Investor-influencer Grant Cardone was recently in hot water in the form of a class-action lawsuit alleging fraud and false promises through his real estate investment fund. You can read all about it on Bigger Pockets (linked above) and other news outlets. Regardless of how the lawsuit has turned out, we see it as a cautionary tale to passive investing hopefuls.
The lawsuit claimed Cardone leveraged his social media influence to spread misleading claims and expectations about lavish returns while underselling the risks of passive investing. This highlights a critical truth every investor must learn: realistic expectations are an investor’s guardrails.
Having the right expectations paired with solid fundamentals will keep you far away from unnecessary risks and gimmicks.
Keep these principles in mind!
6 Expectations Prospective Real Estate Investors Should Have
Expect success to come slowly
Success in real estate investment doesn’t happen overnight. In the beginning, it might seem like your returns aren’t worth your while, but it builds over time through appreciation paired with rental income. That rental income swells once you’ve paid your mortgage. Passive investing takes time to build into the kind of wealth you can see and feel. That’s just the nature of most reliable investments!
Expect to build a portfolio
Substantial wealth as a passive real estate investor demands ownership of multiple properties. Now, we’re not going to tell you a magic number. That’s for you and your advisors to discuss based on your investing ambitions. However, wealth won’t materialize with a single investment property.
Holding many properties does a few important things. For one, it diversifies your portfolio and spreads out risk. You can further diversify by targeting multiple neighborhoods or investment markets. It also means you benefit from several streams of passive income. That, in turn, helps protect your interests should there be a prolonged rental vacancy.
Expect a certain level of risk
One of the claims in the lawsuit against Mr. Cardone is that he did not accurately or adequately present risks to his prospective or existing investors. Listen closely: every investment is risky. There’s a direct correlation between risk and reward. Big promises mean big risks and if someone claims otherwise, they’re lying to you. At the same time, a more gradual “safe” investment like passive real estate investment isn’t without risk, either.
Never, ever invest more than you’re willing to lose. While the likelihood of that happening as a buy-and-hold investor is low, it’s never non-existent.
Expect to be an ongoing and active learner
As mentioned in the beginning, investors need to nail the fundamentals. Invest the time and resources necessary to understand this business – especially within the investment models you use. You should know how your money is made, the expenses involved, and the risks you can expect. Know what kind of services and maintenance to prioritize. Know what common scams look like and how things generally work. This is a time-tested and age-old method of building wealth.
Don’t look to reinvent the wheel. Instead, focus on establishing a firm foundation.
Expect passive to mean hands-off, eyes-on
Just because you’re in the business of passive, hands-off investing doesn’t mean you can “set it and forget it.” Yes, as a passive investor, you rely on a team of property managers to deal with the daily tasks associated with running rental properties. You may not be on the frontlines of maintenance issues, but you do have a critical role to play.
It’s your job to evaluate and refine your portfolio. Look at property performance. Investigate new market opportunities. Consult with your advisor about your next move. Continue your education. Keep your investment goals in focus.
Expect to ask for help
Passive investors depend on quality partnerships. You’re trusting someone with your hard-earned money and your financial future. This is a real relationship that demands trust and understanding. Too many inexperienced investors throw their money at opportunities that sound good without seeing if they can trust those they’re doing business with.
Investigate. Vet. Verify.
Trust doesn’t happen overnight, but through consistent, transparent communication. Only pursue partners that line up with your values, understand your needs, and respect you enough to be honest.
Our clients fall anywhere and everywhere on the spectrum between new and tenured real estate investors. We'll meet you where you are!