10 Reasons Why as a Pilot I Switched From Active Investing to Passive Investing

# 1 - Headspace?

I got a call around 8pm from one of my contractors who was finishing tiling a shower in one of our houses. Turns out he found the drain was clogged and water was pooling up. I then had to call the plumber to come inspect the drain. The plumber blamed the tile guy for having put cement down the drain. The tile guy blamed the plumber claiming the plumber had recently replumbed that section and had thrown cement down the drain. This was a brand-new plumbing system for which I had just paid $13,000 to replace.?

I stood my ground and told them we are all grown ups here - it was obviously one of them who screwed up - not me, so they better figure it out between themselves as to who was responsible. I ended up not paying a dime to fix it.?

These types of problems arising from Real Estate projects are not uncommon. As a passive investor in 7+ different Real Estate syndications, I have yet to get a call from the operator or contractor about any problems arising in the property. Operators have asset managers that manage the professional on-site property management team and handle any issues that come up.

# 2 - Time spent during the project

One of the many perks of being a pilot is all the days off we get every month. Situations like the one above, and having to constantly check on the progress of contractors while also finding new projects, are very time consuming.?

The last thing I want to do on my days off while I’m out having a great time with my son and wife is to get calls from contractors asking me to solve issues and babysit them through them.

In projects where I’m investing passively, I get a detailed monthly report directly in my inbox with full financials, progress on the property, what issues came up, how they were handled, and the outlook for the following months. I also see the cash flow distributions hit my account via ACH.?

# 3 - Time it takes to find a deal?

Finding a deal requires a lot of work and hours. Gone are the days where you can pay retail for deals on the MLS or Zillow and make a good return on your investment.?

Finding deals now requires you to develop a marketing system that consistently generates leads for you. You then need to be submitting hundreds of offers and hope that eventually one of them gets accepted at the price that works for you. Once an offer gets accepted, next comes the due diligence process - doing inspections, securing debt, insurance, lining up contractor bids, etc.?

Passively investing requires less time to get into a deal. Once I have vetted an operator, it is easy to complete an investment in one of their deals. The typical process goes like this: fill out a form, join their investor club or list, schedule a time to talk and ask questions, wait for deals to be sent out, review the deal and the webinar, fill out a soft commitment, sign PPM documents, and wire your funds.

# 4 - Risk and liability

Doing my own projects required me to be responsible for everything that could go wrong. I was responsible for signing on the loan or raising the money if using private lenders, getting the proper insurance, and any other risks that could have risen from contractors working on the property or risking having the property get vandalized.?

With passive investing, your risk is limited to your invested capital. For example, let’s say you invested $50,000, your entire liability is those $50,000 that you invested. If anything were to go terribly wrong with the property, loan, or contractors - the sponsors are the ones held liable for it. Assets are typically held in LLC’s. Risk and liability within the LLC are split between General Partners and Limited Partners. Passive investors are on the Limited Partner side.?

# 5 - Economies of Scale

With a single family home, any small repair meant that I had to either use my own time or call a handyman that would charge me at least $200 just for showing up and doing something simple. Property management costs are high around 10% of the revenue. By investing passively in larger commercial properties (100+ units), economies of scale kick-in and we are able to get discounts on many of the services and vendors as well as afford on-site property management that can be anywhere between 2.5 - 4% for these larger assets. Having on-site staff allows repairs to be done by a $15-20/hr employee, thus reducing overall labor costs. In essence, my $50,000 investment on a large commercial property will go a lot further given the discounts obtained by economies of scale.?

# 6 - Valuation

Regardless of how much I put into a single family home or how well I renovate it, its value will not go much higher than those similar comparable properties in the neighborhood.?

Commercial real estate on the other hand, is valued based on its Net Operating Income. For example, if we find a 100-unit property that we can increase rents by $200 per unit, that will increase our monthly revenue by $20,000 or $240,000 per year. Let’s say that the property trades at a 5 CAP, then the math is like this: $240,000 / 5% = $4,800,000. By increasing rents $200 on a 100-unit building (and assuming no increase in operating expenses), we are able to increase the overall value of the property by $4.8M

# 7 - Diversification

With my single family homes I was stuck investing within a 1 hour radius from where I lived. I wanted to be able to travel to them easily so I could check up on them if anything came up. Passive investing freed me from that limited geographical location. I specifically work with operators who are the ones living within 1 hour from where the property is located. This way I’m leveraging their physical location to be able to invest in assets in other markets that I like.?

#8 - Vacancy risk

A single family home is either 100% occupied or 0%. Nothing in between. The only way to hedge against losing money every month from having 1 single family home vacant is to acquire a large amount of single family homes so that the loss of revenue from those few vacant homes is made up by the occupied ones. But scaling to such a number of single family homes is not really an endeavor I wanted to pursue.?

Large commercial properties can handle vacancy easily. In fact, most multifamily properties are around 95% occupied when in optimal occupancy. Banks consider a multifamily property “stabilized” when it's been 90% occupied for at least 90 days. Given the economies of scale, multifamily break-even points are somewhere between 60% and 80% occupied, depending on the type of debt and phase of the value-add.. This leaves a larger room for vacancy while still being able to cash flow.

#9 - Building a team

Successful active investing requires you to build a team around you - from brokers, accountants, contractors, lenders, attorneys, etc.

As a passive investor, I don’t need to build a team. I rely on the sponsor who already has a team put together and are experts at executing on the business plan.?

#10 - Paperwork

Active investing is paperwork heavy. You need to keep receipts, notes, spreadsheets, do bookkeeping to keep track of profits and loss so you can appropriately file your taxes and keep track of the performance of the property. As a passive investor, the sponsor takes care of all of that. I get a K-1 (tax document) every year that I give to my accountant so that he can appropriately handle my taxes and depreciation.?

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About the author

Satch Bernhardt is an airline pilot and the CEO and founder of V1 Capital, a private equity firm that provides investors the opportunity to invest in their highly curated selection of real estate investments. Focused on value-add multifamily and Short-Term Rental portfolios, V1 Capital has a portfolio with an equity stake in over 1,354 units, with a combined value exceeding $246MM..?

Satch’s main responsibilities include developing partnerships with top tier operators, investor relations, and allocating the company’s funds to minimize risk and maximize investor’s returns.