Silent Real Estate Investors Dont Make Noise

The term Silent Real Estate Investing has two different connotations which is why there is so much confusion about it. Both basically refer to an investor who is not actively involved in the management and commercial development of the property. But, the motivation for the investment is completely different in each case as are the returns on the investment.

In the first instance, an investment is made in property for non commercial reasons usually because of an involvement the investor has with the person receiving the investment. And example of this would be the case of a company that assists its employees by giving them second mortgages on their properties on terms far better for the borrower than what is available in the market. These could include low, deferred or even zero interest. The repayment terms are also usually very generous and often no repayment is to be made until all other mortgages and loans have been repaid.

This type of silent real estate investing may not, on the surface, appear to make commercial sense to the investor since his funds could be better utilized, and obtain higher returns elsewhere. But the returns are there, although them may not be quantifiable or numbers that can be entered in a balance sheet. If the silent real estate investment is seen as a reward, gesture of appreciation or being based on an existing bond or relationship, the returns will be there in the form of gratitude, appreciation and, in the case of business stakeholders, loyalty and greater motivation to succeed.

This concept began in the 19th century when family businesses and commercial establishments offered this kind of indirect financial benefit to employees (who had no entitlements or facilities besides their salaries) as a means to reward and retain good people. From here it spread to labor unions, credit societies and even large publicly held companies. This should not be mistaken for charity or a gift since the investment has to be returned as stipulated and collateral needs to be provided.

The second form of silent real estate investors is one who invests purely out of commercial interest and perceived profit, but stays in the background. The investor does not play any active role in the management of the property or in the promotion of profits and returns. This kind of real estate investor used to be called a sleeping partner.

This kind of real estate investing is most common in the case of service industries like restaurants, hotels and properties that require maintenance and management like rental buildings. The operational aspects of running the business are looked after by a person with the required expertise a chef, hotel manager or building maintenance professional. But this type of professional often does not have the financial resources to make the required investments or even to put up the kind of collateral that institutional financing will require.

This is where a private investor may step in. The investor may have no knowledge of the management of the proposed real estate investment. But he has faith in the professional promoter and is willing to invest money without any further involvement. When the profits come in, he will get his returns at the predetermined rates and be happy with that. If the profits are not there, the silent real estate investor gets nothing. Additionally, depending on how the investment is structured, the silent investor could also be held liable, in proportion with his investment in the property, for any losses incurred or debts.

While this may not, on the surface seem like a desirable form of real estate investing, the advantages are that the investor does not have to devote any time or energy towards the management of the property. Presuming that his faith in the professional who is the manager is well founded, all the silent property investor needs to do is collect his dividends.

Another reason that people opt for silent real estate investing is because of a desire to avoid unwanted publicity say a businessman undergoing financial problems who has other legitimate secure funds to invest but fears the investment would be misunderstood. Often the reason behind the silent investment is a fear of a conflict of interest situation arising for example a close relation of a leading chef who has independent means may want to invest in another restaurant but does not want any issues of conflict of interest to arise.

Due to the quiet nature of this kind of real estate investing, the number of silent real estate investors is impossible to estimate, but because of the benefits this form of property investment offers, it is safe to assume that the number is large.

Seed Newsvine

Bookmark this article in your preferred program

Comments

Add Comment

Popular Articles in this cathegory

This article is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.