Managing your real estate investment properties can be a business by itself. The calls on evenings and weekends about leaks, breaks and tenant complaints can quickly make you wish to have your freedom back. You may have built wealth with your investment, but now your time is consciously and subconsciously controlled by it.
Recently I’ve heard more and more people who have become wealthy through real estate say that, after years of actively managing their investments, they are looking to take a more hands-off approach to free up their time. Most want to continue to invest in the types of assets they are familiar with but don’t want to deal with the day-to-day operations anymore.
There is a sense of control when you are managing your own properties, so putting trust in others can be a big mental hurdle to overcome. Selling off a portfolio creates questions such as where and when the capital will be reinvested and at what rate of return. Those alone are enough to keep people stuck in their ways.
1. Get professional guidance on how to minimize your tax liability before you sell your existing portfolio.
Working with your accountant and tax attorney to ensure you are not paying more in taxes then you are required is being a good steward of your resources. The more you retain, the more you have to put to work again. The cost of hiring good advisors is worth every penny.
Get multiple opinions on what you can expect to net from the sale of your existing assets. Be conservative. Determine what rate of return you need in order to generate the same or better cash flow than your current. Be realistic and research the returns that are typically produced from the property types and strategies you intend to reinvest in. If your apartment building portfolio is netting you $200,000 annually and you intend to reinvest $2.5 million, then you need to hit at least an 8% cash-on-cash return on your next investment to see the same cash flow.
3. Get the capital reinvested quickly by knowing how you want to allocate it in advance.
The real estate you are invested in is hopefully producing strong cash flow before you sell, and as soon as you go to cash, that will stop. The longer it sits idle, the sooner you will need to tap into it. Spending it could cripple your cash flow in the future.
4. Invest in what you understand.
Determine the property types and strategies you want to reinvest in and do your homework. Ask yourself what you would reinvest in if you were going to continue to be active. Where have you earned the best returns? How are the property types or strategies going to perform in the current market? Many strategies perform well in appreciating markets but very poorly when values are peaking and vice versa. What have you looked to acquire but could never find the right opportunity? Aggressively research anything you are considering and seek advice from other investors who are hitting the returns and have similar risk tolerance as you do.
5. Choose the right managers/partners to invest with.
Now that you won’t be the driver of your returns, you need professionals who will manage the investments with goals and risk thresholds you are comfortable with. Strategies can differ greatly, even when acquiring the same property type (stabilized, value-add, distressed, debt, equity, short-term trades, long-term holds, new construction, etc.) so understand theirs. Make sure their fees and profit interest (“promote”) are in alignment with your interests.
Spend time talking with them to determine whether you will want to be invested with them for years to come — personality can make or break a working relationship. Look for transparency, their ability to return calls or emails promptly and clearly. Request referrals. Research their background online. In general, look for a similar mindset in how they operate. For example, they treat tenants and employees respectfully, maintain property the way you would expect, minimize liability and have integrity in their business dealings.
6. Consider investment timelines.
Many offerings have a number of investors and/or a number of assets being pooled so most passive investments are highly illiquid and have predetermined timelines. Seek advice from your financial planner, accountant and family who may be affected to determine how long your capital should be committed. Single asset syndications or funds with pooled assets will usually have a predetermined investment period. You may seek legacy assets that can exceed your lifetime and provide for your heirs.
Reinvesting the capital each time it is returned is something that needs to be considered. Markets are somewhat unpredictable so an informed manager will time the disposition of assets in line with the market cycle but unexpected market conditions can cause delays.
Successfully transitioning from an active to a passive real estate investor is a new challenge and will create both a change in career and lifestyle. Our partners and friends who have done it now have the freedom to travel and spend time with their families that they struggled with when they were involved in the business of their investments. Freeing yourself up to enjoy the wealth you worked hard to accumulate can be one of the most rewarding decisions you will ever act on.
Mario Dattilo , Forbes Councils
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