How to vet a passive investment opportunity -- learnings from 1,000+ investor calls and 45 passive investments

Over the last 18 months, I have had conversations with over 1,000 passive investors. Often in these conversations, I get asked how I vet a passive investing opportunity for my personal portfolio as this is ALL I invest into. After investing into over 40 different syndications or funds, below are the most important components of an investment to me.

1. Operator -- The "who" matters more than anything else to me in nearly every aspect of life. The people that you are trusting your hard earned capital with need to have the following traits:

• Skin in the Game -- both financial and reputation, the later is more important in my option. The financial portion speaks for itself, I love seeing that an operator puts their money where they are recommending their investors to do so. The reputation portion of the equation is crucial -- investing with well known groups that have a reputation in their given space means that bad publicity from lack of communication or returns would cause significant ripple affects in their business.
• Track Record -- in some scenarios, the operating team has done this exact same business plan time and time before. In other scenarios, the group be on the newer side and still executing one of their first business plans. Given the option, I prefer the former, but you may pay for it. The deeper the track record of the group -- the fees are typically higher and the profit sharing is typically less in your favor. This is a trade off as the risk of execution is lower, but so is your upside if there is performance. Personally, I love to invest with up and coming groups who operate with institutional like aspirations, but are still scrappy, driven and offer more favorable terms.
• Financial Security -- people who are financially secure have a less likelihood of making emotional, personal decisions that can impact the success of a project (they shouldn't need cash from this deal to live.) Picture this, the 5 year project is 18 months in and the main operator runs into a personal financial issue -- that person may be very tempted to prioritize themselves over their investors. I want to invest with someone who is in a rock solid financial place prior to doing this deal.
• Longevity -- nearly anyone can put together one deal and get it closed. I want to invest with groups that have the intention of being around for a very long time and doing many deals. To me, if they operate with that mindset, they become more focused on the process and systems they put in place, which then leads to higher performing projects and repeatability.
• What did they give up -- I have no issue investing with lesser experienced operators within a space if they have excellent operational backgrounds/high levels of success in other applicable fields. Personally, I'd rather invest with the ex-sales leader from a tech company that is used to earning $500k+ per year than the house flipper who left their $75k/year business (there is NOTHING wrong with that, but if I had to pick, I know where I stand.) The sales leader who was a $500k+ employee has a few things going for them:

1. Uncomfortable conversations -- as an investor I want to know right away when something is not going exactly as planned (hint: in every deal, no matter how successful, this will happen)
2. Baseline for success -- if they left a $500k+ role to pursue this full time, they likely have a higher standard for what they view as a successful business vs someone else. For example, if they left a $500k role and earned $300k the next year, they may view that as a massive failure, while someone who left a $75k role and earned $150k the next year, may view that as a huge win.
3. Operate within a system -- the ex-executive likely lead an organization of leaders who lead leaders, this is huge. This person knows how to systematically drive change -- wether it be 100 person sales org, 200 unit apartment complex or $50m portfolio of short term rentals spread across the country.

2. Market -- Location, location, location...

• Market demographics -- is the market growing in terms of job growth, population growth, income growth etc. Assuming rent growth is a very difficult forecast, but if the afore mentioned metrics are all positive, the likely hood of rent growth is increasingly higher.
• Job diversity -- the economy should have a wide range of employment that is never too dense in one given field. I always give this the "Detroit during the overseas car manufacturing shift" test. Ultimately, we want the economy of a market to be stable if one profession goes under or takes a hit.
• Does this market support the type of project you are investing in here - for example are there regulatory laws that prohibit short term rentals in that area.

3. Asset Class -- Does this class of asset align to your risk profile and investing goals. Below I will break down the asset classes that I have personally invested in and why they are in my

• Short Term Rentals

1. High Cash Flow -- This is the highest cash flow from day one investment that I have in my portfolio. Currently in this space, you are compensated heavily for taking on vacancy risk (the risk of not having a 12 month lease signed) and managing more hospitality like operations for your guests.
2. Early Institutional Interest -- We have seen multifamily, self storage and now mobile home communities values increase over the last few years due to institutional interest. When this happens, we see cap rates compress, this means that each $ of net operating income is worth more upon sale or refinance of an asset. For example if a property had $100,000 of net operating income and was trading at an 8% cap rate, then this asset is worth $1.25m. If this same asset is now trading at a 5% cap rate, then the value rockets up to $2m. This is the power of institutional capital coming into play -- they drive cap rate compression within an asset class. Personally, from what I have seen within this space, the institutions are heavily interested in making this the next space to pop.
3. Ability to Scale -- Or lack there of...this space is extremely difficult for operators to efficiently scale. Most short term rentals are focused around single family houses, this means that scaling requires MANY acquisitions vs buying one large asset. For anyone who has tried to do this on their own, they know the difficulties that come with finding one good deal, let alone hundreds. After finding the right property, then debt is needed, which in this space is not an easy lift. From there, the property needs to have construction done, designed, staged, branded and built up with reviews. All of this is to help validate point number two -- institutions want to be in this space, but do not have the desire or capacity to the above time and time again. This means that they will gladly pay a compressed cap rate (see the above numbers to highlight how meaningful this is) to groups that scale and consolidate portfolios for them.
4. Adjusting with Inflation -- If the last two years have taught us anything, it's that pricing can change and change fast. One of the things I love about this space is that you can adjust the prices of your stays every single night to keep pace with rising expenses or to capitalize on opportunity within the market. While there is vacancy risk of not having a 12 month lease, there is also operational upside that can be capitalized on.
5. Lack of Institutional Operators in the Space -- this is extremely important due to when institutional capital comes into an asset classes, cap rates compress (valuations rise.) Personally, I believe we are in the second inning of what could be a very interesting and profitable few years.

