A Passive Path to Profit

Ashley :
We know rookies feel like they can’t break into the market today or worry about having enough time to manage a portfolio while working their W2. But what if there was an investing vehicle that’s actually a bit more passive? That’s what we’ll be breaking down in today’s episode. This is the Real Estate Rookie podcast. I’m Ashley Care, and I’m here with Tony j Robinson.

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now guys, today we’re joined by Jim Pfeiffer, a former financial advisor turned passive investor, and he is now invested in over 100 passive syndications. He’s new to the BiggerPockets family, and this week his first episode airs on Passive pockets, the passive real estate investing show. To check it out, check any of your favorite podcast platforms or head straight to passive pockets.com. Jim, welcome to the show.

Jim:
Thanks for having me. I’m thrilled to be here.

Ashley :
Jim, congratulations on the new podcast.

Jim:
Thank you. It’s super exciting transitioning from what we had at Left Field Investors to now passive pockets. We’re just absolutely thrilled.

Ashley :
And I don’t know if you know this, Jim, but we used to do a segment here called Rookie Hazing. So all the OG listeners from way, way back in the beginning in 2020 would remember this segment. Tony and I thought, since your new podcast host to the BiggerPockets family, we had to do some hazing to you. This segment was where the guests had to sing their favorite song. Jim, take it away.

Jim:
Oh my God, you do not want, want that. Just kidding panic. I was about to hang up.

Tony:
Funny enough, I remember when I did it, I sang, I’m pretty sure it was like a Taylor Swift song because at the time, T Swizzy has some new bangers out. But

Ashley :
Everybody go back and find Tony’s episode. Comment below if you’re watching on YouTube and let us know what the song was. Can you

Jim:
See me sweating? Oh my

Tony:
Gosh. Well, Jim, super excited to have you, brother. So I know some of the things we’re going to discuss today is what exactly does it mean to invest passively, right? How someone can get started in passive investing and really how to incorporate this strategy into your investing portfolio. So Jim, again, you’re an expert in all these things, so we’re excited to jump in and see what you can teach us today.

Jim:
Sounds good. Let’s get after it.

Ashley :
Okay, so Jim, let’s start with just the basics. What is passive investing and how does it actually differ from active investing?

Jim:
That’s a great question. And when I started out, I was an active investor. I was an accidental landlord, absolutely hated it. I was terrible at it, and I just kind of kept buying properties because I liked so much what the financial part of it was. The cashflow was not great, but the appreciation because the time in the market I was doing it was fantastic. And the funny thing is at the time I thought I was a passive investor because what I was doing is I was buying turnkey properties and hiring a property manager to manage them. I was the asset manager. I didn’t think of myself as that, but I spent all the time arguing with property managers telling I didn’t want them to evict anybody. It would affect my cashflow, all things that you guys know about, and I was just terrible at it, and I thought I was passive.

Jim:
And then I found passive syndication investing. And what that is, you actually hire and asset manager, right? You invest in somebody else’s deal. They are doing all of the work. All you do, well, there’s a lot to do upfront, but once you decide on an operator, you decide on a deal, and I assume we’ll talk about that, then what you’re doing is you send a wire and you invest in their deal. So if it’s a multifamily property, let’s say they buy it for $10 million and they get a loan for 7.5 million, and there’s 2.5 million of equity that can be made up by a bunch of what they call limited partner investors. Those are the people that contribute 25, 50,000, a hundred thousand dollars. And then as I said, you’re along for the ride. Once you send that wire, all you do is sit around, hopefully collect distributions, hopefully collect reports and information about how the property is doing. And then when the property sells, hopefully you get all that appreciation. So all of the work is upfront, and once you invest, you’re kind of stuck. They’re long-term investments, they’re highly illiquid. But for someone like me who I evaluate the property, I vet the operator, it’s a great way to invest without having to, as they say, you avoid the toilets, tenants, and termites issues.

