Question 1

Why should I passively invest as opposed to just buying a property myself?

Accepted Answer

This is a very common question, especially among sophisticated investors. There are many reasons to take the passive approach vs the operating role.

1. The first reason is that the operating role is very active and require specialized knowledge, skill, and ability to execute when it comes to complicated asset classes like multi family or commercial real estate. So in short the main reason is here is to protect your time. 
2. The second reason is to reduce risk and increase operational success. Having specialized knowledge, skill, and ability to execute are the core features of success with larger scale deals. The more complicated a deal is, like a 100+ unit multifamily apartment, the more value the operating partner brings to the table. There is enormously valuable processes and systems an professional operator can provide.  Because of this, the return profile may be similar to what an investor could do on there own but without any of the work. In simple asset classes like single family residences, there is less difference between best in class and mom and pop. 
3. Due to the distinction between the class of shares between The General Partners (Operating Partner/Sponsor) and the Limited Partner (Passive Investor), the sponsor is the only party to incur credit and liability risk. This is a major value add for passive investors. They also get access to low cost financing through the GP's track record without the risk associated with personally guaranteeing the loan. Eliminating these challenges of investing in real estate shifts the total risk profile of investing without significantly deteriorating the returns. 
4. Investing in passive syndications allows investors to rely on highly sophisticated operators who stand to gain a healthy return themselves, only if they deliver for investors first though. The investment structure aligns the incentive of the GP with investors fully.

Question 2

Why won't I have many voting rights?

Accepted Answer

In this type of investing the due diligence is focused primarily on the operating partner who carries the liability. Passive partners rely on the expertise of the operating partner.

It's important that passive investors who are not experts do not have influence. It's best the operating partner make the tough decisions, especially during challenging times. Voting right are usually limited to decisions like removing an active partner if that was ever needed.

Question 3

What if I need money back during the hold period?

Accepted Answer

For passive investors it is important to understand that this type of investment is typically illiquid and non transferable.

Dollars invested should not be needed for the duration of the investment. However, a  right of first refusal clause is often in the operating agreement to allow the option for the General Partner to buy the shares.

Question 4

What are the tax implications of this investment?

Accepted Answer

We are not accountants. This should be a question for your accountant and legal professional.

It will be depending on your situation and how you bought the shares.  Be sure to ask about the depreciation quality of real estate, which is an income tax deduction.

Question 5

What happens if I invest through my self directed registered retirement account?

Accepted Answer

We are not accountants or lawyers. But it is possible for you to invest in alternative asset classes such as syndications in both the US and Canada, and not be forced into stocks or bonds. This is a major advantage. Talk to your lawyer and accountant about this.

Very few people are aware that this is a possibility within their tax free registered accounts.

Question 6

What are the major risks of this type of offering?

Accepted Answer

Often the biggest risk is the operating partner in these types of deals. You should conducting due diligence around:

1. Systems and processes
2. Local teams
3. Team backgrounds checks
4. Property Management 
5. Accounting Systems
6. Legal Systems
7. Property Insurance

Question 7

How are the passive investors aligned with operating partner incentives in this type of investing??

Accepted Answer

1. One of the main benefits of investing in real estate, as oppose to exclusively investing in stocks or bonds, is that investors in real estate get the benefits of being highly financially aligned with the operators who are managing. 
2. Usually the General Partner must guarantee the loan, as oppose to Passive Partners who have limited liability.