What is a Passive Investor 
Passive investors may share in profits (equity investors) or may earn a
fixed return on their investment (debt investors). Either may invest in your
LLC or syndicate. Passive investors will not share in any of the day-to-day
management decisions or property operations. Their duties are limited to
providing capital for the purchase and acquisition costs.
Many investors prefer to be passive. They do not want the burden of
management, but they do want to benefit from earning a better return on
their money than is perhaps offered through other investment opportunities.
Remember that partners and investors, including passive ones, may also be
able to provide valuable advice and mentorship in addition to their financial
backing. They may have an extensive network or a strong credibility factor
that they can use to strengthen your offer.
Passive Equity Investors
Passive equity investors invest money to acquire a percentage of the
company you form to take title to real estate (your syndicate). Your equity
investors will own a proportionate share of the equity in the investment.
Because of their equity stake, they will be included in both the profits and
the losses that the property generates, so you will have to account to them.
In exchange for their equity investment, the equity investor will receive a
portion of the cash flow, appreciation, depreciation and other tax benefits
based on their percentage of equity ownership. You may also structure your
deal so that a particular class of equity investors gets a larger share of the
tax benefits.
It’s important to find out what your investors want when you first start
talking about them investing with you. Do they want cash flow, equity
or tax benefits? This will prevent us from wasting their time and ours.
Doing this in advance of having a deal under contract will help us find and
structure deals that are attractive to our investor pool.
Passive Debt Investors
A debt investor in your LLC may offer you their funds in exchange for a
fixed return and a return of principal within a specified period of time. The
fixed return is treated as a “preferred return,” just like what we offered
our equity investors. The debt investors get paid first, before the equity
investors receive any returns. They get paid immediately after we pay the
property operating expenses and any loan payments owed to the bank, if
we have a bank loan.
A debt investment may have a shorter duration than our equity investors,
requiring a refinance in order to pay them off, and they may require periodic
reporting. Our debt investors may have the ability to take over management
of the property if we fail to perform as agreed. If we perform as agreed,
they simply get paid their money plus a fixed return. Eventually, after they
get their principal back, plus the returns you offered, they relinquish their
interests in the LLC.