Maximizing client and partner wealth in real estate investments.

Transitioning From Active Owner To Passive Investor: The Do’s and Don’ts

While selling your business brings positives like liquidation of previously illiquid assets and the opportunity to pursue other interests, the transition from active owner to passive investor may bring difficulties. The hands-on work required to build your business was a contributor in its success and eventual sale. Now, handing over control to third-parties may not be your first instinct.It’s important to remember that being a passive investor is anything but passive-it requires active participation in the management of your portfolio to ensure your financial objectives are met. As a starting point, here are a few do’s and don’ts to keep in mind while making the transition:

Don’t Try To Go It Alone

While the liquidity event you just experienced was a strong indicator of instincts and talent you had as a business owner, be honest with yourself about your talents and competencies and check your ego at the door before jumping feet first into an investment space you have minimal prior experience.

A good example is real estate: many high net worth investors pursue investing in commercial real estate but fail to acknowledge the steep learning curve and time commitment required to make successful investments. Business owners may also assume real estate is simply “buy low, sell high, collect rent in-between”. If a real estate operator interested in buying/building a business in your industry thought it was simply “buy low, sell high, collect cash flow along the way”, what would you assume his success would be?

Do Build A Personal “Board of Directors”

Wealth preservation is more than a one-person job: the advice of a diverse set of resources will play an important role in creating and executing your overall wealth preservation strategy. This “board” should include financial advisors to help develop a solid portfolio strategy, as well as CPAs and tax attorneys to advise on tax and estate matters. Alternative investment managers should also be a component of your team . For example, an investment manager in private commercial real estate will bring value if you plan to include private real estate investments in your portfolio, especially if you have little experience in the space.

Don’t Put Your Eggs in One Basket

As a passive investor, one of your major objectives is preservation of capital. Preservation of capital requires diversification. Even if you have high conviction for your investments or have specific industry insights that give you an edge in specific sectors, your portfolio may not be offering protection against inflation risk, interest rate risk, or other types of general market risk.

Do Build A Truly Diversified Portfolio, Spread Across Asset Classes With Low Correlation

Diversification is key, and the secret is correlation.

Your goal when diversifying should be more than buying a basket of stocks, ETFs, and funds, “setting it and forgetting it”. Proper diversification requires investing across asset classes with low correlation to each other.

Diversifying within asset classes is also important for capital preservation. For example, the world of commercial real estate encompasses property investments of varying types, quality, and geographic location. Investing with a manager such as MLG can bring you real diversification across geographic markets, property types, property classes, even managers.

Don’t Only Depend On Your Advisors; In The End You Call The Shots

While you have built your personal board of directors to leverage their specialized knowledge and experience, it’s important to not depend entirely on your advisors, or blindly act on their guidance.At the end of the day, you call the shots. Take into consideration the analysis and guidance they may provide but remember to conduct your own due diligence before you pull the trigger on an opportunity.

Do Build Your Knowledge By Surrounding Yourself With The Smartest People You Can Find

Warren Buffett has famously said, “It is better to hang out with people better than you.” Surround yourself with the smartest people you can find and leverage their knowledge, experiences, and relationships to enhance your own decisions. Private real estate investing has a steep learning curve, with key insights and lessons that may take decades to accrue. Picking up this knowledge from seasoned veterans of the space can get you up to speed more quickly and potentially accelerate your growth.

The more knowledge about the industry you accumulate, the better questions you can ask before committing capital to an investment. Check out our article, 17 Questions to Ask Before Investing Your Money, for the types of questions you should ask before investing in private commercial real estate.

How MLG Capital Can Help You Make The Transition

MLG Capital is more than happy to leverage 30+ years of existing relationships and provide references for seats at your personal board of directors table. In addition, we’d be eager to have a conversation with your personal advisors to see if our strategies fit within your objectives both in the near term and long term, as well as bring our planning expertise to the table.