Tony:
Yeah, and I appreciate you breaking that down because I think in the world of social media, maybe in the age of social media, the word passive is kind of thrown around pretty loosely. And there’s a lot of folks on social media who will lead you to believe that being a traditional real estate investor, whether long-term, short-term, midterm or otherwise, that it’s passive. And as all of us well know on this call, that is not the case right now. You can get it to the point where it’s semi passive, where maybe it doesn’t take up all, it’s not a 40 hour a week job, which is great, but even if you have a property manager in place, Jim, to the point you just made, you still have to manage the property manager to make sure that they’re doing a good job. So the idea of investing in these, so-called syndications, I think are one of the only true forms of passive investing that I’m probably just like debt lending, but those are the only two things I can think about where you can just kind of write the check and then get your return five to seven years later, whatever it may be.

Jim:
Yeah, I would totally agree, because one of the things that if you look at it at passive investing, you aren’t doing all of the work, but you’re doing the vetting. But what happens is if you are someone who, let’s say you’re really good at construction or you can swing a hammer or the Columbus, Ohio single family market super well, then you can be active, meaning you’re the person buying and managing the properties, but you can turn that into something pretty passive because you have an advantage. You can do these things, especially if you’re hiring a property manager. So that’s one thing in syndications, if you don’t have a specific skill in that, then you can still get the returns from real estate that we all love the tax benefits from real estate that we all love without having to actually do all of the work on the properties. There’s a whole bunch of work in education you need upfront, but once that property goes live, you’re not doing anything. You can’t do anything. So it’s just a different model. But I completely agree it is one of the few ways you can actually be passive, but the activity comes before you invest.

Tony:
Stay tuned for more on passive investing and why this could be an investing vehicle to supercharge your real estate portfolio right after this break.

Ashley :
Okay, let’s welcome back Jim Pfeiffer.

Tony:
Jim, let me ask because there’s, and you actually just touched on it a little bit, but when we think about pros and cons versus passively investing into something like a syndication versus going out there and kind of doing all of that work yourself as a rookie, I guess, what is kind of the decision tree there? How should someone decide if as I’m looking to get started, does it make sense to go passive or does it make sense to go active?

Jim:
Yeah, I think that really depends on each individual. One thing you need more in the passive side than you would in the active side is capital. You can’t do a house hack into a syndication. You need some money. These minimums are typically $50,000. Now you can find some at 25, and there are ways through group investing to reduce it down to 10,000 or so, but you need the capital. So that’s one thing. If you’re going to diversify, which is one of the great things about syndications, because diversification is so much easier in syndications, you’re going to need a chunk because if each one is minimum of 50 grand to do a few of these a year, you’re going to need that capital. So that’s one, I guess con of passive investing. But as I said though, the pros in my mind outweigh it because then like I said, you can diversify by asset class.

Jim:
So you can do multifamily, you can do self storage, you can do mobile home parks, you can do car washes. I mean, anything can be syndicated. You can also diversify by market. So I live in Columbus, Ohio. When I was an active investor, I had some things in Columbus, I had some in Indianapolis and Memphis, so I did a little bit of diversification, but now as a syndication investor, I can go anywhere that I find a qualified operator. So there’s a lot more ways to diversify. And so we diversify by market and by asset type, but also by operator. So you can diversify into different operator. So you’re using different people’s expertise so you can diversify a lot easier. I think in the passive side, you also get the same tax benefits and maybe even more than you do in active investing because in active investing you might not do a cost segregation.

Jim:
I don’t want to get too deep in the weeds, but that’s what allows you to accelerate your depreciation. And as we know, one of the biggest benefits of real estate is that you can reduce or eliminate your taxes. And taxes are the biggest rotor of wealth. The big downside is something I already mentioned. It’s completely out of your control. It is totally illiquid. So if you have something where you buy a property and you’re an active investor and something happens in your life where you’re like, Hey, I got to sell this, I need liquidity. If you’re in a syndication, you can’t do that. If you’re in an active investment, you might not get everything back that you put into it. You might have to take a little bit of a loss, but you could still sell that asset at any time. With a syndication, it is very, very difficult to sell because you have to find someone else to buy your shares, and then the operator has to allow that, and there’s a whole bunch of other things. So I think those are the big contrasts for me.

Ashley :
What are some of the other risks that are associated with doing a syndication? I’ve never invested in a syndication personally, but I hear people talk about a capital call, for example, maybe explain what that is and is that a risk? Is that a con to actually investing in syndication?

