. Looking for these types of filings gives you a starting point for finding syndicators who have experience syndicating at least one project.

Read More
5 Multifamily Investment Opportunity Characteristics

5 Multifamily Investment Opportunity Characteristics

Each multifamily investment in a real estate project deal is unique, so it is sometimes difficult to compare them against each other. One way that you can do this is to compare the different characteristics of risk in order to make an informed decision on which one to invest in. You ultimately want to make sure that the riskier a project might be, that you are getting paid for that risk.

Read More
The Challenges of Active Real Estate Investing: Tenants, Toilets and Trash

The Challenges of Active Real Estate Investing: Tenants, Toilets and Trash

Active real estate investing can be very difficult. This article will make you think twice about taking on such a huge responsibility, especially when you can get the same returns passively through syndications. When actively investing, you are responsible for finding opportunities, financing them, renovating them, and renting them out. Managing your property takes time from you since repairs and maintenance calls are inevitable.

Read More
What is Multifamily Commercial Real Estate?

What is Multifamily Commercial Real Estate?

… any residential property consisting of 5 or more rental units. But there is a lot more to this that meets the eye. To truly understand how multifamily commercial real estate is defined, it is important to understand the context of where it fits within the myriad of commercial real estate types.

Read More
What to Expect During Your Passive Syndication Investment

What to Expect During Your Passive Real Estate Investment

Welcome to the world of passive real estate investing. The adventure continues. You have made a decision to invest in a syndication that offers great returns and with a team that you know, like and trust. Will it be a bumpy ride, or will the syndication team execute every aspect of their business plan flawlessly?

Read More
The Syndication Offering – What to Expect During an Investor Presentation

The Syndication Offering – What to Expect During an Investor Presentation

A syndication offering – that is, a passive investment opportunity – can be a lot of information at once, but it is usually quite structured. If you are just starting out, you are probably not that familiar with what one entails. There are key topics that should be discussed by the syndicator, and presentations usually have everything addressed below but likely not in the same order.

Read More
side hustle Make an Extra Income Outside of Your Day Job – Without Becoming a Landlord

A Rewarding Side Hustle – Make an Extra Income Outside of Your Day Job – Without Becoming a Landlord

So… You’re looking for an excellent side hustle and you want to invest in real estate, but do not have the time, energy or knowledge. You have heard that investing in multifamily rentals can be lucrative, if you only had the know-how and a huge down payment. Is there a way? Yes…

Read More
How Real Estate Crowdfunding is Making it Easier to Passively Invest in Syndications How Crowdfunding is Making it Easier to Passively Invest in Real Estate

How Real Estate Crowdfunding is Making it Easier to Passively Invest in Syndications

Using a real estate crowdfunding platform enables you to leverage the crowdfunding site’s due diligence resources, allowing you to invest even more passively than ever before. See how investing in syndications can be simplified. Review the list of crowdfunding sites at the end.

Read More
Reviewing a Syndication Business Plan – Does it make sense to invest

Reviewing a Syndication Business Plan – Does it make sense to invest?

A real estate syndication business plan outlines how your investment will grow. Learn how returns are generated, preferred rates of return (if any), predicted profits at sale, use of funds, as well as overall plan of things to improve in order to force the value of the property higher. Topics include acquisition, improvements, holding period, refinancing, disposition or sale of the property.

Read More
Forced Appreciation – How It Works and Why We Like It

Forced Appreciation – How It Works and Why We Like It

Forced appreciation is the increase in the value of an investment property due to an investor’s actions, in this case, making it more profitable. Contrast this with natural appreciation, sometimes called market appreciation, where uncontrollable (by the investor) market forces are at play.

Read More
Preferred Return vs. Non-Preferred Return – Which One Should You Pick

Preferred Return vs. Non-Preferred Return – Which One Should You Pick?

A preferred return is a return that puts you, an investor, in a preferred position when it comes to profit distribution of a project’s cash flow. Money goes to you first when there is a distribution, and until the hurdle of the preferred return is totally met, the syndicator gets nothing. A preferred position is first in line. If a project doesn’t make any money, chances are that you will not receive a return.

Read More
What is Passive Real Estate Investing

What is Passive Real Estate Investing?

Passive real estate investments are automated income streams that do not have any associated management responsibilities. One of the main differences between passive and active real estate investing is the amount of continuing effort involved to sustain the health of the investment.

