Congratulations, you decided to invest some of your savings outside of the stock market or your traditional retirement plan. But now what? You know real estate can be a good investment option. But how do you get started? You’re probably not excited about being an HGTV house flipper on the weekends or looking to manage tenants and fix leaky sinks at all hours of the night. So you’re considering a passive investment in real estate. As a passive investor, you get a solid return and avoid the dirty work right? Well, no, it’s not quite that easy.
As this article from Mario Dattilo points out, there are some things you should do as a passive investor to make sure your investments are performing well. At Hardscrabble Investments, we can help you to stay on top of what’s going on with your passive real estate portfolio. We also invest alongside our investors, so we’re as interested in keeping tabs on our money as you are. We keep regular communications with our partners and we’ll keep you informed of what’s going on with your investments.
Below are the six steps from Mario’s article on how an investor should track a passive investment in real estate. With each step, we’ve added a description of how Hardscrabble helps you to stay on top of your passive investments:
1. Understand the Business Plan
Before you decide to invest in a property, you should get to know the operator and review their track record. You should also understand the objectives and projections for that particular investment. The operator of the investment partnership will provide this in the offering documents and investor presentations. At Hardscrabble, we know our operators well and review the details of the offering documents to help you understand how they intend to meet the investment objectives. We walk down each property before investing to evaluate the opportunity, the neighborhood, and the market. We will explain the business strategy, legal terms, partnership structure, cash flow distribution schedule, equity share, and other important concepts to you. Before you invest in a property, we make sure you understand the upside opportunity as well as the downside risk of each investment.
2. Review the Periodic Progress and Financial Reports
Once you have selected an investment, it is important to understand the reports that the operator sends on a periodic basis. Some operators will send monthly summaries, quarterly financials, or a combination of reports at various frequencies. As an investor, it’s important to understand the frequency, quality, and detail level the operator will communicate with you. At Hardscrabble, we monitor these reports and help you to understand what’s going on with your investment. We create benchmarks from the projections provided by the operator. Then we track the operator’s progress against these benchmarks to check their performance and alert you to potential issues.
3. Listen to Investor Conference Calls
Some operators present quarterly financial results and investor updates on conference calls like publically traded companies. Not all operators do this, some will only provide written reports. If they do host conference calls, take the time to listen in or review the recordings. Wouldn’t you like to hear directly from the operator what they are actually doing with your money? At Hardscrabble, we’re invested in the same assets as you, so we attend these calls, take notes, and circulate our observations to you. Since we regularly communicate with the operators, we can ask, and often answer, many questions on your behalf.
4. Analyze Performance Metrics on a Regular Basis
This is one of the most critical steps you can take as a passive investor. At Hardscrabble, we track performance metrics from the operator’s reports like occupancy, rent levels, and net operating income to identify trends that could affect returns. Tracking these metrics is crucial to understanding how the operator is performing and whether they are likely to meet the investment objectives. The metrics also provide a basis for asking questions of the operator (next step). Further, measuring your returns and comparing them to other opportunities will guide you with future investment decisions.
5. Ask Questions (Smart Questions)
Anytime you don’t understand something or need clarification about an aspect of the investment, Hardscrabble is here to help. No question is a dumb question. Often, we have heard a similar question and can provide an immediate answer. If we can’t answer the question, we have great relationships with our operator partners and will reach out to get the answer for you. You’re always welcome to contact operators yourself to seek direct answers, but we’re here to make it easier for you.
6. Stay Focused on Results, No Exceptions!
It’s easy to let day to day activities distract you from reviewing your investment performance. We can help you stay on top of these six steps and maintain good investing habits. We help analyze the details and review reports to keep you informed of how your passive real estate investments are performing. We can’t guarantee performance but we can help you understand the opportunity, the risks, and the performance throughout the life of the investment.
When it comes down to investing in real estate, commitment is the key to success. Real estate investing takes dedication for the long-term. Passive investors can achieve great returns over time with minimal effort. By following these steps, you will be able to understand your investment at a whole new level and be able to monitor your capital to make sure it is working for you. Have fun with this process and use it as a learning exercise. Involve your kids or other family members and you may find your real estate passion grow as much as your real estate assets.
Do you have a specific analysis routine for your investments each month? Share your process with me and we can discuss further.