Jim:
Yeah, great question. Absolutely. It’s a risk. I think the biggest risk, we’re talking real estate. So whether you buy an apartment complex or a single family home on your own or you buy one through syndication, you’re going to have the real estate risk. And that doesn’t really change what changes is operator risk because no longer are you managing the asset. So the biggest thing that you need to do is vet the operator, right? When you’re active, you don’t have to vet, well, you should vet yourself, but you’re vetting someone else and you’re making sure that they know what they’re doing, that they have experience, that they’re ethical, that you want to be a business partner with them. Because think about this, these investments can last 3, 5, 7, 10 years or longer. So you’re going to be in business with this person for a long time. So you got to make sure that you want to have conversations with them.

Jim:
One of the number one things I vet when I vet an operator is their communication. Because if they’re not going to respond to me, if I send them an email or call them and they don’t respond within 24 hours before I send them the money, what do you think they’re going to do after I send them the money, right? They’re going to ignore me completely, most likely. So communication is critical. That’s the only way you get information. And you brought up capital calls 3, 4, 5 years ago when we were vetting operators, one of our questions would be, have you ever done a capital call? And if someone said yes, it was red flags all over the place like, oh my god, and I’ll explain what they are in a minute, but red flags everywhere because you never wanted to invest in somebody who had a capital call, but now capital calls are much more common, so it’s a different evaluation.

Jim:
But what a capital call is, is where for whatever reason, the asset needs more money to operate. And nowadays it’s basically because some operators got into trouble doing adjustable rate mortgages, bridge loans, and the costs of those loans have gone way up. Insurance costs have gone way up, so they need more money because those properties, the value is down because commercial properties are valued on net income. And so as the net income goes down or the loan goes up, then you lose equity in the property. A capital call is, Hey, we need more money to operate this property so we don’t have to give it to the bank so it doesn’t get foreclosed on. Different operators handle that differently. It’s all about the communication. They should send you monthly or quarterly reports. So you’ll get the bad operator will send you these reports saying, yeah, everything’s great at the property, here’s the financials.

Jim:
And then maybe they send you one in July and they’re like, yeah, everything’s great. And then in August they send out an email, oops, you invested 50 grand, we’re going to need a 20% capital call. So then they’re going to ask you for another $10,000. And you have to decide, you basically have to decide from scratch, is this property operating efficiently? It might be, it might just be a debt problem, it might be an interest rate problem, but if it’s operational and maybe you don’t want to contribute, it’s optional to contribute in the contract. Sometimes it’s not optional. It says it’s required, but you can always just not contribute. And then what happens is if you owned say 1% of the property and you don’t participate, your ownership percentage could go down. So that’s what a capital call is. Now, the good operators, I have one who has been messaging for about six months that in another year or so, if conditions don’t improve, they might need to call capital. And that’s a completely different story because they are communicating and no one could have predicted that interest rates would go from almost nothing to where they are now in such a speedy timeframe. And that’s what caught everyone off guard. So hopefully that kind of answers some of the capital call questions.

Ashley :
And Jim, I just want to break down the part that you said real quick about syndicators going and getting that bridge loan. So in a sense, they got short-term debt, went and rehab the property and expected to refinance, almost like doing a bur, would you say, Jim, on a

Jim:
Large

Ashley :
Multifamily. And when it came time to refinance, when they did their deal analysis, interest rates were at a low percentage, but by the time they did their rehab. And think about it, if you’re buying 800 units, that can take some time to go through do renovations. It could be two years at this point. But when you hit that mark and now interest rates have raised way more than you expected and ran, your numbers for the deal may not be working. And that could be a sense where they’re going for the capital call, because now with that higher interest rate, it just doesn’t even make sense for them to refinance and they’ll need to put more capital into the property while they refinance.

Jim:
Yes, that’s exactly right. And what happened, as you said, is as interest rates went up, then they couldn’t refinance. And so many of these properties they were either doing burr or a lot of ’em were basically apartment flippers because the market was so hot, you could rehab 20, 30, 40% of the units in there and then flip the in 18 months or two years. Because what you do is you jack up the NOI, which creates a lot of value, which makes the property much more, you can sell it for a lot more. So then you can either refinance and give you all your capital back to your investors, which was awesome. It was infinite returns, right? You get all your capital back and then the property’s still cash flowing or they would sell it. But what happened is let’s say they had a three and a half percent interest rate on that loan and it went up to seven.