Read More
Depreciation and Why it Matters

Depreciation and Why it Matters

This accounting expense can seem almost magical, but as assets tend to wear out over time, we can account for that reduction in value, deducting the cost of an asset over its useful life. Contrary to popular belief, depreciation does not fully eliminate the need to pay taxes… But it can delay them substantially and there are great benefits along the way.

Read More
analyzing real estate investments Listening to the Data – Why is it important to verify demographics - Job Growth Median Income Crime Rates Home Value Growth Flood Zones Schools

7 Smart Hacks For Analyzing Real Estate Investments – Using Data to Verify Profit Potential

When you are analyzing real estate investments in which you might be passively investing, you should be using these data demographic hacks to learn about the neighborhood where that property is. Bad areas can make bad investments, BUT great demographic patterns increase the likelihood of success.

Read More
Understanding Returns CoC IRR AAR How Do They Differ

Understanding Returns – What Are CoC, IRR and AAR and How Do They Differ?

CoC stands for Cash-on-Cash Return, IRR means Internal Rate of Return, and AAR is Average Annual Return. They are all various measures of how profitable an investment might be, though have their own characteristics. Understanding returns, and the different metrics that are used, helps compare different investment opportunities.

Read More
14 Pros and Cons of Investing in Multifamily Syndications

14 Pros and Cons of Investing in Multifamily Syndications

Investing in multifamily syndications has long been accepted as a stable, recession-resistant investment. Great wealth has been created with commercial real estate like apartments. On the flip side, great losses have been experienced as well. As all investments carry inherent risk, the benefits and disadvantages should be weighed and considered.

Read More
How to Invest in Real Estate with IRA Investing in Real Estate with Your Retirement Funds SDIRA Solo 401(k)

How to Invest in Real Estate with IRA

Invest in Real Estate with IRA? Possible? YES. Getting started can be very easy. Don’t be intimidated. Move your retirement funds into a self-directed retirement fund so that you can take advantage of IRS-approved investments opportunities.

Read More
multi-family real estate multifamily real estate class A class B class C class D

There are Different Classes of Multi-Family Real Estate – What are the ABCs?

Each class of multi-family real estate implies different levels of risk, reward, challenge and value. When reviewing syndication offerings, these are often referred to as class A, class B, class C and even class D. The characteristic classes help classify a property based on geographic area and physical condition.

Read More
Stock Market vs Passive Real Estate Stock Market vs. Passive Real Estate Investing Liquidity Historic Returns Stability, Predictability and Volatility Tax Advantage Time Horizon Leverage Passive Investing

Stock Market vs. Passive Real Estate Investing

Which one is better, stock market vs. passive real estate investing? This has been a heated debate for quite a while. There are many pros and cons on each side, and unfortunately it is up to you to determine which risks and rewards you are willing to live with and hope for.

Read More
How to Earn Passive Income from Real Estate

How to Earn Passive Income from Real Estate

We have been told by some that investing in real estate is a way to get rich quick. While this actually has happened to very few, this is not the norm. What you can count on though is that to earn passive income in real estate is a slow but steady way to accumulate wealth. There are usually many fewer surprises than when compared to the stock market.

Read More
managing investment risk Manage Risk Mitigation

Managing Investment Risk in Commercial Multifamily Real Estate

Managing investment risk is unavoidable, especially in passive real estate investing. Generally speaking, the higher the risk, the higher potential reward. The opposite is also considered true. Avoiding absolutely all risk is unrealistic, so your job as an investor is to determine how much risk is acceptable to you, and the things you can do to minimize it.

Read More
apartment syndication investing

Apartment Syndication Investing – What does a good opportunity look like?

You are ready for apartment syndication investing. You found several multifamily syndicators, like them and trust them based on their transparency and past performance. Two of the sponsors currently have projects they are working on and need to get funded. You have a difficult decision.

Read More
K-1 tax form

How to Read and Love a K-1 Tax Form

As part of an IRS income tax filing, the Schedule K-1 tax form is the annual reporting that you will receive from the sponsor in a multifamily syndication. It is used to report income, gains, losses, deductions, credits, and the K-1 lists the beneficiary’s share of these incomes, deductions, credits.

Read More
0
Would love your thoughts, please comment.x
()
x