• Multi-Family Apartments

1. Basic Human Need -- this one is as simple as it can be, people will always need a roof over their heads. The demand for apartments is tried and true. The demand for apartments will NEVER go away.
2. Value Add Business Plan -- commercial assets are valued at a simple equation (Net operating income / cap rate.) This means that if you are raising rents due to renovations or just bringing the rents to market (with the cap rate remaining constant) then you are forcing value into the asset. The math here is meaningful if you see the example below:

• 200 unit apartment complex, 6% cap rate
• $200 rent premiums are achieved across all units -- $200/unit/month * 200 units *.5 (expense ratio) / 6% cap rate = $4m of additional value created (numbers rarely work out this clean, this is solely to show the value of forced appreciation)

3. Comfortability -- people understand apartment buildings. This is about as simple as it gets when breaking into the passive investing world. I would be shocked if each person reading this hasn't lived in an apartment complex, or at the very least, know someone close to them who has. People love investing in things they understand, myself included, this is very understandable.

• Mobile Home Communities/ RV Campgrounds

1. Depreciation -- this is huge for the people who can take advantage of real estate professional status or have the ability of shielding other passive gains. Relative to multifamily, you can see ~2x depreciation as an investor in this asset class.
2. Operational Expenses -- the type of investments that I have made personally within this asset class have been focused on becoming a "land lease" investment with amenities. The focus has always been to shift the community to all tenant owned homes. This is excellent for a few reasons:

• The residents have a greater pride in ownership, so they keep the community nicer
• Moving a home is extremely expensive relative to the lot rent -- this can cost over one full year of rent to move a home
• Tenant turnover is typically below 10% each year vs the traditional 40-60% in multifamily apartments

3. Affordable Housing Option -- this will always be a huge one for me personally. This is one of, if not the most affordable housing option for people in times of an economic downturn.

4. Rent Increases -- we always look at rent increases as both a $ amount and also as a %. In this asset class, due to having the lowest rents across the board, a small $ increases ends up being substantial as a %.

• Self Storage

1. Automation -- within storage, there is the ability to implement significant automation and technology within a facility to drive down operational expenses.
2. Monthly Rent + Headache Factor -- rents are adjusted on a month to month basis within most storage facilities. By increasing rent $10, this could be a 10% increase in total revenue for that unit. That $10 per unit/month could mean as valuation increase of over $1,000 for the storage complex...per unit! While $10 is likely not enough to drive someone to move all of their belongings out of storage, it is enough to make a huge difference in the valuation of the asset.
3. Performance in a Downturn -- storage has the ability to be extremely recession resistant. In an economic downturn, people may downsize their homes or move in with family members -- all of their stuff has to go somewhere.

• Debt

1. Liquidity -- Think of a high end money market account. Personally, I always like to have the ability to access a portion of my net worth as a safety net, but more importantly for the ability to go big when on an investment when a "homerun" type projects hits my desk.
2. Predictability -- While this offering will not pay the highest return, the return is very predictable and consistent. This allows me to budget cash flow from my investments easily.

III. Deal -- does this specific investment underwrite to a place where you are comfortable and aligns to your goals?

• Hold Period -- How long do you want to be in this investment or type of investment for? This is a big driver of how to select the right opportunity -- projects can range anywhere from three months to 10+ years.
• Cash Flow or Growth -- All investments are different, but can be generalized into a few main categories. The former is an investment where the goal is to provide investors cash flow every month or quarter. The later is focused around doubling the investors capital as quickly as possible. Then, there is everything in-between.
• Liquidity -- How long will it take to get your initial investment back? Some investments model a refinance that will return investor capital, while others only project a sale to give investors liquidity. Also, many investments like the ones above are NOT liquid -- ensure that you know what you are committing to ahead of wiring your funds.
• Risk -- This one is a given. Ensure that you evaluate the type of project that you are investing on based on the worst case scenario, most likely scenario and best case scenario and what would have to happen for each one of these scenarios to play out. Digging into the operators on "what can go wrong" is crucial to ensure they have been thoughtful about how to mitigate downside risk. For me, seeing a deal that is well capitalized and has strong, longer term debt always makes me feel more comfortable.

Want to Invest Passively?

If you are interested in learning more about passively investing in real estate, you can sign up to learn about upcoming opportunities?here ?or schedule a call?here .

About the Author

Sam Silverman is the founder and Principal of Silverman Capital, a private equity firm that offers passive?investing?opportunities to limited partners through both funds and syndications. With a primary focus on value-add multifamily, Silverman Capital has invested in over 8,000 units with a combined value of over $1bn. Sam's main responsibilities include oversight on acquisitions, sourcing investor capital, investor?relations and building partnerships?with top tier operators. Sam has a background in building global sales and go-to-market organizations from the ground up in software and tech companies, selling into the world's largest brands. Currently, Sam lives in Tampa, Florida, permanently moving there after playing baseball at the University of Tampa, completing a Bachelor of Science in Marketing.

To learn more, check out Sam's?website .