Jim:
So now your cost of debt has doubled and you can’t refinance. And these are three year loans. So hopefully the operator bought what’s called a rate cap, right? That’s where they paid the lender to cap the rate. Say they bought a loan at 3% or whatever, or got a loan at 3% and they bought a 2% rate cap so it couldn’t go above five for them, right? At the time, they were paying 50, 60, $70,000 for those rate caps. Well, after two or three years, these are short-term loans. Now the rate caps to buy an extension and get that same rate cap, they’re paying $500,000 a million dollars.

Jim:
And so you can see, and the banks aren’t saying, well, hey, maybe we need this money. They’re saying, you need to escrow this money now. So can you imagine if you’d underwritten a property and all of a sudden they say, we’re going to need an extra million dollars escrowed for the rate cap. And also your interest costs doubled. So now you can see why some of these properties are getting into trouble. It was less the adjustable rate, it was more the term because they had agency adjustable debt that some properties did, and those are 10 years, so it might be adjustable, but you have 10 years to work that out where these short loans you didn’t. And that’s a big problem in the industry, mostly for multifamily.

Ashley :
So Jim, I guess one thing we can take away from this is kind of knowing what the plan is for the syndicator and kind of what their operational plan is when you’re looking to invest with them and having an idea and seeing how much risk is there involved, what are they actually budgeting for? What do their numbers look like? So I’m sure if people tune into passive pockets and listen to your podcasts, they’re going to learn exactly how to vet a syndicator and to look into the numbers and the operations.

Jim:
One thing real quick that I do want to explain, it’s not all deep, dark, bad stuff. It is just we’re going through a difficult time, which is actually going to make it easier going forward because we’ll have operators with a track record of coming through a difficult time and we’ll be able to see what happened. Because a lot of operators, I vetted them and I thought they were great, and they had alternatives. They had a business plan. And I would say, what happens if this business plan doesn’t work out? Essentially an apartment flipper? That was the goal. And they said, oh, well then we’ll just pivot and we’ll just hold and wait until times get better. And it turns out they weren’t able to do that. So now you really need to dig into those other plans to make sure they have a plan B, a plan C, a plan D to make sure they can pivot effectively.

Tony:
Jim, obviously you have a tremendous amount of experience. I can tell just from this short conversation we’ve had so far. And I think for a lot of the folks that are listening, the reason that we’re doing this is because we want the return. So what kind of returns can a passive investor actually expect from investing in someone’s syndication? And maybe how does that compare to, again, if they went out and tried to do this on their own?

Ashley :
And Jim, I’m taking this as a guarantee that you’re guaranteeing me. These are

Jim:
Oh yeah, absolutely. It’s all guaranteed just like your active real estate, right? That’s guaranteed. The funny thing is you would think it would be less, but for me it really hasn’t been. So I told you my active properties, they did not cashflow well, but they really did good on the back end because I was not a good asset manager, but I was lucky to be investing in a time when all assets were going up for years. But with a syndication, typically you’re going to get some, well, if it’s typical, you’re investing for cashflow because you can also invest for appreciation. But if it’s a cash flowing asset, you’re going to get three, five, 7% through the hold, right? It’ll be not much in the early years. And then year three, year five, it’ll be a little bit more. So you can expect between probably three and 10% annual cashflow.

Jim:
And then at the end, when they sell the property over a five to seven year period, you can expect to roughly double your investment. And that was, of course, the times have changed. So maybe I would knock those numbers down a little bit. But typically you’re going to cashflow as you go, and then you’re going to get the appreciation on the back end of things, go well. So for me, it hasn’t been that much different than active returns, except for I have a lot more confidence in the people I’m investing in than I did in myself. Now, again, you’re not going to be perfect. There’s some operators who, as we talked about, had some issues, but for the most part, the returns are pretty comparable.

Tony:
Alright, guys, we have to take one final break, but more with Jim on why passive investing with high interest rates is still viable after this.

