Signs You Should Not Work with a Passive Investor on an Apartment Deal

Finding passive investors for an apartment deal is an important step that needs to be completed on any apartment syndication upfront.

When you’re putting together your first syndication or two, you may be eager to accept any qualified investors who are interested in contributing their funds to the deal. After all, it can be challenging to get investors without a significant amount of established syndication experience.

However, when there is more interest in your deals, you have the flexibility to scrutinize the potential investors more closely. As you do, there are some red flags to look for that could steer you away from some investors.

Before you start searching for investors, it’s important to define what the relationship entails. A typical multifamily syndication deal extends for five to 10 years. Ideally, the passive investor will work with you on future deals as well, so your relationship with one investor may actually be much longer than 10 years.

Because of the long nature of the relationship, the investor should be someone who trusts your business skills. More than that, the investor should view you as a partner in a business venture rather than as someone he or she is making a one-time purchase from.

With these factors in mind, a look at the signs that could indicate trouble down the road is in order.

Contempt in the Relationship

One red flag is if there is obvious contempt in the relationship. There is no hard and fast rule to determine with accuracy if there is contempt. It’s more of a gut feeling about whether this person views you as a partner or as someone beneath you.

A simple conversation or a few email exchanges can shed light on this important area. While you may entertain the investor if you’re struggling to raise money, you may otherwise find that the investor relationship would be too much of a hassle if you have other investors waiting in the wings.

Asking Accusatory Questions

As you look for warning signs, pay attention to the tone that the person uses. Tone can convey trust or distrust. When someone takes an accusatory tone while also asking tons of questions, this can indicate a lack of trust.

Keep in mind that it is natural and even expected for an investor to ask questions. In fact, by asking questions, an investor can build more trust and may be more likely to invest. However, if the tone of the questions is accusatory or suspicious, there may be a lack of trust that is not possible to overcome. Keep in mind that a passive investor must trust you in order to invest with you.

For one of Joe Fairless’s deals, Joe spent time answering many questions from the same investor. Most of the questions that the investor asked indicated that he was suspicious of Joe. Over time, Joe presented many other investment opportunities to the investor. The investor always had the same suspicious tone, and he never invested in a deal.

Keep in mind that there are many other ways that an investor may display a lack of trust in you as a business partner. Often, a passive investor will not come out and say that he or she does not trust you or your business sense. Instead, you may develop a gut feeling.

For example, you may get a sense that the investor is asking questions to try to trick you into revealing something they are suspicious of. On the other hand, an investor who has trust in you may ask different types of questions to get a better sense of the deal and to determine if the investment is right for them.

A Pattern of Problematic Behavior

It can be difficult to gauge contempt or an accusatory tone in some cases. After all, people have different personality types. They also may have trouble connecting to a person in writing or verbally, but that does not necessarily mean that they will be problematic investors.

On the other hand, if a person shows contempt upfront or has an accusatory tone, the individual’s distrust in you may persist even if he or she decides to invest with you. This sets the stage for a poor relationship rather than a mutually beneficial partnership. Remember that this type of business relationship could last a decade or longer.

Before you write off a potential investor, it is important to get to know the person. Consider that Joe Fairless presented several deals with the investor mentioned previously. He did not make a gut decision about the individual’s lack of trust until he saw a pattern over a period of time. When he ultimately decided not to work with the individual, he was polite and professional with the delivery of his decision.

Final Thoughts

As a multifamily syndicator, you can choose to take on any investors you want for your next apartment deal. However, Joe has structured more than 20 syndication deals over the years. He has worked with numerous investors and has solicited many others. He sees the value of trust and the importance of establishing a partnership with each investor.

As you continue lining up investors for future multifamily syndication deals, keep these important signs related to trust and partnership in mind. If you can afford to be more discerning with your selection of investors for your next apartment deal, it may be wise to find investors who you can establish a trust-driven partnership with.

For more information and helpful apartment deal tips from Joe Fairless, check out the Best Ever Apartment Syndication Book.