Ashley :
Thank you for taking the time to check out our show sponsors and welcome back to the show.

Tony:
Jim, just to kind of clarify, for the Ricky’s that are listening, it almost sounds like it’s a bit of a hockey stick curve where you initially put your money into this deal, the actual quarterly distributions or whatever that you’re getting are pretty small, but they start to ramp up as that property stabilizes. And then when they sell, which is I think the goal for most syndicators is to sell this stabilized property now to someone else, that’s when you get this kind of big capital event that brings back a lot of what you put in. Is that a fair description?

Jim:
Yeah, absolutely. And remember, we’re talking generalities because there’s some that are development deals. You’re going to get no cashflow for the first couple years, or if you do a heavy value add, you might not get any cashflow for the first year and then a little bit after that. But if you buy a fully stabilized a class apartment building, you might get 7% cashflow from day one. So as you know as real estate investors, there’s risk and reward and you have to balance those out. So you need to make sure that you kind of target me. I don’t have a W2, I’m just fully a passive investor, so I need cashflowing property. So that’s kind of what I focus on. And then once you get enough cashflow, then you can look at some of the riskier options. But yes, you are correct. It should increase as you go because we’re looking at a standard mid value add property. They might only be able to pay two or 3% in year one, but then they’re going to rehab a few units, they’re going to add some dog parks and appliances and things and do some upgrades, and then they’ll get more cashflow, and then maybe they’re up to 5%. And then once it’s stabilized, they could get seven, 8%. And as you said, when you sell, that’s when hopefully if everything’s gone right, you should be able to get a significant appreciation on your investment.

Ashley :
So Jim, as a rookie investor, what do we need to do before we even give our money to a syndicator or even find a syndicator? Do we have to do anything before even approaching a syndicator?

Jim:
Absolutely. I can tell you a little story about how I did it when I first started, and that’s the wrong way. And then I’ll tell you what I do now, which is, I dunno if it’s the right way, but it’s much better. The way I started was I was transitioning from active to passive. And so I went to a conference and I just assumed you go to a conference and everyone there is just fantastic top of their game. So I had a self-directed IRA, which we can talk about, and I just went around and met new operators, new to me, and I said, oh, hey, you’re here. You must be awesome. Here’s some money, here’s some money, here’s some money. And just invested without doing any due diligence. That is a terrible way to find operators. It turns out to go to a conference, all you have to do is pay and show up.

Jim:
I mean, I wasn’t thinking. And then I decided, okay, you know what? I’m going to get educated. And so I started listening to podcasts and I’d hear operators on podcasts, and then I’d think, okay, then I’ll call them up, talk to ’em for 30 minutes, and then I’ll wire them my money because now I’ve kind of heard them and that’s a better way, but it’s not a great way because you can be a great podcaster and a horrible asset manager talking to myself, right? Because that was me. Well, hopefully I was a great podcaster, at least a good marketer.

Ashley :
Well, we’re going to find out on passive

Jim:
Pocket pocket. Yeah, we’re going to find out. Yes, yes, we’re going to find out one way or another, but you never know. And so now what I do is we started a community, left field investors, which is now passive pockets. We’re super excited about that. That is where I go to help me vet operators. I don’t invest with a new operator unless they’re recommended to me by somebody in my community who I know and trust who has already invested with that operator. And what that means is that person can tell me, Hey, you know what? Their communication is good. They promised these returns, and here’s what actually happened. They promised to send me reports monthly and they do it. I had a question and I emailed them and they responded right away. So I still have to do all the vetting of an operator, but at least I’m starting 10, 20, a hundred steps ahead of where I was before. So a community to me is the number one most important thing.

Tony:
There’s obviously a lot of value in doing this passively, but I think one of the challenges is that especially for a lot of the syndicators who maybe have big followings on social media, a lot of their offerings are for accredited investors only. And for a lot of folks who are maybe getting started, maybe they have the capital, but they’re not accredited. I guess two questions. First, can you define what an accredited investor is? And then for the folks who maybe don’t meet that requirement, what steps should they be taking to get into their first syndication?

Jim:
Thank you, Tony, for asking this. I love this. Okay, I hate accreditation. I think it’s ridiculous, but I’ll explain what it is. If you are accredited, that means single filing, single. You make 200 grand a year filing jointly, you make 300, or you have over the last past two years and you expect to this next year, or you can have a million dollars in assets outside of your primary home. Now, I don’t think those qualifications mean that I’m smarter than someone, that I’m a better investor than someone. So it makes me crazy. And most operators and even communities and people that are in this space, they don’t target non-accredited investors. And those people sometimes get left behind so we don’t have to get too deep in the weeds, but there’s two different kinds of syndications. They’re all regulated by the SEC one can advertise, and that’s basically 5 0 6 C, and they can only accept accredited investors.

Jim:
Now, there’s others that are called 5 0 6 B, and they can take a certain number of non-accredited investors, but they cannot advertise. They have to have a relationship with you if you’re non-accredited before you can invest. So that means calling a lump and having a conversation. The problem is those aren’t advertised. So how do you find them? And that’s why in our community, the non-accredited people are sometimes the most active because they have to work harder to find quality operators. They have to work harder to find quality deals. But I can tell you they are absolutely out there and you can find them. It just takes a little bit more. So if you’re non-accredited, that doesn’t mean you can’t do this. It means it’s a little bit tougher and you’re really going to need a community because we have groups in passive pockets, little clubs, and we have one that’s for non-accredited investors.

Jim:
So they all go in that group and they talk about, Hey, who can we invest with? Can you introduce me? And so it really bothers me that some investors are left out of this because of their accreditation status. And I think joining a community like passive pockets, that should be enough to make you accredited because you’ve decided to educate yourself. And just because you have a bunch of money doesn’t mean you’re a better investor than someone who’s just starting out. So great question. I love that. And passive pockets. We are going to, initially we have to start with accredited, but there will be spaces for non-accredited investors, and we’re going to help you out too.

Ashley :
Jim, I have a question. I’ve always wondered this and I’ve never asked anyone. So for having the tax return to show how much income you have, that’s pretty easy to prove, but how are you proving your net worth of, or your assets are over a million dollars in value besides your primary? Are you getting appraisals on everything and submitting them? What does that vetting process look like from the syndicators side to say that you’re accredited?

Jim:
That’s a great question. And the answer isn’t great. Every operator does it differently and there’s no way to know what they’re going to do. Some are super careless and they don’t check properly. And then if you’re non-accredited or you’re accredited and they don’t check, then that’s on them. But usually for me, I just get a letter from my CPA that says what my income is or what my assets are, and that’s usually enough.

Ashley :
Yeah, cool. Now I can sleep at night. I lay awake. Now I know.

Tony:
How are they really figuring that out? It just doesn’t make sense. Exactly.

Ashley :
Do I have to pay to get an appraisal on every single property? That would be terrible. Do I have to pull comps? What does it look like? So Jim, what about the capital to actually invest? Okay, I’m accredited, I’m ready to go. How much capital, and you kind of touched on this a little bit in the beginning of the episode, but kind of what is the standard minimum amount to contribute to a syndication, and then what are some other ways to actually find the money? Like you mentioned, a self-directed IRA.

Jim:
Typically the minimums are 25, 50, a hundred thousand dollars in passive pockets. We use a company called Tribe Vest, and they allow groups to invest together. So if you use a tribe, you can, maybe with 50,000, let’s say you have $50,000 a year, you can allocate. If you go on your own, you’re investing in one deal. If you get a group together and you want to get 10 people together, then you can get in five or 10 deals a year with smaller amounts. It’s a little more complicated. We haven’t talked about K ones yet. That’s an issue. But there are ways, but typically you want to diversify. So if you have $50,000 a year that you can allocate, I would recommend get in two deals a year at a $25,000 minimum and do that consistently for 3, 4, 5 years. And then you will have diversification as you go, and that will then your snowball really starts.

Jim:
So you can definitely do it with smaller amounts. You mentioned the self-directed IRA or self-directed 401k. Those the only downside if you don’t have any non-qualified money. Qualified money is in a retirement plan. So if you don’t have any non-qualified money, then absolutely I would do it in the 401k or IRA if you had to. But the problem is you lose the tax benefits, right? You lose the depreciation, just like if you were to invest in active real estate that way. So what I do, I do have some leftover funds from old 401k that I rolled over. And how I use that is I do that. I invest in debt because there’s no tax benefits to debt anyway, so I can invest in debt funds where maybe they’re buying notes or lending to flippers or active investors. So there’s a lot of note funds out there, and that’s where I concentrate my money in the qualified space. But I do want to just say, if you want to get into real estate and syndications are for you, your 401k rollover is a great place to start.

Tony:
Jim, you mentioned a term K one. And again, not to go too deep into the weeds, but just so Ricky’s maybe understand the kind of tax reporting they’ll get at the end of the year if they’re doing a syndication at a high level, what is a K one? Why is it important?

Jim:
So all of these investments, when you invest in a syndication, you’re investing in an LLC, right? A limited liability company. So you’re investing in the company that buys the property. Well, that company, there’s a bunch of limited partners, which is what you are. And as an investor, they have to send the tax reporting to the limited partners, and they do that through a document called the K one. So they’re supposed to be delivered on March 15th of every year. You get your K ones and you just submit those to your tax person. And on the K one, it says how much loss, because usually you get losses on these deals in the first few years because of the depreciation. So it’ll show the money gained, the money invested in the loss, and you just submit that to your CPA. Now, the problem is we are recording this in mid-September, and I still haven’t filed my tax returns because I haven’t gotten all of my K ones.

Jim:
Now I’m an outlier because I have a lot of deals, and most of the K ones you get in time. But if you’re going to be an investor in real estate syndications passively, you are almost certain to have to extend your tax return, which it doesn’t cost you anything. It’s not painful, but it is unlikely that you will be filing your taxes on April 15th. So that is something that if you’re like, I got to file on April 15th, just know that this might not be for you because you are probably going to extend. And once you do it, you realize, okay, it’s not a big deal. But a K one is just a document that says the money you made or lost on this transaction, basically.

Ashley :
Yeah. The one thing I would add to that is if you need to file, one reason that could be is because you’re trying to get a loan. So maybe you’re getting a loan for a new primary residence where they’re going to want to your most recent tax return, and that if you have to extend and wait, then that’s something that could actually hold up. Your approval for the loan is waiting for that tax return too. So you always got to think of everything that you want to do, everything that’s going on and make nothing affects the approval of a loan.

Jim:
Absolutely. That’s a great point. That’s a great point.

Tony:
Well, Jim, we covered a lot today, and I hope we were able to open the eyes for a lot of our Ricky listeners about one of the only true ways to passively invest in real estate and how to grow about into a smart fashion. But I guess, do you have any last pieces of advice for all of the rookies that are listening about passively investing into other syndications?

Jim:
Yeah, absolutely. It’s similar to real estate in a way, just active real estate is you really have to educate yourself and you have to become knowledgeable. But the number one thing I would recommend is join a community. You would be surprised. I was doing this on my own and I didn’t know what I was doing clearly when I was just going to conferences and throwing money at people. And that’s why I started a community, and we grew it to where we had thousands of people working together to help each other and educate each other. It is not like active real estate investing where you can become an expert in one market and go buy a property on your own and maybe look for a couple investors or something like that. That’s not what this is. This is you have to evaluate a person and try to figure out, okay, is this a good operator? Is this a good deal? And having a community where you have resources that can help you with this is just, it’s so crucial, and it’s helped me become a much better investor. And it’s helped thousands of others in our community really understand, okay, here’s the operators, here’s the deals, now let’s work together to vet these together and work together. And it’s just been a fantastic experience. So number one thing is join a community. Absolutely.

Ashley :
And that community can be passive pockets.

Jim:
Oh, most definitely.

Ashley :
Yeah. Well, Jim, thank you so much for coming onto the show today to share your knowledge about syndications and to enlighten us about the new passive pockets. We are really excited, and we wish you the best of luck to be the number two podcast on the BiggerPockets platform.

Jim:
Yeah, if I could get to number two, I would be completely satisfied with that. Absolutely.

Ashley :
Thank you so much for joining us today, Jim. It was great to talk with you once again. The first episode of Passive Pockets, the Passive Real Estate Investing Show, first episode aired yesterday, so go check it [email protected].